Jobs reality less cosy than life on planet Randall

I quite like watching Jeff Randall’s live evening business programme on Sky News. I’ve appeared on it once or twice and found Mr Randall courteous as well as challenging. On occasion I’ve also tuned it to hear my own views and forecasts being questioned, notably back in November 2010 when I was working as Chief Economic Adviser to the Chartered Institute of Personnel and Development (CIPD). And although I have now moved on it’s my views that are implicitly under attack in Mr Randall’s criticism of the CIPD as being part of a so-called ‘Armageddon Alliance’, published in this morning’s Daily Telegraph. http://www.telegraph.co.uk/finance/comment/jeffrandall/9639842/Armageddon-It-doesnt-look-like-it-to-me.html I therefore think it necessary to put the record straight on a number of counts.

In my 30 years as a professional economist I’ve always steered an independent line on policy issues, and did so throughout my 12 years at the CIPD which is itself a fiercely independent professional membership organisation. This has at times caused me to disagree with politicians and commentators of every hue.

As someone who takes a broadly Keynesian view of macroeconomics, I have argued consistently since 2010 that the coalition’s policy of rapid severe fiscal austerity is misguided in an economy struggling to escape the trauma of the worst global post-war financial crisis. I continue to hold this opinion and cite the experience of the past two years, in which the economy has experienced almost no overall net expansion in output, as proof in support of those who share my view. And on this matter I make no apology in acknowledging that my opinion is far closer to that of the Shadow Chancellor of the Exchequer than to the present incumbent of 11 Downing Street.  

It is, however, my analysis of the labour market that requires most scrutiny. My reckoning in 2010 was that the coalition government’s fiscal austerity measures would eventually result in a gross loss of 1.6m million jobs across both the public and private sectors of the economy. The net effect on employment would then depend on the strength of any subsequent recovery in private sector employment, which would in turn depend on the overall strength of the economy.    

I have so far seen no reason to alter my estimate of the gross employment effect of austerity. While my estimate that public sector employment would fall by more than 700,000 was widely ridiculed in 2010 this is precisely what the Office for Budget Responsibility (OBR) has been projecting since November 2011.  Redundancies in the construction and retail sectors, those parts of the private sector most obviously susceptible to cuts in public spending and the higher rate of VAT, have to date also been running in line with my expectations.

What has surprised me, however, is the strength of offsetting job gains, especially in 2012, which has resulted in a much bigger than expected net increase in employment. Having argued at the outset of the recession in 2008 that Britain’s flexible labour market was likely to respond to an economic shock far better than in earlier decades, I had anticipated a relatively fast rate of job creation once the economy started to grow again. Yet despite this I did not expect to witness net employment growth against the backdrop of economic stagnation. Indeed, my forecast for 2012, published by the CIPD last December, was for employment to fall and unemployment to rise to close to 2.9 million this year. But if this was an Armageddon forecast it was one shared by most other major forecasters, including the OBR.    

Just why the economy has been creating jobs without economic growth therefore remains a puzzle to most economists, especially when one also considers that the stock of unfilled job vacancies has, like the GDP growth rate, been flat-lining since 2010.  Putting to one side explanations that involve some error in either the GDP or jobs data, I think the answer lies in a slump in real wages – down around 7% since 2009 – and a tougher benefit regime that means jobless people fill part-time jobs that they might have turned down in previous recessions when, like now, there was a serious shortage of full-time vacancies.

This brings me, finally, to Mr Randall’s criticism that the CIPD is dismissive of people who have become self-employed during the recession, a group who in one of my final reports for the Institute I described as ‘odd jobbers’. Again not true. Self-employment is a welcome feature of our economy. I myself recently became self-employed. But just as jobless people who want full-time work have been turning to part-time employment to avoid the dole, so too the tens of thousands of people who have taken up self-employment but who in a stronger economy would probably choose to work as employees.

Having looked in detail at the rise in self-employment between 2008 and 2011, my CIPD report concluded that this was accounted for by individuals with characteristics very unlike the bulk of self-employed people. The latter tend either to be skilled professional consultants or trades people of the ‘white van man’ variety, in both cases working long hours. The ‘new self-employed’ by contrast are often unskilled and work hardly any hours at all – hence the ‘odd jobber’ tag.

Although the recent jobs market data have taken many people, myself included, by surprise, on closer examination the picture they paint is one consistent with an economy that is seriously short of demand rather than, as the tenor of Mr Randall’s article suggests, on the up. ‘Part-time/odd job/pay squeezed’ Britain might well be preferable to the kind of ‘doleful Britain’ seen in earlier decades but it is just as much a sign of ongoing economic malaise. And those of us who wish to point this out rather than act as cheerleaders for a flawed fiscal policy don’t deserve to be called ‘pedlars of gloom’.  

Much ado about nothing but construction

There’s always something slightly old fashioned about Office for National Statistics (ONS) media events and this morning’s press conference to announce the preliminary estimate of Q3 GDP was no exception. Avuncular chief economist Joe Grice delivered the news that the economy had grown by 1% between Q2 and Q3 – marking a statistical departure from the double-dip recession – with the air of a country solicitor telling assembled eager beneficiaries of a will that it’s a little too soon to be precise about the size of the bequest.

Mr Grice said that the latest growth estimate will have been affected, positively and negatively, by the impact on the economy of the Queen’s Diamond Jubilee bank holiday, unusually poor midsummer weather and the Olympic and Paralympic games. But just how big these effects are wasn’t yet clear, although the sales of tickets to the two sporting extravaganzas was reckoned to have added 0.2% to GDP in Q3.

However, what the sober statisticians did highlight was that even with the largest quarterly surge in output since before the start of the financial crisis in 2007 the economy was no bigger in Q3 than a year before and only 0.6% bigger than Q3 2010. The economy has thus been through three quarters of decline and one quarter of growth which roughly balance out. Given the furore that accompanies these GDP snapshots, good and bad, this could be a case of much ado about nothing. Yet that can’t be said about one particular sector, construction, which may hold the key to explaining why the economy has flat-lined over the past year.

Q3 was much better for both the production and service sectors which grew by 1.1% and 1.3% respectively (the latter, intriguingly, boosted most by output in the ‘government and other services’ sub-sector). But construction sector output contracted by 2.5% in the quarter, following a big contraction in previous quarters. While all such figures are subject to revision, these preliminary estimates suggest that the construction sector is producing 10.8% less than a year ago and a whopping 17% less than before the recession.

Why is this economically significant as well as important for construction firms and workers? Because construction is not only suffering very badly, in terms of jobs and pay as well as output,  but is also the one major part of private sector activity that is clearly being adversely hit by fiscal austerity.

The Chancellor may argue that broader economic forces, rather than cuts in public spending and investment, are the reason for our current woes. But the plight of the construction sector suggests otherwise. Mr Osborne may outline his own ideas for boosting infrastructure spending, and thus demand for construction projects, in the forthcoming autumn statement. However, the longer he waits the fewer the excuses he will have if the relatively good economic news in Q3 isn’t repeated well into next year.            

Mini jobs, maximum confusion

In common with some of you reading this blog, I spent much of yesterday at a seminar organised by the Office for National Statistics (ONS) listening to assembled economists and number crunchers puzzling over why Britain’s stagnant economy is somehow creating jobs by the bucket load albeit at the cost of a slump in labour productivity.

As is often the case at such events, most participants agreed there is a puzzle to solve but no one was fully convinced by any of the suggested explanations, though the ONS was at pains to stress there is nothing dodgy about the numbers it churns out. I therefore left feeling rather like one of those bemused coppers in television’s Silent Witness who can’t understand why after hours of picking over a horribly mutilated corpse the expert pathologists are unable to tell him how, let alone why, the victim died.   

I’m no less bemused this morning having sifted through the latest ONS labour market statistics. There’s no doubting the headline news is good – a quarterly June to August rise of 212,000 in the number of people in work and 50,000 fewer unemployed. August in particular appears to have been an amazingly strong month of almost Olympian proportions in the jobs market, the ONS monthly estimate suggesting that total unemployment may have dropped by more than 190,000 in that single month alone.

Best of all 18-24 year olds account for almost a quarter of the rise in employment, helping to cut total youth unemployment to below 1 million. And better still, these jobs have gone to NEETs, jobless young people not in education or training, rather than students looking for jobs to support them through college.

Yet not everything in the garden is rosy. 1 in 3 new jobs created in the latest quarter are ‘mini-jobs’ providing fewer than 15 hours paid work per week while more than half (54%) provide fewer than 30 hours. Moreover, the annual rate of growth in average earnings was just 1.7%, much slower than the corresponding rise in the Consumer Prices Index.    

For millions of people in work the downside of generating jobs in a stagnant economy is therefore low hours at low pay and with little prospect of getting a pay rise big enough to keep pace with price inflation.  A surge in low paid mini jobs may be better than no jobs at all but this is not a sign that the economy is experiencing anything like a proper recovery.

‘Shares for rights’ risks sullying employee ownership

What is it with George Osborne and Adrian Beecroft? Business Secretary Vince Cable openly reckons venture capitalist Beecroft’s ideas on reforming employment law are ‘bonkers’. Yet time and again the Chancellor gives special credence to whatever the leading Tory donor proposes.

Mr Osborne was at it again today in his speech to the Conservative Party conference in Birmingham. Having name checked his friend in a manner otherwise confined only to the prime minister and high ranking Cabinet colleagues, the Chancellor announced a Beecroft inspired change to employment law that, when introduced next April, will allow private sector employees to swap certain employment rights for shares in the companies they work for. Moreover any profits made on the shares held by these new ‘owner employees’ will be exempt from capital gains tax if they do not exceed £50,000.

The plan, detail of which is subject to consultation, is aimed primarily at small and medium sized businesses in an effort to encourage them to hire, although companies of any size can take part. Participating employees will waive their rights on unfair dismissal and redundancy as well as the right to request flexible working and time off to train. Women on maternity leave will also have to give much longer notice of the date they will return to work. Existing employees can choose whether to give up these rights for shares but when hiring new staff employers will be able to offer contracts only on these terms if they so wish. The only proviso is that if an employee leaves, is dismissed or made redundant the company has to buy their shares back at “a reasonable price.”

Mixing the sensible idea of employee share ownership, which can in principle be said to be good for businesses and workers alike, with the populist view, widely held in business circles, that watering down workers’ rights is good for jobs, is clever politics. The Chancellor reckons ‘owner-employees’ amounts to “owners, workers and the taxman all in it together’. But could linking this to reduced workers’ rights prove to be lousy economics?

An obvious problem is limited take-up. For some workers giving up key employment rights for the uncertainty of a return on shareholdings will look like a risky bet, increasing their day to day insecurity with no guarantee of additional reward. However, even if others decide the risk is worthwhile, associating employee share ownership with minimal employment rights undermines the shared interest ethos that makes such ownership successful in the first place.

Having shares in a company is a potential incentive to higher employee performance and productivity not only because of the possibility of greater financial reward but also because it tends to go hand in hand with high trust styles of employment relations. This is the exact opposite of the ‘hire and fire’ business culture that the Chancellor and Mr Beecroft seem determine to instil in the UK. Given, as is well known, that there is no evidence to suggest that watering down workers’ rights would have any significant positive impact on employment levels, why sully employee share ownership with the taint of low trust management and heightened job insecurity.  

Shaken and stirred by tax dodge debate

Turned on the radio just before 7am this morning and immediately heard Monty Norman’s famous James Bond theme, played to mark fifty years since the film franchise was launched with the release of Dr No. In a reverse of the way Bond likes his favourite tipple fixed, I was stirred rather than shaken by the music. But within seconds a phone call from BBC Radio 5 live, asking me to give a live interview at 7:10, kick started the adrenaline.

The House of Commons Public Accounts committee has published a report looking at the contractual arrangements of people hired by public bodies, notably the BBC, which enables them to pay less tax. These so-called ‘off payroll’ staff are self-employed service providing contractors who control their own limited companies. They can avoid the income tax and national insurance they would pay if engaged by public sector organisations on the payroll as employees. While such arrangements are perfectly legal the concern is that these contractors, especially if they work for just one public body or do so for a prolonged period of time, are merely employees dressed up as self-employed to cut their tax bill.   

The issue surfaced earlier this year when it was revealed that the head of the Student Loans Company was employed full-time on this basis, which led MPs on the Commons committee to inquire into the scale of the practice. HM Treasury has also been undertaking an investigation and is currently reviewing submissions to a public consultation exercise which it ran until August.  

The perceived avoidance caused by ‘disguised self-employment’ was initially tackled almost a decade ago by the IR35 legislation but it’s generally reckoned that this is being bypassed because of more widespread hiring of ‘controlling persons’ , so ministers are considering tighter regulation. The aim now is therefore to ensure that where an organisation hires a controlling person to perform a role, that organisation (unless a private sector firm with fewer than 10 staff) will have to deduct PAYE and NI at source, just as if the contractor were an employee. 

Judging by the tone of today’s Commons report, not to mention loads of anti-tax avoidance stories in this morning’s newspapers, there is likely to be widespread political and popular support for such a move. For example, the shadow chancellor Ed Balls spoke of cracking down on ‘bogus self-employment’ when addressing the Labour Party conference at the start of the week. However, those taking tough action must take care not to undermine the important source of flexibility that ‘off payroll’ work provides both to hiring organisations and the economy more generally.  

The Treasury has yet to calculate how much revenue a tightening of tax rules in this area might generate, though it does conclude that there will be ‘no significant economic impact’ and only ‘minimal impact’ on public service delivery, a conclusion I find somewhat surprising.

It’s silly to portray off payroll contractors as tax avoiding ‘fat cats’ who can afford to cough up extra taxes without any side effects. Only a minority are the ‘top talent’ media personalities that attract criticism, the majority are working long hours for comparatively little financial reward. The most obvious possibility therefore is that if required to pay higher tax and national insurance these contractors will simply raise their fees. This will either dent any hoped for addition to the government’s coffers or mean that public sector bodies will cut back on their use of contractors, which will be bad news for those hoping to improve public service delivery as well as contractors themselves. If private sector organisations (which will also be covered by changes to tax rules) end up having to cut back too, work will be left undone with no guarantee that more employees will be hired on the employee payroll to compensate.

It’s perfectly understandable that at a time of fiscal austerity, with either ‘we’re all in this together’ or ‘One Nation’ essential mantras for politicians looking to respond to popular sentiment, there is a policy imperative to ensure everyone pays their fair share of tax. But it’s daft to go about improving tax transparency in a way that could easily harm public sector reform, economic growth and jobs. We may not need our politicians to be as ruthlessly efficient as James Bond, but we don’t want them to act like Bond’s hapless comic opposite Johnny English and shoot us all in the foot either.  

No kidding - employment might be flat-lining too

I liked Ed Balls’s Butch Cameron and the Flat Line Kid joke in his Labour Party conference speech yesterday. Not, it has to be said, a side splitter but funny enough to trigger a smile. However, a lot of economists think the joke will one day be on the shadow chancellor himself, who may eventually have to admit that the economy is doing a little better than official statistics at present suggest.

Last week the Office for National statistics (ONS) revised its estimates for GDP in the second quarter of the year. Output fell by 0.4%, a bit better than the previous estimate of minus 0.5% and a lot better than the 0.7% contraction the ONS originally reported. Many commentators reckon that without the distorting effect of the long June bank holiday to celebrate the Queen’s Diamond Jubilee the economy might have registered positive growth. Moreover, some go further in challenging the accuracy of the ONS numbers, which show contraction since the final quarter of 2011, thereby questioning whether there has been a double dip recession at all.

One reason for this is the strength of employment growth during this period. The number of people in work rose by 201,000 in the second quarter, while total unemployment fell by 46,000. Maybe, it’s argued, this isn’t a genuine puzzle, but simply the result of faulty GDP estimates. Yet while the growth figures get a lot of stick the employment and unemployment figures are taken at face value, so it was good to see last Saturday’s article on the Labour Force Survey (LFS) by Sam Fleming, economics editor of The Times.

http://www.thetimes.co.uk/tto/business/economics/article3553295.ece

The LFS provides estimates, published each month, of a variety of key labour market indicators drawn from a rolling quarterly survey of households. All those in the sampled households aged 16 or over are interviewed five times at 13 week intervals, initially face to face, and asked questions about their employment status, hours of work, pay etc. Households drop out of the sample after their fifth interview and are replaced by newly sampled households, so there is a quarterly turnover rate of 20% in the total sample.

The survey involves a variety of well-known statistical practices designed to ensure results can be obtained and published without too much delay. For example, if a household misses one of its interviews its responses from the previous interview are assumed to be unchanged (a process called imputation, though this is not extended if a further interview is missed). Similarly, typically, a third of responses are proxies, with answers for a temporarily absent household member given by an appropriate respondent, normally a spouse or parent of the absent person. While these proxy responses, which are much higher than average in the case of teenagers and ethnic minorities, amount in effect to informed guesses, an ONS study from the late 1990s suggests they provide fairly close approximations to the answers the absent respondent would have given except with regard to hours of work and earnings.   

However, as The Times article notes, these normal statistical practices are being applied to a survey with a much lower response rate, and thus far fewer households, than it used to achieve. This is due in part to a methodological change in 2010 which saw households with respondents aged 75 or over removed from the sample after their first interview because it was found that their subsequent answers were very unlikely to change. But a long running downward trend is evident nonetheless, with the total sample having fallen from around 60,000 to around 45,000 between 1999 and 2010.

The significance of this lies in what it might mean for so-called ‘sampling variability’. This is the possibility that any given survey sample might give a somewhat different estimate of particular labour market indicators than other samples. This possibility gets bigger the smaller the sample size of the survey. Consequently, the ONS publishes substantial confidence intervals alongside its estimates of LFS indicators which show how much higher or lower the ‘true’ figure of an indicator might be than the survey estimate.

These confidence intervals don’t get much attention but in the second quarter of 2012 were as high as 159,000 for the quarterly LFS estimate of the level of total employment and 83,000 for total unemployment. The corresponding estimated quarterly rise in employment and fall in unemployment was 201,000 and 46,000. It is therefore quite possible that employment increased by no more than 40,000 in that quarter with unemployment flat.

I personally doubt that the puzzle of rising employment in a contracting economy can be entirely attributed to a ‘statistical illusion’, especially since the ONS’s alternative Workforce Jobs Survey also records net job creation of 93,000 in the second quarter of the year. But a closer look at the statistics might give pause for thought to those who accept the strength of the LFS figures without question.