Soaring UK employment and big fall in unemployment still barely registers in pay figures so no need for early interest rate rise

The Office for National Statistics (ONS) has released the latest set of UK labour market data, mostly covering the three months to November last year.

In terms of the pace of employment growth, these latest figures could hardly be better. Many more people in work (up 280,000 in a single quarter), the rate of unemployment already down to 7.1%, fewer young people without work (down 39,000 on the quarter), fewer long-term jobless (down 18,000), rising job vacancies and a fall in redundancies. The number of unemployed people on Jobseekers Allowance has also fallen (by 24,000 in December)

The rise in employment is fairly evenly split between employees and self-employed people. Full-time employment accounts for the bulk (80%) of the total increase and the number of part-timers who want a full time job, one measure of underemployment in the economy, has at last fallen (down by 12,000). The unemployment rate has fallen in every nation and region of the UK except South West England (where there has been an increase of 0.5 percentage points) and Northern Ireland where the rate is unchanged.   

However, all this good news is yet to significantly boost the economic feel good factor for most workers because soaring employment is still barely registering in the pay figures. Average weekly earnings are rising at an annual rate of only 0.9%, still well below consumer price inflation of 2%.   

It’s now inevitable that unemployment will soon fall below the Bank of England’s forward guidance rate of 7%, though precisely when remains uncertain (although the headline three month measure of the unemployment rate fell to 7.1 in November, the latter month itself saw the rate tick-up to 7.4% on the volatile single month measure). But despite this the weakness of pay growth suggests there is still a considerable amount of slack in the labour market which for the time being remains an inflation free zone. Better than expected news on jobs is no reason for an early rise in UK interest rates.

Racial inequality a key factor in structural youth unemployment for some ethnic minorities

The Department of Work and Pensions was uncharacteristically sotto voce yesterday when it released figures on the labour market status of Britain’s ethnic minorities for the 20 year period up to and including September 2013. Those looking for a brief summary had instead to wade through a series of data spreadsheets in order to single out the key headlines for themselves.

My attention was drawn to the figures on youth unemployment, which has yet to be significantly affected by the emerging economic recovery. Although the vast majority (8 in 10) of the almost 1 million young unemployed people in Britain at present are white, it’s clear from an interrogation of the data that youth unemployment is disproportionately affecting at least some of Britain’s ethnic minorities. 

The headline unemployment rate for whites aged 16-24 (19% in September 2013) is much lower than that for blacks (45%), young people of mixed race (26%), Indians (34%), Pakistani/Bangladeshis (46%) and Chinese (29%). As is well known, however, our perspective of youth unemployment is affected by the fact that so many young people participate in full-time education – which reduces the size of the active workforce and raises the measured unemployment rate – and includes young people in full-time education who are looking for work.

If instead one looks at unemployed jobseekers not in full-time education as a proportion of all young people in the 16-24 age group the adjusted ‘youth unemployment rate’ for whites is measured at 10.4% rather than 19%. Moreover, since people from different ethnic groups have different propensities to enter education or to look for work this adjustment likewise alters our view of youth unemployment rates for the other ethnic groups, in some cases markedly: 12.1% for blacks, 10.1% for young people of mixed race, 10.9% for Indians, 15.3% for Pakistani/Bangladeshis, and 5.4% for Chinese.

Unlike the headline youth unemployment rates, the adjusted rate suggests that only two ethnic minorities, blacks and Pakistani/Bangladeshis, fare much worse than whites, while young Chinese fare much better. However, some commentators object to this adjustment for a variety of reasons, notably because it excludes young inactive jobless people not in full-time education. Adding these people to young unemployed job-seekers (to obtain a figure broadly approximating to that for young people not in employment, education or training, or ‘neet’) is problematic since not all jobless people want to work or study at any given time. But while doing so shows ‘neet’ rates to be higher than adjusted unemployment rates they also offer a different perspective on ethnic minority joblessness  than that conveyed by the headline youth unemployment rate: 19.3% for whites, 19.9% for blacks, 17.7% for young people of mixed race, 19.1% for Indians, 26.9% for Pakistani/Bangladeshis and 14.2% for Chinese.  

A positive aspect of these figures is that they show relatively little change in the relative position of the various ethnic groups since before the recession in 2008. But the persistence of an ‘unemployment gap’ between black, Pakistani/Bangladeshi and white youths on all these various measures suggests that there is a larger structural element to the problem of youth unemployment for some ethnic minorities that won’t be solved by a stronger economic recovery alone.

It remains my view that around half the current total level of youth unemployment is due to weak demand for labour. As a result we should start to see a substantial and welcome fall this year if, as I now expect, job vacancies return to the pre-recession level. However, while urgent improvement in skills and employability is needed to reduce the remaining structural component of the problem, with ethnicity such a significant feature of youth unemployment for some groups more has to be done to tackle the racial inequality that also appears to be a key underlying causal factor. This receives too little attention in policy discussion of solutions to youth unemployment and ought to be highlighted.  

UK productivity: ‘gap’, ‘puzzle’ and the disappointing HRM narrative

Another New Year and self-help professionals are in full-swing, urging us all to get into better physical or emotional shape. Enthusiasts for Human Resource Management (HRM) are joining in too, calling upon organisations to ‘work smarter’ and engaging employees to boost labour productivity. UK HRM commentators are especially exercised about this at present in the belief that improved people management is the key to reversing the big (and still puzzling) fall in UK productivity since the start of the recession which has widened the productivity gap with other major developed economies. However, it’s important not to overhype the significance of HRM in the UK’s productivity story and also to ask what role HRM should play in promoting productivity, so a brief analytical perspective is useful.

The most recent comparative data published by the Office for National Statistics (ONS) show that in 2012 UK output per hour was 29 percentage points lower than in the United States, 24 percentage points below Germany and France, 3 percentage points below Italy, 1 percentage point below Canada, but 16 percentage points above Japan. The 16 percentage point difference between UK output per hour and the average of these countries is the ‘productivity gap.’

The consensus of studies of the causes of the gap indicate that the entire difference between productivity in the UK and the major European economies is entirely explained by the UK’s relatively low level of investment in physical and human capital. By contrast, half the productivity gap with the United States is due in addition to less effective use of physical and human capital in the UK.  This latter deficiency is in part due to deficient management in the UK, though this involves management in general not solely people management. Moreover, insofar as people management helps explain part of the United States success story on productivity this isn’t because US organisations are applying the kind of ‘high engagement’ people management strategies beloved of HRM enthusiasts. US workplace management practice is commonly very hardball by European standards, with levels of employee engagement often very low even by current UK standards, an observation that undermines the frequently asserted link between engagement and productivity. Overall therefore the role of HRM in closing the productivity gap is thus far from straightforward and not necessarily good news for workers.

As for the productivity puzzle, this refers to the unexplained absolute and relative fall in UK productivity in recent years. The productivity gap in 2012 was wider than at any time since 1994, with UK output per hour 2 percentage points below its pre-recession peak and 15 percentage points lower than if productivity had continued to grow at the average pre-recession rate.

Economists are divided on the causes of the fall in productivity. Some consider it a temporary phenomenon caused by weak demand in the economy that will disappear over time as the economy recovers. Those holding this view explain the fall in terms of workers accepting cuts in their real pay to avoid unemployment, encouraging organisations to produce any given level of output in more labour intensive ways. Eventually, falling unemployment will put upward pressure on pay, thereby encouraging organisations to become more productive so as to curb labour costs. Other economists by contrast think there has been a permanent, or at least long lasting, hit on the productive potential of the economy reflecting the damaging structural impact of the financial crisis. And there are those who combine demand and structural explanations, suggesting that real wage cuts in the wake of weak demand have acted as a disincentive to capital investment which will lower productivity growth over the longer term.

HRM probably played an integral role in the UK's recent productivity story by wisely encouraging organisations to seek alternatives to redundancy during tough economic times and persuading employees to put jobs before pay rises. Not surprisingly, however, the HR profession, which puts an awful lot of effort promoting itself as a key source of organisational performance, has been somewhat reluctant to see headlines proclaiming ‘HR achieves welcome fall in UK productivity’. As a result we instead continue to see lots of assertion that HR will drive the UK to future prosperity, although even here the message is confusing, with calls for higher investment in human capital often buttressed by apologias for bad employment practices, such as the use of zero hours contracts, that only serve to the increase the appetite for low cost, low productivity production.

The HRM narrative on UK productivity remains disappointing. The millions of people stuck in low productivity jobs with poor pay and conditions deserve more than the current diet of simplistic management consultant nostrums of engagement and empowerment which take no account of the reality of life in most organisations. In particular we need HRM models that are truly about people, for people and involve people, which in an honest way advocate improvements in pay and workplace conditions, recognise that proper engagement requires genuine employee consultation and questions deregulation as the solution to our poor productivity performance.