The broad conclusion to be drawn from all this
analysis – which chimes with my own view as expressed in previous blogs - is
that a combination of increased outsider power in the labour market, caused by
an expanded supply of labour, and reduced insider power, resulting from the diminished
influence of trade unions in the workplace, has altered the UK’s trade-off
between real wages and employment. This changing trade-off is apparent in data
stretching back a decade but has only really been noticeable since the start of
the crisis with, as the IFS notes, real wages falling by more than in any
comparable five year period and associated robust employment growth resulting
in a big drop in productivity rather than a 10% unemployment rate.
We can debate until the cows come home as to how to
view this. Few would argue that downward adjustment of real wages is preferable
to a large shake-out of jobs when an economy is depressed. The IFS reiterates
this, going on to note that as a result ‘the long term consequences of this
recession in terms of labour market performance may be less severe than
following the high unemployment recessions of the 1980s and 1990s.’ But what we
don’t know is whether there will be lasting economic implications of a
prolonged squeeze on real pay. A low rate of capital investment is the long-standing problem of the UK
economy – thirty years of labour market deregulation has not been a spur to a
high productivity economy and several years of falling real wages will surely
diminish the incentive to invest still further.
However, what is most intriguing about the IFS
analysis is that it to some extent rewrites the accepted narrative of how
businesses responded to the recession. Back in 2010 it was widely asserted that
CEO’s and HR managers in larger firms had learnt the lessons of previous
recessions and were holding onto staff during the downturn rather than
resorting to large scale redundancies. Although this meant a fall in
productivity while order books were thin, and hence a rise in unit labour costs
and a squeeze on profits, business could either meet this out of healthy cash
reserves or keep a tighter rein on pay, aided by a more equable employment
relations climate. Small firms by
contrast were said to be hit hard by restrictions in bank lending, and with little
or no cash reserves to fall back on were cutting jobs, if not going to the
wall. As a result the business lobby was calling on the incoming coalition
government to freeze the National Minimum Wage and cut employment red tape,
especially for small firms, to preserve jobs.
In fact, the IFS finds, it was mainly larger firms who
cut jobs whereas small firms were more likely to keep workers on at lower pay
in order to limit the impact of a fall in productivity on unit labour costs.
With credit hard to come by but labour getting cheaper, small firms instead cut
investment rather than jobs, this probably further reinforcing the drop in productivity.
The IFS shows that firms with fewer than 50 employees suffered a productivity
fall of 7% relative to a pre-recession trend, compared to no change for firms
with more than 250 employees.
All this suggests that an explanation for what’s
happened to UK jobs, pay and productivity in recent years mainly revolves
around the balance of power between bosses and workers in small firms, where
employment relations are highly individualised and staff are most exposed to
the availability of an abundant supply of people in the external labour market.
It also suggests that the micro-economic policy response lies in easing credit
constraints to small firms and supporting their ability to invest in physical
and human capital in order to boost productivity, rather than further watering
down of employment regulations which would simply reinforce the foundations of
our low-pay, low productivity economy.
