Record UK employment? Not until we get 2.8 million more private sector jobs

Another month, another set of mixed official figures on the UK labour market. Those who know me are aware of how desperate I am to see a return full employment. But unlike commentators with a political or commercial vested interest in talking things up, my approach is always to make a fair assessment of the state of play. And it’s not as good as some want us to think.

I have already commented publicly today on how our ‘jobs without growth’ economy is a sign of economic weakness, sustained only by falling productivity and a severe squeeze on real pay levels, not success. This can’t go on forever, and evidence of a sharp jump in redundancies at the end of 2012 – well before the current spate of job cuts announced this month – could spell the beginning of the end. But what really bugs me is constant talk of the UK’s ‘record number of people in work’. This bald statistical statement conveniently glosses over the fact that the true measure of a country’s employment performance is its employment rate, the proportion of people in work, which takes account of population.

The UK employment rate fell sharply between 2008 and 2010, stabilized between 2010 and 2011 but despite subsequent improvement remains 1.7 percentage points below the pre-2008 recession peak of 60.3%. Without any further rise in population, the total number of people in work would have to increase by more than 900,000 for the employment rate to return to the 2008 peak. However, on current official population projections a return to the 2008 peak employment rate will require a net increase in employment of 2.2 million in order to offset the effect of population growth.

Adjusting for the projection of the Office for Budget Responsibility (OBR) that public sector employment will fall by a further 600,000 between the start of 2013 and the start of 2018 the estimated number of jobs needed to restore the 2008 employment rate implies a required net increase in private sector employment of 2.8 million.  With a normal pace of employment growth this is unlikely to be achieved before 2020 even if the economy avoids further shocks before the end of the decade. Record employment? Not really. 

Beware politicians bearing stats

The coalition government’s mid-term review, published earlier this afternoon, states that ‘since we came to office more than 1 million jobs have been created in the private sector.’ This claim is somewhat misleading. Adjusting for changes to statistical classification the correct figure is 900,000. Moreover, taking account of a corresponding increase in the size of the workforce, the assertion that the labour market has been performing better since May 2010 is also misleading. In fact, both the employment rate and the unemployment rate are unchanged, female unemployment, youth unemployment and long-term unemployment are higher, real wages have fallen, and workers are producing less per hour worked.

Official data available from the Office for National Statistics show that since the quarter May-July 2010 (the first in which the coalition government was in office):

The total number of people in work has increased by around 500,000 (900,000 more working in the private sector, 400,000 fewer working in the public sector).

The employment rate (proportion of people in work) is unchanged at 58.5% - still 1.8 percentage points below the pre-2008 recession peak.

The unemployment rate is unchanged at 7.8% - still 2.6 percentage points above the pre-2008 recession low.

 The proportion of unemployed people who are long term unemployed has increased from 32.3% to 36.0%.

The male unemployment rate has fallen from 8.6% to 8.3%.

 The female unemployment rate has increased from 7.0% to 7.3%.

 The youth unemployment rate has increased from 19.5% to 20.3%.

 The average weekly wage is 2.7% lower in real terms.

 The amount of goods and services produced per hour worked has fallen by 1.28%.    

A fair mid-term assessment of the coalition’s jobs record is that the labour market has not weakened dramatically despite fiscal austerity and economic stagnation. But while ministers can take some comfort from this relatively benign outcome it should not be overplayed as a success story.

Happy New Year?

Being one of those people who really enjoy the festive season, I find the start of January hard going. My day therefore began with a look at the pristine 2013 diary to check when Easter will fall (good news, it’s at the end of March, about the earliest date possible, though I guess it might still be cold then). However, having cheered myself with that prospect, it was back to the grim reality of economic statistics, with the third quarter 2012 labour productivity statistics dampening the mood.

The UK economy may have emerged from recession in the third quarter of last year but what might be called the ‘productivity recession’ deepened, with the amount produced per hour worked falling by 0.2%. For the economy as a whole output per hour worked fell by 2.4% between Q3 2011 and Q3 2012, while for the market sector the fall was 3.9%.

The continuing and deepening productivity recession highlights the degree to which rising employment levels mask a severe underlying shortage of demand in the UK economy. This situation continues to be sustained by an ongoing pay squeeze which is helping to keep wage costs in check. Despite this, however, the annual rate of growth of unit labour costs remains well above 3% at a time when, after several years of real pay cuts, the exercise of pay restraint has probably reached workplace tolerance levels. With the economy likely to have flirted with a further contraction in the final quarter of 2012 and a slow start to 2013 on the cards, businesses will therefore be under increased financial pressure to boost productivity in the coming months. Whether this means more redundancies, less hiring or an increase in staff workloads remains to be seen. But either way it suggests the UK workforce faces an imminent reality check.

Consequently, I expect total employment to increase by only around 80,000 in 2013, less than a fifth of the increase seen in 2012. When I released this forecast last week on December 28^th a Conservative MP (Ms Harriet Baldwin, Parliamentary Private Secretary to Employment Minister Mark Hoban MP, no less) tweeted that not only I was being wildly pessimistic but also that the media should ignore my comments because I had been wrong in my prediction for employment in 2012. Hands up to the latter change – I have openly admitted I got 2012 wrong, though since my forecast for last year was in line with the consensus view of economists I am far from alone, and still no one quite understands why a contracting economy managed to create loads of jobs. However, I fervently dispute the assertion that I am relatively pessimistic about 2013 (anyone who thinks this either hasn’t read the detail of my forecast or doesn’t know what other economists are saying).

In fact my 2013 forecast is both more optimistic than the consensus view and that of the independent Office for Budget Responsibility (OBR). The OBR, for example, forecasts no net employment growth in 2013 and a rise in the unemployment rate to 8.3%, up from 7.8% at the end of 2012. By contrast, I expect unemployment to peak at 8.1% (with youth unemployment actually falling a little). Critics who consider this forecast itself too pessimistic are fully entitled to their view and I genuinely hope to be as wrong about 2013 as I was about 2012. But I’m no more of a doomster than most other practitioners of the ‘dismal science’, all of whom, like me, are eager to see the UK economy return to solid growth as quickly as possible, with rising employment and pay. Happy New Year!