A full employment target is no longer enough

The political economy of full employment has been my principal professional interest – some might say obsession – for the past 30 years. For much of that time the concept has remained dormant, having been placed in deep freeze in the late 1970s. But every now and then a politician decides to revive the idea, suitably reframed for a new audience, as the UK Chancellor of the Exchequer, George Osborne, did earlier today.  

Even though politicians on the left long ago abandoned the Keynesian-style policy mechanisms associated with full employment in its post war heyday, they have generally been more comfortable about promoting it as an objective. Conservatives, by contrast, have to skirt round the unhelpful fact that Mrs Thatcher disliked the idea (the former prime minister claimed to always carry a copy of the 1944 employment policy white paper in her handbag, but presumably only as a reminder never to back-slide on her neo-liberal principles). Tory Chancellors, such as Ken Clark in 1994 and now George Osborne, instead evoke Churchill as an advocate of full-employment, while at the same time applying the concept to an entirely different frame of economic reference.

Mr Osborne’s task is to suggest that his current, and presumably future, agenda of tax cuts and welfare reforms is needed to propel the UK to top spot in the G7 when it comes to the employment rate (i.e. the proportion of the population in work). To Mr Osborne’s credit this is a specific full employment target – most of his predecessors have aimed more loosely at ‘a high and stable’ level of employment. However, although this is a moving target – since employment rates in other G7 countries will be changing too - it isn’t particularly stretching, and on current Office for Budget Responsibility projections will probably be met within five years without any changes to policy.

And here’s the rub. A generation ago full-employment was hard to achieve in the UK because an inflexible labour market meant wage inflation proved to be a serious problem even when the unemployment rate was close to 10%. But after 30 years of supply side reform, Mr Osborne has the good fortune to have inherited an economy with a labour market so flexible it can churn out jobs without triggering inflation until unemployment is close to, or perhaps even below, 5%. In other words, the Chancellor knows that in looking forward to full employment he is on to a winner. All he need do is sit back and wait for the economic recovery to create jobs, raise the employment rate to 75% and cut unemployment from around 2.3 million to around 1.5 million.

In aiming for full employment as he defines it, Mr Osborne has therefore chosen too easy a target. Although cyclical unemployment remains far too high, the UK’s key policy challenge today is not how to increase the number or proportion of people in jobs but rather how to increase productivity in the jobs we are creating, and hence the living standards of those doing them. So while I remain a firm advocate of jobs for all, I am increasingly of the view that full employment is no longer enough. Our stretching target must now be ‘full employment plus’.      

Combination of rising job vacancies and falling unemployment at last breathing life into pay

The Office for National Statistics (ONS) has released the latest set of UK labour market data, mostly covering the three months November 2013 to January 2014.

The employment figures continue to be strong, up by a net 105,000 in the latest quarter, though a big rise in self-employment (which increased by 211,000) masked a surprising fall of 60,000 in the number of employees in employment. The latter figure appears odd when set against the broader range of data and should therefore be treated with caution, especially since the entire fall is due to fewer employees working part-time, which was partly offset by an increase in the number of employees working full-time. Moreover, the level of job vacancies increased by 23,000 on the quarter and at 588,000 is 92,000 higher than a year earlier and getting ever close to the pre-recession level.  

Total unemployment on the headline ILO measure fell by 63,000 in the quarter, the unemployment rate falling from 7.4% to 7.2%. The unemployment trend thus remains downward albeit because the ONS calculates change in unemployment on the basis of a quarterly rather than monthly comparison the headline unemployment rate is the same as that published in February. Youth unemployment (16-24 year olds) fell by 29,000 and long-term unemployment (people unemployed for more than a year) fell by 38,000. The administrative count of people unemployed and in receipt of Jobseeker’s Allowance fell by 34,000 between January and February.

Perhaps the most significant news from the latest labour market statistics is that we are at last seeing signs that the economic recovery is breathing life into the pay figures. The combination of job vacancies rising back toward the pre-recession level and falling unemployment has lifted pay growth to within sight of price inflation, especially in the private sector where the real pay squeeze eased markedly around the turn of the year. Regular pay (excluding bonuses) in the private sector is now increasing at an annual rate of 1.6%, not too far off the corresponding 1.9% rate of consumer price inflation. In the public sector regular pay is growing much more slowly (averaging 0.6%), though the figure is higher (1.1%) when financial services organisations are excluded. It is therefore now very likely that the average real pay squeeze will end in the coming months, with private sector workers set to enjoy real pay rises for the first time since 2009.

The better news on pay reflects the changing balance of employment growth. Adjusting for statistical reclassification, the private sector added 118,000 jobs in the final quarter of 2013 while the public sector shed 13,000 jobs. The immediate labour market outlook is thus one of much better news on jobs and pay for private sector workers but continued job cuts and an ongoing severe real pay cut for public sector workers.  

The UK’s jobs rich recovery – how many cheers for the Chancellor?

On Wednesday the UK Chancellor of the Exchequer, George Osborne, will present his fifth Budget to Parliament. Informed media speculation ahead of the event has been relatively silent on what Mr Osborne might say about jobs – though fresh measures targeted at youth unemployment are likely - but his preamble will almost certainly refer to the strength of employment growth since he entered HM Treasury in May 2010.

At the end of 2013 the number of people in work in the UK stood at 30.14 million - 1.34 million (4.7%) higher than in the first quarter of 2010. Full-time employment accounts for three quarters of the net increase and full-time employees for more than half (54%) of the increase. Of the additional employees in employment (full-time and part-time) more than 8 in 10 were employed on permanent contracts. During the same period there was a net reduction of 170,000 in the total number of people unemployed and looking for work, including a net reduction in youth unemployment (16-24 year olds) of 27,000, although the total number of people long-term unemployed (jobless for a year or more) increased by 80,000.

Despite this broadly positive story the level of unemployment remains high at 2.34 million (an unemployment rate of 7.2%), youth unemployment is still close to 1 million and long-term unemployment above 800,000. However, the outcome is much better than I expected in 2010, and I dare say the same goes for most economists. Following Mr Osborne’s first Budget I forecast that unemployment would at first rise and then fall to around 2.5 million by the spring of 2015 (the date of the next UK General Election). Based on this forecast it was my view that anything less than 2.5 million unemployed in 2015 could be considered a significant achievement for the coalition government and, were that to be the outcome, I would be the first to congratulate the Chancellor and his colleagues. With unemployment falling rapidly and now likely to be closer to 2 million than 2.5 million by the time of the General Election, I am happy to fulfill my pledge.

Yet while I congratulate Mr Osborne, I remain uncertain as to how many cheers he deserves. The economy has not performed better than I expected in 2010. On the contrary, whereas I expected a return to growth in 2012 and a return to the pre-recession level of GDP by the end of 2013, the recovery took far longer to emerge. Similarly, it is not that fiscal austerity has been less harmful to jobs than I had expected, the Office for Budget Responsibility at present projecting a net reduction in public sector employment of more than 700,000 between 2010 and 2015. What I failed to anticipate is the prolonged weakness of labour productivity and pay since 2010 which has enabled a struggling economy to sustain a far higher level of employment.

It is hard to attribute this ‘jobs rich/pay poor’ economic trajectory to anything the Chancellor or anyone else in the coalition government has done. The outcome is instead the consequence of three decades of labour market reforms implemented by successive Conservative and Labour governments. The underlying rationale for this reform process was to weaken the ability of workers to preserve the relative and real value of pay in the context of either structural or cyclical shocks to the economy. The erosion of relative wage resistance became apparent in the 1980s and 1990s before being stemmed to some degree by the introduction of the National Minimum Wage which has proved to be the only serious exception to the rule of labour market deregulation in a generation. The erosion of real wage resistance took longer to notice and thus came as a surprise with the sharp, prolonged and at present still ongoing fall in real wages since 2009.

When Mr Osborne address the House of Commons and the nation on Wednesday he would therefore be wise not to take credit for the UK’s recent jobs performance but instead acknowledge it as part of his neo-liberal inheritance. I don’t expect him to do so of course, not least because the implications of a labour market model designed to churn out jobs at any price may not bring him as many cheers as a look at the headline jobless figures might suggest.           

A ‘guaranteed day’s pay’ to ease the fundamental injustice of zero-hours contracts

There’s less than a week left to respond to the coalition government’s consultation on zero-hours employment contracts (the closing date is next Thursday, 13 March). But you’ll be wasting your time if you propose an outright ban on this controversial and increasingly widespread type of ultra-flexible on-call working which is now used in most sectors of the economy, especially retail, hospitality and public services, and right across the occupational spectrum.

The Office for National Statistics (ONS) estimates that between 2004 and 2012 the proportion of people employed on zero-hours contracts in the UK doubled from 0.4% to 0.8% of total employment. This represents around 250,000 people in the latter year, though the ONS is unsure whether the estimate, obtained from the Labour Force Survey (LFS), fully reflects the incidence of zero-hours contracts because respondents to the LFS may not always be aware of their exact contractual status. The ONS therefore intends to publish estimates based on a broader methodology and will start to publish these in due course. My estimate is that around 750,000 people were employed on zero-hours contracts in 2012, 2.5% of total employment.    

The government consultation, launched last December by the Business Secretary, Vince Cable, is open to the possibility of placing restrictions on the way zero-hours contracts are used.  However, the basic principle at the heart of the controversy over zero-hours contracts – i.e. that employers should be able to hire people on contracts that offer no guarantee of work - has not been questioned. As a result of this limited scope, the consultation process is flawed because it addresses neither the fundamental injustice of a practice which looks suspiciously like a 21^st century version of the master-servant relationship or the various economic drawbacks associated with it.

The Secretary of State it seems is content to accept the argument of the employers lobby that zero-hours contracts have been ‘unfairly demonised’. On this view the contracts are said to be good for jobs and add to the happiness of many people employed in this way who like the flexibility of choosing when they work; the quid pro quo for no guaranteed hours of work is no obligation to accept work offered. For example, the UK Commission for Employment and Skills (UKCES) last week published the findings of a survey of which suggests that two-thirds of people on zero-hours contracts are satisfied with their jobs.   

Supporters of the practice admit that some bosses abuse the contracts, for example by offering work at very short notice and then penalising people unable to meet the request by not offering work on other occasions. The UKCES survey finds that 45% of people on zero-hours contracts have only ‘a little, not very much or no control’ over how many hours they work while 60% have to accept work if their employer offers it. Supporters of zero-hours contracts are therefore not entirely opposed to reform, albeit attributing abuses to poor management practice which a suitable code of conduct or a bit of enlightened leadership and management training would overcome.

Consequently, the employers lobby is fairly relaxed about what might emerge from the current consultation even though Dr Cable is using it to examine whether to legislate against exclusivity clauses in zero-hours contracts which prevent people from working for more than one employer, as well as looking at how best to make these contracts transparent so that people on them are clear about precisely what they have signed up to.

Yet aside from acknowledging some problems, the consultation document adopts a generally favourable stance towards zero-hours contracts, emphasising the flexibility and choice they bestow on labour market participants, without subjecting the practice to proper analytical scrutiny. In particular, the consultation document fails to acknowledge that zero-hours contracts represent a clear departure from what have commonly been found to be more economically efficient and socially just forms of employment relationship.

Ideally employers should employ people on a permanent or temporary basis, at an agreed rate of pay for an agreed usual number of hours subject to the uncertainty of possible short and/or long-run change in economic or market conditions.  Employers implicitly accept they will bear the cost of any very short-run or mild fluctuations in activity by continuing to pay staff even if fewer than usual hours are required. Those employed in turn implicitly accept that they will bear the cost of more prolonged or permanent reductions in required hours, either in the form of job loss, a reduction in usual hours, a lower rate of pay for usual hours, or some combination of these outcomes.

This type of relationship is both just and efficient. The financial burden associated with uncertainty is shared. People in work have the security of knowing they will be paid in the event of short-run or mild fluctuations which reduce the amount of hours their employer can offer. And by ensuring an element of fixed wage cost into the employment relationship employers have a greater incentive to increase the productivity per hour of those they employ. Zero-hours contracts, by contrast, are unjust and inefficient.

Zero-hours contracts are unjust because employers bear none of the cost of uncertainty while those they employ have no guarantee of work and thus no security of income (the UKCES survey cited above finds that 57% of people on zero-hours contracts find it difficult to budget from month to month). Zero-hours contracts also flout the spirit of the National Minimum Wage (NMW). Although people on zero-hours contracts are legally entitled to the NMW for the hours they work, the entitlement is worthless at times when no work is offered. 

Zero-hours contracts are in turn inefficient because productivity suffers from their increased use.  People on these contracts are always nominally in work, adding to employment, but not necessarily always at work, depressing measured productivity. It is no coincidence that the continued rise in zero-hours contracts since the start of the recession has been accompanied by a slump in productivity. Moreover by establishing the employment relationship on as casual a basis as possible it is far less likely that employers will invest in productivity enhancing training and development for people on zero-hours contracts, an outcome also highlighted by the UKCES survey finding that 17% of zero-hours contract workers have to fund their own training if they want to progress in the labour market. Supporters of zero-hours contracts who in the same breath stress the importance of investment in human capital to raise labour productivity thus appear to be suffering from a severe bout of cognitive dissonance.  

The negative impact of zero-hours contracts on productivity clearly places a question mark over the value to the economy of the additional jobs their use has been said to generate. This is especially true when one considers that the impact of zero-hours contracts on unemployment is probably far less than whatever impact they have on jobs. These contracts are most attractive to people without dependents and/or who aren’t reliant on their zero-hours contract job for their entire regular income, notably full-time students, who the UKCES survey finds account for 1 in 4 people on a zero-hours contracts, and also older people who may use the occasional bit of casual work to supplement their pension. But the situation is very different for those unemployed people who need the security of a steady job that pays a regular wage. These are at risk of being effectively blocked out of work if their only alternative to a pitiful but secure welfare cheque is the insecurity of a zero-hours contract job.

All this suggest that the best policy response to the rise of the zero-hours contract is not, as the Business Secretary is proposing, to tackle abuse of the practice but instead to actively discourage it. How might this be done? One approach would be to outlaw zero-hours contracts by requiring all employment contracts to stipulate guaranteed minimum hours. However, this would effectively reduce flexibility and choice both to employers and those they employ. A preferable alternative would be to allow the use of zero-hours contracts but require employers to guarantee a day’s pay per week to people employed in this way.

The statutory guaranteed pay level would normally reflect the agreed rate for the job in question but could be no less than the NMW times 7.5 hours (i.e. the current UK standard statistical definition of a day’s employment). At present this would represent a minimum weekly wage of £47.32 for an adult on a zero-hours contract in any week where no hours are offered. For people on zero hours contracts who usually work fewer than 7.5 hours in a week, the pro-rata equivalent would be a guarantee of 1.5 paid hours per week. HMRC would inspect the payment as part of the normal process of minimum wage inspection, so no significant additional red tape would be imposed on employers.  

The merit of a guaranteed day’s pay is that by adding a small element of fixed wage cost to zero-hours contracts (over and above any non-wage employment costs employers might already incur) it eases the injustice and reduces the inefficiency the contracts cause without harming the flexibility they give to the labour market. In so doing it also removes the fig leaf defence that the rationale for using zero-hours contracts is to maximise flexibility rather than simply to minimise costs by employing people on the cheap.  

Opponents of this idea will doubtless still argue that the proposed increase in wage costs might result in job cuts. But given the minimal size of the cost increase any negative effect on jobs is likely to be negligible, especially when considered alongside the potential offsetting social and economic benefits. A more legitimate concern is that employers might attempt to claw back any increase in wage costs by offering fewer hours to zero-contract workers or lowering pay rates for hours actually worked. However, the ability of employers to behave in this way will, as always, depend on the state of the labour market and the relative bargaining power of workers. Either way, the guaranteed day’s pay at least provides people with some modest degree of wage security and the dignity which goes with that.                

In this respect, one should also remember that ‘it will be bad for jobs and the jobless’ has been the default position of opponents of progressive labour market reform since time immemorial, most recently in the period before introduction of the hourly NMW. The same voices today defending zero-hours contracts were arguing against a statutory wage floor in the 1990s and on very similar grounds. A minimum wage would cost jobs and all we needed were more trained and progressive bosses who would see the business case for ‘doing good’ by their employees. However, in a labour market which at the time included employees on less than £1 per hour it eventually came to be accepted that in a world where not all employers aspire to be good, or are under constant economic pressure not to be, the very last thing you should do is make life easy for the bad employer.

Opponents of the NMW in the 1990s were on the wrong side of history. The same is true of those today who think it right that people can be employed on zero-hours contracts without any guarantee of if or when they will be paid. On the contrary, it is entirely right that zero-hours contracts be demonised in a civilised society. Sadly, Dr Cable’s timid consultation will not lead to the end of the practice but one can but hope that the end will not be too far away.