Wednesday 12 June 2013

IFS study serves to rewrite UK narrative on pay, jobs and productivity

The Institute of Fiscal Studies (IFS) analysis, published today, of the interaction between pay, employment and labour productivity in the UK since the start of the financial crisis is the latest output from what’s becoming a cottage industry examining the so-called ‘productivity puzzle.’ John van Reenan at the LSE’s Centre for Economic Performance has done similar work, as has the TUC which published its report on the subject yesterday.

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.   

Latest official jobs figures paint a mixed picture

The Office for National Statistics has released the latest set labour market data, mostly covering the three months to April this year. The headline labour market figures look slightly better than those in recent months, with total employment 24,000 higher than the previous quarter, total hours worked on the up and total unemployment down 5,000. There has also been an encouraging increase in job vacancies (reducing the average number of unemployed people per vacancy to below 5 for the first time for several years) while the number of people claiming jobseeker’s allowance has fallen by 8,600. The rate of growth in total weekly earnings has jumped from a paltry 0.6% to 1.3%. However, the underlying picture is more mixed.

The number of men in work has fallen by 14,000 with a further 63,000 men becoming economically inactive – the headline fall in male unemployment of 12,000 therefore masks a weakening labour situation for men. By contrast, the number of women in work has increased by 38,000 but this has coincided with a quarterly rise in female unemployment of 7,000, mainly because 33,000 stay at home mums entered the labour market. Similarly, the number of over-65s in work has increased by 38,000 – taking the total number of people in employment in this age group above 1 million for the first time – while employment amongst 16-24 year olds has fallen slightly (down 4,000). For men and women as a whole, the number of people long-term unemployed (i.e. jobless and looking for work for more than a year) increased by 11,000.

Private sector employment has increased by 46,000, driven by 21,000 more people becoming self-employed, but public sector employment continues to fall (down 22,000 in the first quarter of the year). Moreover, for the economy as a whole, the number of people being made redundant has increased. The underlying rate of fall in public sector employment continues to be slightly lower than Office for Budget Responsibility projections. This suggests either that the rate of public sector job cuts will accelerate between now and the General Election in 2015 or that the final net loss of public sector jobs will be somewhat lower than currently expected.

The regional pattern of ups and downs in the labour market is also mixed, with the West Midlands being the big loser in the latest quarter (the latter region suffering a fall in employment of 43,000 and an increase in unemployment of 19,000). But the UK’s ‘Celtic fringe’ is having a much better 2013, in marked contrast with the jobs drought outside of England in 2012. Employment is up by 43,000 in Scotland, 10,000 in Wales and 24,000 in Northern Ireland.  Unemployment is down in Scotland and Northern Ireland and unchanged in Wales.      

The improvement in pay growth is also slightly deceptive. Stripping out the effect of very large spring bonus payments for some workers in the private sector, the underlying rate of growth in weekly earnings (i.e. regular pay) remains weak at 0.9% and still well below the rate of price inflation.

Taken together, these mixed jobs figures suggest the UK labour market is experiencing a modest improvement compared with recent months, which is consistent with broader evidence for the economy as a whole. But the news is better for some groups of workers than others and with unemployment still at 7.8% and real pay being squeezed the hard slog continues for people at work and job seekers alike.

Monday 10 June 2013

Do workless women deserve more attention than workless men?

When the global financial crisis first hit the UK labour market in 2008 it was widely expected that in our increasingly service based economy women were likely to suffer more than in previous recessions. Moreover, when the coalition government began to cut public spending in 2010 women were again expected to bear the brunt of the impact of job cuts given the relatively high proportion of women working in the public sector.

There is a widespread perception that these expectations have been, and continue to be, fulfilled. The Fawcett Society, a UK campaign group for women’s rights, talks of a ‘female unfriendly’ labour market.  Last week BBC Radio 4’s Woman’s Hour included an item on the particular difficulty faced by women aged over 50 in finding work. And the plight of women in the UK labour market has also been stressed in a recent report from the government sponsored Women’s Business Council “Maximizing Women’s Contribution to Economic Growth.” The report notes that over 2.4 million UK women are not in work but want to work, and also suggests that women are currently setting up new businesses at half the rate of men.

All this comes with repeated calls to government and employers to make a special effort to help more women into work. Yet while I fully agree with the need to return the economy to full employment, I’m not entirely convinced that women are suffering disproportionally. On the contrary, although men continue to have a higher employment rate than women, Office for National Statistics data, obtained from the Labour Force Survey, show that women have generally fared better than men in the five years since the start of the recession.

Since the first quarter (q1) of 2008 the number of women in work has increased by more than a quarter of a million (a net rise of 267,000, or +1.2%) while the number of men in work has fallen (a net fall of 70,000, -0.4%). The number of men in employment fell much more sharply than the number of women in employment in the two years to q1 2010 (-600,000 for men, -100,000 for women), increased by more than the number of women in employment in the subsequent two years to q1 2012 (+340,000 for men, +140,000 for women) but increased by less in the year to q12013 (+194 for men, +240,000 for women).

Most strikingly, the number of women aged 50 and over in employment is almost half a million (457,000) higher than at the start of the recession in 2008, the number of men in this age category in employment having increased by a quarter of a million (258,000).  The employment rate of women aged 50-64 has increased by 3.3 percentage points since 2008. Employment rates have fallen for all other working age categories. As for budding entrepreneurs, women account for approaching two-thirds (203,000, or 63%) of the total net increase in self-employment since 2008, the number of women self-employed having increased by almost a fifth (19.3%).

Despite this, it is true that unemployment for women has risen sharply since 2008 and has been above 1 million since 2010. Indeed although the net increase in unemployment has been smaller for women than men since the start of the recession (408,000 compared with 492,000), in percentage terms unemployment has increased by more for women (+60%) than men (+53%). However, the net rise in female unemployment is due to job shortage rather than job loss, with a substantial net increase of 676,000 in the number of women participating in the labour market exceeding the net increase in the number of women in employment. Similarly, there is relatively little difference between the number of economically active and inactive jobless women who want to work (2.45million) and the corresponding number of jobless men (2.36 million). Moreover, the net increase in this so-called ‘want work’ joblessness since the start of the recession is larger for men (513,000, +27.2%) than women (470,000, 23.7).
While we need to get more women into jobs and close the gender pay gap – which, incidentally, has continued to narrow in recent years, so it can’t be said that the increase in the number of women in work is due to women becoming relatively cheaper to employ - the reality is that women have generally fared better than men in the labour market since the start of the recession. It’s therefore far from obvious that the problem of workless women deserves greater attention than that of workless men.