Monday 17 March 2014

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.           

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