The worrying slump in manufacturing productivity

I’ve just got back from the barbers having had my pre-Easter shearing. Fortunately my Cypriot hairdresser did as good a job as on all my previous visits in the past 20 years. He was understandably concerned about his finances but seemed happy that he was doing haircuts rather than having them metaphorically done to him by assorted monetary authorities. But I made sure I went before the banks reopened, just to be on the safe side.

Suitably shorn, I turned to the latest economic headlines. A good news day it seemed. The Office for National Statistics figures for service sector output looked good, while a report from the OECD paints a somewhat brighter picture for the global economy, continued weakness in the Eurozone notwithstanding. The OECD also reckons the UK will avoid a triple-dip recession, though I’m increasingly tired of debate on this subject. Whatever modest side of zero GDP turns out to be in Q1 2013 is of far less significance than the possibility of several more years of below trend growth.  

As for the latter, with the number of people in work rising sharply against a backdrop of falling GDP it’s not surprising to see that the ONS this morning also reported a further quarterly fall in UK hourly labour productivity (down 2.3% comparing Q4 2012 with Q4 2013). However, I was taken aback by the figures for manufacturing productivity.

Output per hour in the manufacturing sector has now fallen for five successive quarters and in Q4 2012 was 5.2% lower than a year earlier. Such a sharp and prolonged fall is in marked contrast to much of the period since the start of the recession in 2008 during which time manufacturing productivity has generally increased. There have been a few isolated quarters of falling productivity but these have never been sustained in the manner of 2012.

This is worrying. The counterpart to the slump in manufacturing productivity has been a surge in unit wage costs in the sector which have registered a year on year increase of 7.4%, despite relatively subdued pay rises for manufacturing employees. This cost hike is not good for manufacturing competitiveness, especially with our potential customers in the Eurozone feeling the economic squeeze, and represents a serious further blow to hopes of an export led recovery in the UK. Falling productivity in the economy as a whole is a problem as well as a puzzle. A slump in manufacturing productivity is an even bigger concern, and deserves more attention.

Loss of public sector jobs is more than a numbers game

The focus on private sector job creation in this week’s Budget statement from the Chancellor overshadowed the wider labour market implications of the latest OBR projections for public sector employment.

Adjusting for statistical reclassifications and the fact that the OBR sets Q1 2011 rather than Q1 2010 as the starting point for its projections, total general government employment is on course to fall by 700,000 during the current Parliament and by 1.1 million by Q1 2018. The projection is exactly in line with what public sector HR professionals were expecting in 2010, although it has taken a while for those not experiencing the pressure on public sector organisations first hand to accept the harsh consequences of the Coalition's spending squeeze.   

The projected total fall will have cut the public sector workforce by a fifth and reduced the public employment rate – i.e. the share of public sector employment in total employment - from 20% to 15%, by which time proportion of people employed in the public sector will be lower than at any time since the dawn of the welfare state in the 1940s.

Does this matter? Commentators on the political left consider it a tragedy, neo-liberals a positive development. But either way a big structural change in the employment base of the economy in such a relatively short space of time represents a seismic shift in the underlying labour market. The numerical impact of this is masked by the surprising and most welcome strength of private sector employment growth. However, the qualitative effect of such a shift should not be underestimated given that the public sector employs relatively skilled workers on relatively decent rates of pay and has traditionally been considered a source of ‘good work’ in terms of training, staff development, flexible working and equal opportunities. The deep impact of the loss of such jobs on a mass scale could prove as significant to the British way of work as the mass de-industrialisation of the labour market in the 1980s and 1990s. The big switch from public to private sector employment amounts to far more than just a numbers game. 

Chancellor banking on a late economic spring

This year I produced my post-Budget response for the IPA, the membership body that aims to raise organisational performance through workforce engagement. I have the IPA's permission to publish this on my own site

George Osborne delivered his fourth Budget statement to Parliament in time for the spring equinox. The economic climate he has to contend with is even chillier than our very un-spring like weather. But rather than spend more directly to warm things up, the Chancellor kept the fiscal thermostat low and turned instead to the Bank of England to apply a bit more heat while offering a little comfort in the form of targeted tax and infrastructure investment measures paid for by a tighter squeeze on public sector budgets. Mr Osborne is clearly hoping that the delayed economic spring will not be too long in coming. But how much longer might he and the rest of us have to wait?

Grim arithmetic

The basic economic arithmetic is fairly grim. According to the latest forecast from the Office for Budget Responsibility (OBR), the economy will grow by 0.6% this year, half what the OBR forecast last December, though fingers crossed we should avoid a triple dip recession. And even though things are gradually expected to improve from 2014 onward, growth will be insufficient to absorb all the spare capacity in the economy for some considerable time to come. Consequently, unemployment isn’t expected to fall below 2.5 million until the second half of 2016 and will still be above 2 million five years from now.

An anaemic economy means weak tax revenues, so the Chancellor is struggling to get to grips with record government borrowing and public debt despite the cuts in public spending he set in motion when taking the helm at HM Treasury in 2010. The OBR reckons public sector net borrowing will be close to £120 billion last year, this year and next year. In 2010 Mr Osborne hoped that by this year net debt - the cumulative sum of government borrowing - would have peaked, albeit at a fairly horrendous 70.3% of GDP. In fact, the peak is now expected in 2016-17 at an even more horrendous 85.6% of GDP.

Persisting with Plan A

Critics argue that slow growth, stalled progress in reducing government borrowing and a rising debt burden prove that the Chancellor’s so-called ‘fiscal plan A’ has failed. Mr Osborne counters, extending the meteorological metaphor, by arguing that he is travelling the correct path but has encountered more difficult weather than expected, notably a cold blast from across the Channel where the Eurozone is doing even worse than the UK, which seriously dents exports. Either way, the Budget shows that he has no intention of changing course, which means that it’s essentially Plan A from now until the General Election due in 2015.

This doesn’t mean the Chancellor is doing nothing, merely that he isn’t heeding the calls of his opponents who would countenance an increase public borrowing in the short-run in the belief that this would stimulate stronger economic growth and help cut borrowing even more in the medium term.

Bank to the rescue?

Although the Budget is broadly fiscally neutrally for the period 2013-14 to 2017-18, it contains various supply side measures designed to foster an ‘aspiration nation’, including cuts in business taxes and a £5 billion injection of off-public balance sheet finance aimed at the housing market, while also changing the remit of the Bank of England’s interest rate setting monetary policy committee (MPC), enabling the MPC to use ‘unconventional policy instruments to support the economy.’ The remit change is written on the welcome mat at Threadneedle Street ahead of the arrival this summer of new Governor Mark Carney.

The main question mark over this policy of fiscal constraint, monetary activism, and supply side reform is that it’s been the bedrock of Mr Osborne’s economics for three years and for three years failed to deliver the goods. The economy has flat-lined. Unconventional monetary policy instruments have had the drawback of pushing up inflation. And several supply side Plans for Growth aren’t obviously working as far as one can tell.

Job market success

However, the Chancellor can point to one particular recent success story, the performance of the UK labour market. A stagnant economy in which, as the OBR highlights, the public sector will have shed 1 million jobs between 2010 and 2018 is creating jobs at a rate normally seen only during periods of boom.

Adjusting for statistical distortion there are 1.04 million more people working in the private sector since Mr Osborne’s fiscal austerity began – with 6 new private sector jobs for every lost public sector job in 2012 alone. This is obviously little comfort for public sector workers in fear for their jobs and who, as Mr Osborne announced in his Budget, not only face an extension of the 1% cap on pay rises but also, and perhaps more significantly, curbs on progression pay increments. Moreover, the downside of rising employment in a stagnant economy is falling productivity and cuts in real pay for private sector workers too. But from both a social and economic point of view strong employment growth is preferable to the even higher unemployment that would otherwise have accompanied austerity.

Indeed the OBR, which is gloomy about the outlook for most key economic indicators, is more optimistic about prospects for the labour market than it was in December. The number of people in work is expected to rise by around 100,000 more than previously forecast this year, though the increase in average earnings will at just 1.4% remain well short of consumer price inflation of 2.8%.Unemployment is expected to peak at a somewhat lower rate (8% rather than 8.2%), elevated slightly above the current rate of 7.8% only because of strong growth in the number of people active in the labour market. Overall, private sector employment is forecast to be 2.4 million higher in 2017-18 than in 2010-11, with total employment, accounting for public sector job cuts, 1.4 million higher.

Employment Allowance: a good idea?

Not content with this, the Chancellor wants even more job creation. One of the centrepiece measures of the Budget was therefore a £1.25 billion Employment Allowance offered to employers. The Allowance, which when introduced in April 2014 will cut the employers’ national insurance (NICs) bill by £2000 for around 1.25 million, mostly small businesses and charities, is a potentially positive move. The Labour Party as well as business organisations have welcomed it, providing a rare example of something both Mr Osborne and his Labour shadow Ed Balls agree on. Yet popularity aside, the consequences of the Allowance for jobs and the wider economy is uncertain.

The impact of the Employment Allowance on jobs will clearly depend on take up – itself dependent on demand for the goods and services of business and charities as well as their access to finance– and could be prone to an element of deadweight by offsetting NICs for employers that would have hired the same number of people anyway. Similarly, the cut in NICs might be absorbed into higher profits or passed on in higher pay to employees, without boosting hiring. Not surprisingly therefore, the OBR thinks it will have only a marginal impact on labour demand.

The overall cost effectiveness of the Employment Allowance might also be questioned. At a time of falling real wages and very strong employment growth it’s not obvious that the cost of labour is a significant constraint on job creation, even for small businesses. In this context, a further reduction in labour costs could act as a disincentive to capital investment and deter much needed improvements in labour productivity. If so the Allowance might not be as beneficial a policy measure as it appears. In the absence of a full Treasury impact assessment the jury should remain out on the measure.

We needed a Budget for Investment

Overall, however, any concern about the effect of the Employment Allowance on investment pales into insignificance alongside the overall weakness of UK business investment at present. Although the OBR sees this as an important driver of growth, its forecast for business investment between now and 2017 is considerably weaker than that published last December . This is perhaps the most worrying aspect of the OBR forecast, which attempts to take account of the impact of the Chancellor's Budget measures. Without much faster business investment the economy won’t achieve the truly desired combination of higher productivity, higher employment and higher real pay. Neither will the economy rebalance away from over-reliance on consumer spending as a driver of growth.

Budget 2013 needed above all to be a Budget for Investment. This would actually have had a more important impact on aggregate demand and jobs than any measure targeted specifically at boosting employment, as well as underpinning future economic prosperity On that measure, if the OBR forecast proves correct, the Budget looks to have fallen short.     

Jobs boom amid Budget day gloom

As I write it’s just a little over an hour until the Chancellor, George Osborne, delivers his fourth budget statement to Parliament. He might have chosen a better day. For months now each set of official labour market figures from the Office for National Statistics (ONS) have shown falling unemployment. This morning, however, the news was less good – unemployment up by 7,000 in the three months to January.  

The latest headline rise in unemployment is disappointing though primarily due to a flood of women into the labour market at the turn of the year rather than weak employment growth (see headline figures below). On the contrary, the number of people in work again rose sharply, with a big rise in full-time employees more than offsetting a fall in part-time employment and self-employment. Private sector job creation continues to rise at a remarkable pace, while the loss of public sector jobs has slowed from around 30,000 a quarter to 20,000 a quarter. Overall, job vacancies are up very slightly, redundancies down and encouragingly long-term unemployment down. However, it’s clear that people are experiencing real pay cuts to price themselves into work, the rate of growth in weekly earnings slowing yet again from 1.3% to 1.2% at a time when price inflation is on the rise.

The big worry in these latest figures is what appears to be a more fundamental renewed deterioration in youth unemployment. Employment has fallen for 16-24 year olds while unemployment has risen sharply, with the core group of young people not in full-time education, who had a relatively good 2012, now being hit hard once again despite a significant amount of government support being targeted at them.

But we should be careful not to go overboard on the doom and gloom. With the UK economy at risk of a triple dip recession, almost 7,000 public sector jobs being shed each month and 2.52 million people unemployed it might seem odd to suggest that we’ve just been through a jobs boom. Yet believe it or not 2012 was the best year for employment growth since 2000 and surpassed by only nine other years in the previous four decades. What makes the 2012 jobs boom truly extraordinary is that all the other jobs booms since the 1970s occurred during periods of economic boom, with GDP growing well above the underlying trend rate, rather than stagnation.

The 2012 jobs boom can’t be explained solely by more people working short-hours. Full-time employees account for half the total increase in employment. Only in two years since the early 1970s has the volume of work undertaken in the UK economy as measured by total weekly hours worked increased at a faster annual rate than in 2012.

 A jobs boom without economic growth is unprecedented in recent UK economic history. The downside of course is a fall in labour productivity and a continued real pay squeeze. This might justifiably be deemed a price worth paying for more jobs. But a jobs boom that doesn’t deliver improved living standards is like nothing we’ve seen before in the UK and not necessarily a signal that the economy is heading in the right direction. The extraordinary jobs boom may console the Chancellor but doesn’t lessen the onus on him to deliver a Budget for growth later today.      

Latest Quarterly (November-January) Labour market headlines from ONS stats

Number of people in work up 131,000 (of which 111,000 women)

Number unemployed up 7,000

Number of people in labour market up 137,000 (of which 116,000 women)

Number unemployed and claiming Jobseekers Allowance down 1,500

Number 16-24s in work down 30,000

Number 16-24s unemployed up 48,000

Number long-term unemployed down 16,000

Private sector employment up 151,000

Public sector employment down 20,000 (mostly due to education)

Full-time employment up 195,000

Part-time employment down 64,000

Part-time who want full time job down 6,000

Employees up 170,000

Self-Employment down 21,000

Temp employees up 18,000

Temp employees who want permanent job up 8,000

Vacancies up 2,000

Redundancies down 14,000

Regions: unemployment up in North East, North West, Yorks and

Humber, West Midlands, South East, Wales and Northern Ireland

Growth in total pay (including bonuses) down from 1.3% to 1.2%

Growth in regular pay down from 1.3% to 1.2%

Public pain, private gain

Yesterday the Office for National Statistics published figures showing change in public and private sector employment in the English regions and Wales, Scotland and Northern Ireland covering the period since the start of the recession in March 2008 and September 2012:       

The burden of public sector job cuts across England has so far generally fallen most heavily on those regions with greatest dependence on the public sector for employment, notably the North East which has already seen its public sector workforce shrink by 10% since the pre-cuts peak (see table). By contrast, London and the South East have got off relatively lightly and along with the East Midlands are actually still employing more public sector workers than before the recession in 2008. But the pattern is slightly different in the other nations of the UK with Scotland suffering a bigger percentage loss of public sector employment than either Wales or Northern Ireland which have slightly higher shares of public sector employment in their total employment pools.

Surprisingly, however, although the North East is among the biggest shedders of public sector jobs it is also the region with the highest proportionate increase in private sector employment (almost 5%) comparing 2008 and 2012. Overall, all the English regions now have more people working in the private sector than at the start of the recession, though Wales and Scotland have suffered the double whammy of a fall in both public sector and private sector employment.

The bounce-back of private sector employment in a public sector dependent region such as the North East could be evidence that private sector employers are becoming more competitive in the hiring process in areas where public sector jobs were previously plentiful and public sector pay rates relatively generous. However, the bounce back is less strong in other English regions with similar dependence on the public sector, and notably Wales and Scotland where there has been no bounce back at all, which suggests a variety of factors are at work. The argument that a big public sector crowds out private sector jobs, and hence that even bigger public sector jobs cuts would be good for private sector employment, thus remains unproven by these latest figures.

Regional change in public and private sector employment, excluding the impact of the reclassification of further education and sixth form colleges from the public to the private sectors in 2012.

                                       

                                   Public sector        Private sector

                                       % change             %change         % share public sector employment

                                     Peak to latest       2008-latest     

North East                        -10%                        +4.9%                               22.2%          

North West                         -9%                          +2%                                20.3%

Yorks/Humber                   -8%                           +1%                                20.6%

E Midlands                         -6%                           +2%                                17.7%

W Midlands                       -7%                         +1.5%                               19.7%

East                                    -8%                            +2%                              16.7%

London                               -7%                            +3%                              16.9%

S East                                 -7%                            +0.5%                           16.6%

S West                               -11%                            0.0%                            19.0%

Wales                                  -7%                           -3%                               25.7%

Scotland                             -10%                          -2%                               23.5%

N Ireland                               6%                            1%                               27.7%

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Source: ONS