It’s ‘payja vu’ in the UK labour market

This is one of those days when the eyes of most economic commentators will be fixed on what the United States Federal Reserve decides to do to the interest rate rather than the latest UK job market figures. The Office for National Statistics (ONS) data, mostly covering the three months August to October 2015, nonetheless provide another twist in the tale of the labour market trend on this side of the Atlantic.

After a brief hiatus in the spring, the UK jobs boom is clearly back in full swing with (according to the household Labour Force Survey) 207,000 (+0.7%) more people in work compared with the previous quarter and 505,000 (+1.6%) more than a year earlier. On an annual basis employment of employees increased in percentage terms by 1.9%, somewhat more than self-employment 1.6%. Within these totals, in percentage terms part-time employment (+2%) increased by more than full-time employment (1.5%). At the sector level, construction recorded by far the largest annual increase in jobs (+111,000 or 5.3%) in a big employment sector.

The ONS’s alternative quarterly Workforce Jobs series, mostly based on a survey of employers, offers a slightly different but broadly consistent picture of job growth of 1.2% in the year to September 2015. The ONS also finds that in the year to September private sector employment increased by 2.2% while public sector employment fell by 1.1%.  

The rise in LFS employment takes the total number in work to 31.30 million and the working age employment rate to 73.9%. Both the latter are new records but less noteworthy this month than two other landmark figures. First, total hours worked each week in the economy have topped 1 billion for the first time ever. Second, unemployment has at last returned to the pre-recession rate of 5.2%. Yet after a period of much better news on pay, the rate of average regular weekly wage growth (i.e. excluding bonuses) for employees has fallen sharply to just 2% in the year to October, down from 2.4% in the year to September. The slowdown is particularly marked in the private sector (down from 2.8% to 2.3%), the rate in the public sector actually rising slightly (up from 1.2% to 1.3%). The ONS notes that the drop in the overall figure reflects a high single month growth rate for July of 2.9% falling out of the latest three month average and being replaced by a much lower single month growth rate of 1.7% for October.  

There is thus a palpable sense of what a punster might call ‘payja vu’ in the UK labour market at present, a reminder of the initial phase of the economic recovery characterized by a jobs boom alongside weak productivity and pay growth. What’s most surprising it that for all the talk of mounting skills shortages employers in most sectors (with the exception of construction where very strong job growth has pushed wage growth well above 6%) appear perfectly capable of hiring at will without having to hike pay rates. This will please jobseekers and Bank of England interest rate setters even though it means employees are now enjoying real wage gains only because almost zero consumer price inflation is nowhere near the Monetary Policy Committee’s target rate of 2%.

UK jobs market sending out mixed signals but no need yet to ring ‘overheating’ alarm bells

You can come up with almost any narrative you want from the latest UK job market figures released earlier this morning by the Office for National Statistics (ONS), mostly covering the three months July to September 2015.

The good news story is a very healthy quarterly rise of 177,000 (to 31.21 million) in the number of people in work, taking the employment rate to yet another new record high of 73.7%, and a big drop of 103,000 (to 1.75 million) in the number unemployed, lowering the unemployment rate to 5.3%, only slightly higher than before the recession.

And yet there is also more than enough disappointing news for the pessimist to latch onto. Most of the rise (82%) in total employment in the latest quarter is in part-time jobs with the result that total hours worked in the economy have fallen (by 0.1%). Meanwhile the number of unfilled job vacancies is, as the ONS says, ‘little changed’, albeit still at a very decent level of around 740,000. This combo of falling hours and stable vacancies may help explain why the rate of average weekly regular pay growth (i.e. excluding bonuses, the best regularly available official measure of underlying nominal wage inflation) has fallen to 2.5% in the year to September (down from the 2.8% figure recorded for the year to August). This is still very good when set against zero consumer price inflation but suggestive of an overall easing in the strength of demand for labour.

Some amount of demand easing might also account for a slight rise of 3,300 between September and October in the number of people claiming unemployment related welfare benefits. However, as former senior member of the Government Economic Service and labour market expert Bill Wells has noted this morning, the headline claimant count total might be being affected by administrative delays associated with the introduction of the new out of work Universal Credit system (the number of unemployed people claiming the long standing Job Seeker’s Allowance benefit fell by 11,200 between September and October).

What therefore does an overall reading of these data tell us? My view is that while we can continue to take comfort in the general good health of the UK employment situation these latest data do not provide evidence to suggest the labour market is overheating. Neither do they lend weight to the view that the Bank of England should start to raise interest rates sooner rather than later. For the time being at least the alarm bells can remain silent.  

UK’s topsy turvey jobs market trend confounds narrative of mounting recruitment difficulties

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months June to August 2015.

It’s proving to be a topsy turvey year for the UK jobs market. The first six months were characterized by relatively slow employment growth, a fairly stable unemployment rate but much better pay figures, overall suggesting an improvement in labour productivity. However, between June and August the number of people in work leapt by 140,000 to 31.12 million, reaching a record working age employment rate of 73.6%, the unemployment rate fell from 5.6% to 5.4%, close to the pre-recession low, while the pace of regular (i.e. underlying) pay growth eased back from 2.9% to 2.8%.

The explanation for this apparent flip in behaviour is unclear, though it’s possible that recruiters were cautious in the first half of the year because of political uncertainty surrounding the General Election in May. What is clear is that hiring picked up strongly from June onward with the number of employees rising by 120,000 in the three months to August, full-timers accounting for more than half (70,000) this increase. Interestingly, this outcome contrasts with the popular narrative of recent months which explains the labour market trend at the start of the year in terms of mounting recruitment difficulties and increased competition for talent. Whatever the validity of this argument, employers don’t seem to have had too much difficulty hiring staff between June and August, and didn’t have to put more into regular pay packets to do so.

Fresh jobs and pay figures point to better news on UK labour productivity

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months May to July 2015.

It’s now fairly clear that the UK labour market recovery changed tack in the first half of the year. The previous and prolonged ‘jobs-rich/pay-poor’ trend appears, at least for now, to have gone into reverse. The headline unemployment rate is static at 5.5% when compared with the late winter/early spring quarter while the rate of average regular weekly pay growth for employees has risen further to 2.9%.

The number of people in work increased by 42,000 in the quarter (up 0.1% to 31.095 million), much slower than the quarterly growth rates seen for most of the period since 2012, albeit enough to lift the employment rate from 73.4% to 73.5%. But with the working age economic inactivity rate also dropping slightly (down from 22.2% to 22.1%) this modest improvement in employment was unable to lower the headline unemployment rate (the level of unemployment indeed rising by 10,000 to 1.823 million).

These latter figures are of course drawn from the household Labour Force Survey (LFS). The ONS’ alternative, largely employer survey based Workforce Jobs (WJ) data series (published each calendar quarter) complicates the picture somewhat by indicating a much stronger rate of net job creation in the second quarter (to June). The total number of Workforce Jobs is found to have increased by 102,000 in the quarter (up 0.3%), almost 90% of the increase accounted for by jobs for employees.

Historically, movements in the LFS and WJ series do diverge at times, which is not surprising since they are obtained from different constituent respondents and cover slightly different time periods. Generally, however, these series tend to offer a consistent view of the underlying employment trend when viewed over a number of quarters and years. On the face of things the latest divergence might be explained by a combination of a relatively large quarterly increase in part-time jobs but with some of these being taken by people who already have another job, either as an employee or self-employed. But while close examination of the latest LFS data do indeed show a relatively strong quarterly rise in part-time working (up 0.6%, the number of people working full-time unchanged in percentage terms) the number of people with second jobs actually fell quite sharply (by 0.2%).

Putting aside such statistical puzzles and looking solely at the picture painted by the LFS and average earnings data, the good news is that the latest employment/unemployment/pay combo provides further evidence that the much needed improvement in labour productivity may at last be underway. This will be welcomed by employers, wage earners and economic pundits, not to mention interest rate setters at the Bank of England. But the news is not so good for jobseekers because it now looks as though it will take a little longer than previously expected for unemployment to fall back to the pre-recession rate (of around 5.2%).

Public sector workers will also be feeling less than chipper. Their average weekly pay is rising at a rate of 1.3%, almost three times slower than the average rate of pay growth in the private sector, while the first half of the year saw an underlying fall (adjusting for statistical reclassification effects) of 22,000 in the number of people employed in the public sector. 

Further signs of hiatus in UK jobs recovery

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months April to June 2015.

Although these quarterly data refer to the spring and early summer they convey a picture befitting August and the summer holiday season, since nothing much appears to have happened.

Admittedly, the number of people in work fell by 63,000 in the quarter to 31.03 million, while the number unemployed increased by 25,000 to 1.85 million. But as the ONS notes the employment rate (73.4%), the unemployment rate (5.6%) and the economic inactivity rate (22.1%) were all ‘little changed’.

Nonetheless, this is the second consecutive month of weak employment data, which suggests the UK jobs recovery ran out of steam in the spring. What’s less certain is whether this represents a temporary pause, perhaps due to employers’ caution over hiring around the time of the General Election in May, or a clear break in the previous trend of sharply falling unemployment. Either way it now looks as though it will take a little longer than previously expected for unemployment to fall back to the pre-recession rate (5.2%).

The most disappointing feature of the latest data is that the apparent hiatus in the jobs recovery is not offset by faster pay growth - the rate of growth of regular pay, excluding bonuses, for employees remaining unchanged at 2.8% - which might have indicated a pick-up in labour productivity. A combination of jobs standstill and lack of momentum in pay therefore makes this the least positive set of UK labour market figures for some considerable time.

Faster pace of average real weekly pay growth plus slight fall in employment and slight rise in jobless rate - might the UK economy be embarking on a productivity revival?

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months March to May 2015.

The strong jobs recovery looks to have taken a pause in the spring. Although the number of people in work fell by 67,000 in the quarter to 30.98 million and the number unemployed increased by 15,000 to 1.85 million these changes are tiny relative to the magnitudes involved. Better therefore to think of the employment rate (73.3%), the unemployment rate (5.6%) and the economic inactivity rate (22.2%) as, to use the ONS’ phrase, little changed.

Indeed the quarterly fall in employment is almost entirely due to fewer people in self-employment (down 55,000), the number of employees in fact increasing by 5,000. The level of vacancies remains high at 726,000 (albeit down 17,000 on the quarter). Moreover, youth unemployment fell by 13,000 and there was also a small monthly fall (in June) of 2,500 in the number of people claiming Jobseeker’s Allowance. No need therefore to panic.

However, if the jobs recovery has paused the opposite is true for the pay side of the labour market. Total pay for employees is rising at an annual rate of 3.2%, higher than at any time since spring 2010, and regular pay (excluding bonuses) by 2.8%, the highest rate since winter 2009. With the CPI inflation rate close to zero between March and May this year these represent real pay increases, mimicking what one would see if the economy were still enjoying the pre-recession trend rate of productivity growth prior to the productivity slump.    

While it’s far too soon to conclude that these figures overall indicate a change in the recent UK labour market trend, a faster pace of wage growth plus slightly weaker jobs and unemployment performance might suggest an economy that for several years has preferred more jobs to higher pay is at last embarking on a productivity revival.

On the positive side, the slightly weaker jobs and unemployment figures may ease pressure on the Bank of England to raise interest rates for the time being despite mounting concern over the possible inflationary effect of stronger real wage growth. On the negative side, a slowdown in the pace of the jobs recovery is bad news for jobseekers for whom the availability of work is more important than what’s happening to pay.

The ‘National Living Wage’: is the Chancellor gambling with low paid jobs?

Chancellor of the Exchequer, George Osborne, ended his budget speech to Parliament yesterday with what has come to be the customary clever twist. Having told MPs he’d be removing or reducing tax credits from several million ‘hard working families’ he sweetened the pill by announcing a big hike in the statutory national minimum wage for employees aged 25 and over, which will rise to £7.20 per hour from April next year and to £9 per hour by 2020, thereby forcing employers to cough up extra cash in order to make up the cut in the taxpayer subsidy to low paid employment.

Moreover, by rebranding the enhanced wage the ‘National Living Wage’ he not only disguised the fact that for many employees the guaranteed wage hike will be smaller than the tax credit cut, leaving them worse off, but also wrong-footed potential critics who find it hard to oppose the language of the Living Wage even though Mr Osborne’s version is a lot less generous than the figure campaigners calculate individuals need to cover the basic cost of living. This is currently estimated at £7.85 per hour, or £9.15 in London where living costs are higher, albeit both these figures will rise considerably once the effect of tax credit cuts are taken into account.  Living Wage campaigners have thus at one and the same time had to welcome the Chancellor’s move, question it for not going far enough, and been left having to persuade employers who might otherwise have decided to opt for the full fat Living Wage not to settle for Mr Osborne’s Living Wage Lite.

Consequently, the main voices of opposition to the Chancellor’s belief that ‘Britain needs a pay rise’ have so far come from sections of the business community who appear happy to accept the austerity rhetoric of ‘all in this together’ if this means mass downsizing of the public sector but not if their own finances are put on the line.

To be fair, not all business organisations are complaining and even those that are have been fairly measured in their response to a government whose ideological stance they in general support. Contrast this with what was being said only a few months ago when most of these same bodies declared the Labour Party ‘anti-business’ for advocating an £8 per hour national minimum wage by 2020.  Nonetheless, the CBI still considers Mr Osborne’s pay plan ‘a gamble’ which might cost jobs and thinks the jury is out on the wisdom of his move. So just how much of a gamble is the Chancellor taking?

A lot depends on whether pay at the bottom end of the labour market is determined purely by the interaction of demand for and supply of workers of given productivity or instead to some extent reflects a power imbalance between employers and individuals. If the former conditions exist employers are price (i.e. wage) takers in the labour market – which increases the risk to jobs from a high statutory minimum wage – if the latter, employers are price makers, in which case there is less risk to jobs.

It’s not clear whether the Chancellor’s decision to introduce the National Living Wage is based on some such assessment of the workings of the labour market but he does say he has been influenced by the findings of an independent commission set up in 2013 by the Resolution Foundation think tank to look into the future of the national minimum wage and the role of the Low Pay Commission (LPC) under the chairmanship of Sir George Bain, who was first Chair of the LPC when it was formed in the late 1990s. The commission published its detailed recommendations in March 2014 (and here, as a member of the commission, I should declare an interest).

After an extensive review of available evidence the Resolution Foundation commission concluded that there was a strong case for government to ask the LPC to be more ambitious in its approach to raising the minimum wage and it now appears that the Chancellor agrees. This doesn’t of course mean that one can take a gung-ho approach to the minimum wage, nor indeed that politicians should from now on feel free to raise the minimum without reference to the LPC (a fear expressed by some in the past 24 hours, though I think the Chancellor’s actual intention is in fact to enhance the LPC’s remit). But regardless of this my view is that any risk to jobs from the National Living Wage (NLW) at the level proposed by the Chancellor is minimal, although the policy does raise a variety of attendant considerations.

In keeping with the consensus of econometric analysis, the employment impact of the NLW as measured by jobs is likely to be close to zero. This is mainly because the NLW does not cover young workers (i.e. under 25s), the group most adversely affected by high minimum wages.  The initial estimate of the Office for Budget Responsibility (OBR) thus suggests a negative employment impact of around 60,000 – tiny in a UK labour market of 33 million people which is currently creating jobs at a very fast rate - and a 0.1 percentage point increase in the estimated structural unemployment rate. Jobs at greatest risk are those in sectors with the highest incidence of low paid workers – in particular retail, hospitality and care – while over 25s may lose out relative to younger workers (a potentially beneficial job displacement effect given the high rate of youth unemployment).  

It is possible, indeed likely, that employers will adjust to the NLW by cutting hours of work instead of, or in addition to, cutting jobs, which for those affected will to some extent offset the effect of a higher hourly wage on people’s weekly or annual earnings. The other adjustment alternative, raising labour productivity at given hours so that the NLW ‘pays for itself’ sounds good in theory but rarely shows up in econometric evidence.  

This effect of minimum wages on hours is very difficult to assess (the OBR reckons the NLW will reduce hours worked in the economy by 4 million per week) but I think a big potential concern is that the NLW might act as a further incentive to employers to increase their use of zero-hours contracts – which are already very prevalent in sectors where the NLW will bite hardest - in order to minimise the impact on total labour costs. Such a perverse effect would flout the spirit of the new NLW but is an outcome one might expect in a lightly regulated labour market where it remains easy for employers who so wish to hire workers on the cheap whatever the level of the legal minimum wage.   

        

Inflation free/jobs rich economy delivering above ‘normal’ rate of average real weekly pay growth despite flat-lining productivity – but this exceptional combo is unsustainable

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months February to April 2015.

The strong labour market recovery continues. The number of people in work increased by 114,000 to 31.05 million in the quarter – despite public sector employment falling by a further 22,000 in Q1 to a new record low of 5.37 million on comparable figures - though against the backdrop of a rising population and an increase in the number of people participating in the labour market the employment rate dipped a little to 73.4%. According to the ONS’ quarterly workforce jobs measure, the service sectors as a whole averaged a rate of jobs growth of 2.2% in Q1 2015, compared with 1.3% in manufacturing, 0.4% in construction and 0.5% for the economy as a whole.  

Unemployment meanwhile fell by a further 43,000, the unemployment rate down to 5.5 per cent, ever closer to the pre-recession low. With job vacancies also at a near record high the rate of growth of average weekly earnings growth (both including and excluding bonuses) has increased to 2.7 per cent, excluding bonuses faster than at any time since the depth of the recession in early 2009, against a backdrop of near zero CPI price inflation. Average weekly pay increased by 3.2% in the private sector and 1.0% in the public sector, the rate of growth being relatively strong in construction (4%) and wholesaling, retailing, hotels and restaurants (3.9%).  

For the time being therefore the UK economy is delivering more than what prior to the recession was considered a ‘normal’ rate of real wage growth of around 2.5% even though labour productivity is still effectively flat-lining.  However, this exceptional combination of circumstances is unsustainable. With price inflation at some point set to rise back toward 2% a continuation of real wage growth at the current rate will have to be earned by a return to a more normal rate of productivity growth; if not there will eventually be renewed upward pressure on prices and, ultimately, interest rates. In recent months UK workers have benefited from an economy merely mimicking a strong underlying recovery. We should enjoy this while we can. But a genuine sustained recovery will need to be based on higher productivity.

UK Conservatives hold all the economic and political cards – for now

I’ve been out of action for most of the time since the UK General Election. Here, just in time for tomorrow’s Queen’s Speech setting out the new Conservative majority government’s legislative programme, is my somewhat belated reflection on the outcome, which was clearly devastating for both the Labour Party and the Liberal Democrats.

From an economic perspective, the Conservative party had the strongest hand of cards to play, in large part because of fortuitous circumstances. I remain of the view that phase one of Chancellor George Osborne’s fiscal policy regime from 2010 to 2012 delayed the economic recovery. But whether by luck or judgement the inevitable upswing came at just the right time politically. Better still for Mr Osborne, the improvement in aggregate demand coincided with, and was supported by, a slump in global oil prices which caused consumer price inflation to eventually fall to zero before polling day. As result, an economy experiencing an unprecedentedly long period of weak productivity growth and anaemic nominal average pay rises began to deliver real wage gains that mimicked what would be achieved if productivity was increasing in line with the historical trend. Add in the fact that the flip side of low-productivity and low nominal wage growth was a surge in employment to a record high rate and a positive economic narrative was there for the taking, even if government policy had actually done little to underpin it. As the Chancellor and the Prime Minister David Cameron have proved therefore, it does pay to put lipstick on a pig.

The consequence of all this is that the other main English political parties were probably on an electoral hiding to nothing, albeit they also had to contend with other factors that continue to bedevil them.         

Nick Clegg and co., for example, remain in denial that they made the wrong call in entering a formal coalition with the Conservatives in 2010 rather than offer support in a looser form that would not have meant ditching key manifesto pledges. The Lib Dem poll ratings throughout the past five years showed many people considered this the action of unprincipled careerists who seized a once in a lifetime opportunity to gain high public office. And although there are still some who argue that the experience of life under an untrammelled Conservative majority government will demonstrate the positive restraining role played by the Lib Dems after 2010, this ignores the fact that the coalition formed the bridgehead for this year’s Conservative victory. The only hope for the rump of Lib Dem MPs is to depart from the so-called Orange Book neo-liberalism that led them to disaster under Clegg and choose a leader who will tack back to the centre-left ground that served them well until the mid-2000s.

The task facing the Labour Party is far more difficult. Ed Miliband failed to appeal either to the party’s one time working class core – most notably, though far from exclusively, in Scotland - or to middle England. While much has been said about Miliband’s personality as a factor in this the key dilemma is that traditional social democracy is a hard sell in 21^st century England which has bought into a post-Thatcherite north American view of the world that broadly tolerates marked income inequality, scorns welfare recipients and is sceptical of the merit of any form of tax funded social provision other than the NHS. Whoever leads the Labour Party from this autumn will have little option but to build a policy platform that reflects this dominant ideological reality; simply confronting it with pious denigration will not work, as Miliband found to his cost.

However, a more coherent centrist policy platform is unlikely on its own to challenge the current dominance of the Conservatives. The necessary additional condition is an event big enough to demolish the Conservative’s reputation as being the party of competent economic management.

Throughout my adult lifetime there have been periods when one or other of the two largest political parties has been described as ‘the natural party of government’. In both cases supposed perennial supremacy has been swept away almost overnight by economic events. John Major’s Conservative government lost its reputation for economic competence during the ERM crisis of 1992. The global financial crisis of 2008 did the same for Gordon Brown’s labour government. The fact that in both cases these governments made the correct policy calls is immaterial. The (misguided) public perception was that the government in charge either caused these crises or mishandled the aftermath.

As night follows day there will come a time when the current Conservative government will suffer a hit to its economic reputation too, whether self-inflicted (perhaps a hubristic approach to fiscal austerity, or in the welter of the forthcoming EU referendum) or by way of an external shock to the system. The bad news for the opposition parties is that no-one knows when that day will come – next month, next year, next decade. All they can do is prepare so as to be in a position to offer a credible political alternative when the tide finally turns.          

UK average weekly wage growth on the up, especially in low pay sectors, as jobless rate edges ever closer to pre-recession low

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months January to March 2015.

This month’s labour market figures bring good news for jobseekers and wage earners alike. Another large quarterly increase of 202,000 in the number of people in work in the UK has lifted the employment rate to a new record high of 73.5%. More than two-thirds of the additional jobs are full-time, mostly for employees. The unemployment rate meanwhile has fallen to 5.5%, including a substantial fall of 50,000 (to 588,000) in the number of long-term jobless. Despite this, the overall quarterly fall in unemployment (35,000) is modest compared to the rise in employment due to a corresponding rise of 167,000 in the number of people participating in the labour market. Part of this latter rise is in turn due to a fall of 69,000 in the number of economically inactive people of working age.  

With the unemployment rate edging closer to the pre-recession low (5.2%) and both employment and vacancies (up 34,000 to 745,000 in the quarter) at record highs, there is also clear evidence that wage growth is at last gaining momentum. The rate of growth of average regular weekly pay (excluding bonuses) has increased from 1.9% to 2.2% against a backdrop of zero price inflation. The increase is far higher in the private sector (2.7%) than the public sector (0.9%). Most encouraging of all, however, pay is rising fastest in low wage sectors, averaging 3.1% across wholesaling, retailing, hotels and restaurants, offering a welcome boost to real wages for the lowest paid workers.

Remarkably strong quarterly surge in employment helps boost regular pay growth

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

The remarkably strong quarterly 248,000 rise in employment indicates a surge in the pace of job creation at the end of last year, helping to cut unemployment by a further 76,000 to a rate of 5.6%. People working full-time account for two-thirds of the total rise in employment this quarter, most of whom are employees on permanent contracts. With the number of people in work now above 31 million the working age employment rate has risen to 73.4%, a new record.

The fact that very strong employment growth had only a relatively modest impact on unemployment in the quarter is explained by a large fall of 104,000 in the number of economically inactive people, itself likely to be an indication of improved labour market opportunity.

A further fall in unemployment combined with both a record employment rate and record job vacancies (up 32,000 in the quarter to 743,000) has also given a boost to the rate of growth of regular pay (i.e. average weekly earnings excluding bonuses) which has increased from 1.6% to 1.8%. Regular pay growth is a better indicator of underlying wage pressure than total pay (including bonuses), the rate of which fell from 1.9% to 1.7%.  

Together with zero price inflation, the jobs boom is helping improve real incomes despite the fact that nominal wage pressure remains subdued. However, the rise in employment and real wages continues to mask severe underlying weakness in labour productivity. This will have to improve markedly if the current recovery in living standards is to be sustained into the medium and long-term.

Record jobs but we’re only just back to normal hours

During the course of the UK General Election campaign the Conservatives and Liberal Democrats have pointed to the number of jobs created since 2010, while Labour and many of the minority political parties instead emphasise the squeeze on real earnings. As a result, I’m often asked why a record employment rate has yet to trigger an obvious economic feel good factor. There are several ways of looking at this but something that is often overlooked is the average amount of work people are doing, which has only just returned to what was considered normal prior to the recession.

At the start of 2008, just before the recession struck, UK workers were on average working 32.2 hours per week. This was around the average for most of the 2000s and around an hour less than the average for the 1990s, the fall over the decade due to a shift toward jobs offering shorter hours. At the time of the last General Election in 2010 this figure had, in the wake of the recession, fallen to 31.6 hours – a loss equivalent to almost a week’s work over the course of a year, which is clearly enough to make the average worker feel worse off.

Since then average hours have risen again but (by the end of 2014) were only back to where they were just before the recession i.e. 32.2 hours per week. This is despite lots more jobs being created and a record employment rate, reflecting the fact that there has been a further shift toward jobs offering shorter hours. However, for most of the period during which average hours were returning to normal the amount people were on average earning for each hour they worked was also falling in real terms. The lack of a noticeable feel good factor is therefore understandable.

For the average worker to feel as well off as before the recession we will thus have to see either an increase in the length of the average working week (say taking it back to where it was in the 1990s) or higher productivity per hour worked in order to boost hourly earnings. Assuming that most people would prefer to work smarter rather than harder (i.e. enjoy an improvement in their overall economic and social well-being) this suggests that measures designed to raise productivity and pay per hour should be at the centre of the General Election debate. Sadly, despite lots of rhetoric about the situation of ‘hard working families’, such measures are a best only implicit in much of what we have heard from our politicians in the election campaign so far.    

Pick and mix politicians should spare us detailed manifestos

Although it has being going on for months, the UK’s General Election campaign doesn’t officially start until next week. I doubt I’ll be alone in wishing it was all over already but just as many people seem excited by the prospect. However, something I won’t be doing this time is giving much attention to the various political party manifestos, the magazine-style documents the political parties publish detailing their policy platforms. These used to offer a guide to who to vote for but seem far less meaningful in an era of ‘pick and mix’ coalition politics.

While manifestos have always represented the outcome of ideological horse-trading within parties they usually contain some degree of internal policy coherence. But compromise between parties effectively destroys this. The 2010 General Election, for example, produced a Coalition with a programme for government that didn’t appear in either the Conservative or Liberal Democrat party manifestos. Nobody voted for the policy mix subsequently pursued and we’ll never know if the quickly cobbled together package of measures has produced superior economic and social outcomes to what would have occurred if the Conservatives had governed alone as a minority administration. Either way, however, the possibility of another hung Parliament and thus some kind of post-Election arrangement between one or more parties makes it harder to take manifestos in the traditional sense at face value.

In my view political parties should only publish detailed manifestos if they also rule out a formal coalition or some other informal post-electoral pact in the event of a hung Parliament. Otherwise parties should simply issue a short statement of overall intent – akin to an organisational mission statement – along with a clear list of red line policies they would either not deviate from or not sign-up to following any post-Election agreement with other parties.

Politicians who wish to garner public trust should demonstrate that they are more interested in policy than politics. The best way to lose trust is to stand for office on a detailed policy agenda merely to ditch this once the votes have been counted.

      

Disappointing pay figures show why Chancellor can't take credit for rise in real wages

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data. These mostly cover the three months November 2014 to January 2015 but also include estimates for public and private sector employment in Q4 2014.

The jobs figures continue to be strong, with employment up 143,000 on the quarter (to a total of 30.94 million people in work) and unemployment down 102,000 (to 1.86 million). The working age employment rate has reached a new record of 73.3%. Full-timers account for more than two thirds of the quarterly rise in employment, all the net rise due to more employees in employment (the number of self-employed fell by 9,000). Excluding the effect of major statistical reclassifications, the number of people employed in the private sector increased by 148,000 to 25.64 million in the final quarter of 2014, while the number employed in the public sector fell by 5,000 to 5.23 million.  

There was a quarterly fall in both the unemployment rate (down from 6% to 5.7%) and the working age inactivity rate (down from 22.3 to 22.2%). The number of people long-term unemployed (i.e. unemployed for more than 12 months) fell by 55,000 in the quarter (to 629,000). Youth unemployment fell by 12,000 to 743,000 in the quarter and has now fallen below 500,000 if full-time students are excluded from the total (the overall youth unemployment rate down from 16.6% to 16.2%). The number of people claiming Jobseeker’s Allowance fell by 31,000 to just over 791,000 in the month to February 2015.  

But the average weekly earnings figures disappoint yet again, the rate of growth in both average weekly total pay (down from 2.1% to 1.8%) and regular pay (i.e. excluding bonuses, down from 1.7% to 1.6%) slowing slightly. Although pay is now growing faster than the 0.3% rate of consumer price inflation this nonetheless dents Chancellor of the Exchequer George Osborne’s positive Budget day narrative. Real wages are rising only because low global oil prices, which Mr Osborne can't take credit for, are pushing the economy toward zero inflation; in our high employment/low productivity jobs market pay packets still aren't benefiting from the so-called ‘long-term economic plan’.   

How to view Britain’s post-recession jobs recovery

The performance of the UK labour market since 2010 will feature in political rhetoric between the Budget day on Wednesday 18 March and General Election polling day on May 7. With politicians and commentators set to trade opinions on the subject, here is my brief take viewed in the light of what I thought would happen five years ago  

At the outset of the recession I expected unemployment to rise higher than it has (to a peak of around 10% rather than the outturn of 8.5%) but also expected a very sharp and sustained fall (to well below the pre-crisis rate of 5.2%) once the economy returned to above trend growth. 

The projected effect of the recession on unemployment was based on the assumption of no underlying change in the rate of labour productivity growth and stable real wages. Unemployment only rose less than expected because productivity and real wages at first fell and then remained subdued during the recession and subsequent period of stagnation.

On the subsequent sharp fall in unemployment I argued in a lecture to HR directors in March 2012 'Unemployment: the case for optimism" that this was highly likely because the structural unemployment rate is nowadays much lower than in previous decades (the lecture was a response to a CBI claim at the time that the UK's structural unemployment rate was around 8%, allied to which was a call for further labour market deregulation).

In my view the only barrier to a sharp fall in unemployment in 2012 was the coalition's macroeconomic policy stance, which served to stymie economic recovery in the first few years after 2010. In the event we had to wait another year for a solid improvement in aggregate demand and thus what I would consider a genuine jobs recovery. In terms of trajectory, job growth was weak in 2010 and 2011 and then only very modest in 2012 and the early part of 2013. It was only from mid-2013 onward when the economic recovery really gathered steam that we saw a very fast rate of job growth and acceleration in the fall in unemployment. Unsurprisingly, it is also only in this latter period that we saw the balance of job creation switch away from part-time, temp and self-employment jobs toward full time, permanent jobs for employees. 

The conclusion I draw from this is that had the coalition pursued a less restrictive macroeconomic course after May 2010 the jobs recovery enjoyed since 2012 would have begun much earlier (probably in 2011) and the labour market would by now have tightened sufficiently to allow much stronger real wage growth. Moreover, only the strong aggregate demand driven phase of the jobs recovery from mid-2013 onward can be considered unalloyed good news, which means we should view put figures related to net employment growth between 2010 and 2015 as a whole in the perspective of what has happened to productivity and real wages over the same period.

Although it is possible to portray the use of more workers at lower average real wages to produce a given level of output as good economic news, the reality is that this is a sign of underlying economic malaise rather than strength and does not bode well for long-term improvement in living standards.

The disturbing rise in zero hours contracts

The Office for National Statistics (ONS) this morning published its latest estimates on zero hours contracts (contracts with no guaranteed hours). Responses to the Labour Force Survey (LFS) indicate that almost 700,000 people in the UK were employed on such a contract in the final quarter of 2014 (over 100,000 more than the year before). Responses to a separate business survey meanwhile finds organisations employed 1.8 million people on such contracts in August 2014, up from the previous estimate of 1.4 million for January 2014, though the increase could be due in part to seasonal factors. The LFS and business survey estimates aren’t directly comparable but in general terms the discrepancy between number of contracts and people employed on contracts is due to the fact that some people have more than one contract.

The latest estimates of the number of people employed on zero hours contracts is disturbing not only because the share of jobs without guaranteed hours of work is increasing (up from 1.9% of total employment to 2.3% in the year to Q1 2014) but also because we were told that the economic recovery was likely to see their use diminish. On the contrary, it looks as though zero hours contracts are becoming a more ingrained feature of the UK’s employment landscape, which is likely to buttress poor pay and working conditions in the lower reaches of the labour market. 

Although the ONS is uncertain how much of the 19% annual increase from 586,000 to 697,000 in the number of people employed on zero hours contracts is due to increased reporting by people previously unsure of how to define their contractual status, the big leap in public awareness of zero hours contracts was in 2012 and 2013 which suggests that most of the rise between 2013 and 2014 is probably due to a greater number being employed in this way. But any rise is disappointing given the expectation that a tightening labour market would diminish use of these contracts.

It can of course be argued that, despite the apparent increase, the share of zero hours contracts in total employment remains relatively small and that some people (especially students and older workers) like the flexibility they provide. What this ignores, however, is that the ability of employers to hire people in this way undermines the bargaining ability of other workers, thereby dampening pressure for improved pay and conditions at the bottom end of the labour market. The practice also undermines the spirit of the statutory National Minimum Wage, since although people employed on zero hours contracts are entitled to the minimum wage for the hours they work the lack of guaranteed hours is a source of income insecurity. Consequently, what appears to be a gradual structural shift toward use of zero hours contracts in our economy is therefore disturbing. 

When it comes to judging the Common Good at Work the Church should not rely on Living Wage alone

The Wages of Sin.  So read the front page splash on yesterday’s issue of The Sun newspaper whose reporters found the Church of England doesn’t always practice what it preaches when it comes to paying staff the hourly Living Wage. The headline is obviously a bit rich coming from a red top tabloid that for almost half a century has profited as a purveyor of insidious soft porn. But the story highlights one of many issues that stem from advocacy of this particular change in employer practice.

I have no problem whatsoever in church people calling for higher wages for the working poor. On the contrary, Catholic Social Teaching provides a central plank of my own personal ideology and I’ve always tried my best to apply such principles as the Common Good or The Just Wage whenever considering public policy issues. However, it’s important to put specific calls in their complete economic, social and moral context so as to avoid being tripped up by the law of unintended consequences.

It’s inevitable that some cash strapped church organisations will struggle to pay workers the Living Wage right away, despite the best of intentions. But more to the point before deciding if this is something they or similarly placed organisations in all sectors of the economy should be told to aspire to we need to know how they will foot the bill.

Although it’s often asserted that the Living Wage in effect pays for itself because the workers who benefit from it will somehow become more productive there is little or no evidence to support this. Ultimately therefore something has to give. The common implicit assumption is that the cost of paying the Living Wage is met out of organisational profit or surplus. If not, which is likely to be the case in organisations operating on very tight margins where low pay is most prevalent, the news is less good for workers. The outcome could be fewer jobs albeit research on the effects of big minimum wage hikes indicates that employers tend instead to cut hours of work or if possible trim other parts of the overall reward package. Either way, a substantial increase in the hourly pay rate runs a substantial risk of being offset by a reduction in workers weekly income, especially if the result is lower employment which leaves some people with no income at all.

Payment of the Living Wage is therefore only a very partial guide to whether a Living Wage employer is a ‘good employer’ or whether a general shift of employer practice in this direction furthers the Common Good. One can see why the Church of England and others wish to see better terms and conditions for working people but when it comes to the realm of work the test of the Common Good does not rest on the Living Wage alone.  

UK jobs recovery accelerates but underlying pay growth weakens

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months October to December 2014.

The UK labour market recovery is continuing to bring good news to jobseekers but also continuing to disappoint wage earners.

The quarterly 103,000 rise in employment represents acceleration in the pace of job creation at the end of last year, helping to cut unemployment by 97,000 to a rate of 5.7%. With the number of people in work now close to 31 million the working age employment has risen to 73.2%, a joint record

But although the December bonus season pushed growth in total average weekly earnings above 2%, underlying pay pressure as measured by regular average weekly earnings (i.e. excluding bonuses and a better guide to the state of the labour market) fell slightly. Economy wide the underlying rate of growth of average earnings dipped from 1.8% to 1.7%. In the private sector the dip was from 2.2% to 2.1% and in the public sector from 0.8% to 0.6%. This suggests that the jobs rich economic recovery is still failing to boost labour productivity, which does not bode well for long-term improvement in UK living standards even if very low price inflation is at present helping to raise real incomes.

The odd politics of business

Politics is a funny old business. What used to be the populist wing of Britain’s Conservative Party, often appealing to the working and lower middle classes and now at the core of Ukip, don’t want David Cameron to remain as prime minister after the General Election on May 7. The former ultra Blairite wing of the Labour Party – as voiced by Messrs Mandelson, Hutton and Milburn – don’t appear to want Ed Miliband to become prime minister. And almost nobody wants Liberal Democrat Party leader Nick Clegg to be anywhere near the next prime minister, although he says he doesn’t mind who is prime minister as long as they give him an important job in the Cabinet.

Meanwhile the politics of business is itself becoming funnier as polling day approaches. All the main business lobby groups claim to be politically neutral but have a default bias toward centre right parties and only favour centre left parties that seek office by claiming to be business friendly. Sometimes the mask slips, as it did last week when the head of the Institute of Directors made clear that his nightmare scenario is a Labour led government in coalition with the Greens and SNP. Despite this the big corporations usually try to keep their heads down – realpolitik requiring them to be prepared for every political eventuality – albeit individual business figures, especially those who provide financial backing for one party or another, tend to come out in open support of those they favour.

Yesterday, however, saw an exception to the rule when Stefano Pessina, active chief executive of high street retailer Boots (‘the chemist’) told a leading Sunday newspaper that the Labour Party’s current policy agenda was “not helpful to business, not helpful for the country and in the end it probably won’t be helpful for them.” “If they acted as they speak”, Mr Pessina went on, “it would be a catastrophe.” If one were being generous it might be possible to view Mr Pessina’s comments as well intentioned advice to Mr Miliband to change his policy stance ahead of the Election so as to gain business support which might help win votes. But given that Mr Pessina does not criticise any specific Labour Party policy, nor offer Mr Miliband a clear new prescription (no joke intended!) it’s hard to interpret the comments as anything other than an attempt to undermine Labour's chances at the ballot box. Indeed Conservative figures immediately took advantage of the situation by branding Labour the 'anti-business party', and there is talk of other top business leaders also preparing to put the boot in. 

This is interesting in part because it appears that Mr Pessina is using a position of potential influence to attempt to exert political influence regardless of what might or might not be the views of the various stakeholders in his business. Should we view the comments of a boss who neither lives or pays tax in Britain as representative of Boots employees or customers, as if to suggest that the next time we pop into one of Mr Pessina’s stores to purchase a seasonal flu remedy this might come with additional medicine to treat this or that public policy ailment. But more important is the widespread response to Mr Pessina’s words which seems to be that they must be sensible simple because he is an important business figure.

Mr Pessina is presumably very good at this job, as presumably are others in similar positions. But this does not necessarily make him an expert on public policy or well informed about the evidence upon which good policy is best based. The likelihood is that Mr Pessina’s view, and that of other business people and their representative bodies, is a reflection of vested interest, even if also based in part on a mix of personal experience, personal ideology, or evidence. Such views deserve to be given no more or less weight than those of any other vested interest, including trade unionists, environmentalists or church leaders who may well be equally vociferous in the coming months, and insofar as they are listened to should always be subject to the acid test of hard evidence to support them.

Political debate is all too often conducted as if the only economically sound policy mix is that deemed to be business friendly, on the unwritten assumption that this always equates with what is in the national interest or that most likely to maximise the common good. It might be at times but experience suggests that this is rarely the case, as is likely to hold true for any policy mix designed to pander too heavily toward one vested interest or another.

Seldom in British history have successive governments, centre right and centre left, been more business friendly than those in office in the past three and a half decades. The resulting predominant policy mix has been one of extremely light business regulation, with taxation kept low enough to just about fund the key public infrastructure firms need to underpin the profit making process. Has this helped make our economy more stable or productive, our society happier and less unequal? It’s up to each of us as individuals to decide how to answer these questions, which should at the top of our shared policy objectives. But at the very least, when it comes to assessing how beneficial uncritical acceptance of the odd politics of business is to the common good of British society the jury must surely be out.                   

Why talk of The Living Wage both helps and hinders policy debate on low pay

The Living Wage is all the rage but mostly honoured in the breach. Around 1 in 5 UK employees (5 million people) at present earn less than the rate of pay its reckoned an individual needs to cover the basic cost of living – currently estimated at £7.85 per hour (£9.15 in London where living costs are higher) roughly a fifth more than the statutory hourly National Minimum Wage (NMW) of £6.50. As of yet, however, only around 1,000 organisations (that’s less than 1% of employers) have voluntarily signed up to be accredited as Living Wage Employers, benefitting less than 0.2% (35,000)  of employees.

Not surprisingly therefore campaigners want many more employers to voluntarily pay their lowest paid staff at least the Living Wage and are increasingly supported in their efforts by politicians across the political spectrum. Last week Prime Minister, David Cameron, encouraged employers who can afford it to pay the living rate and if we ever get the much pondered televised Leaders’ debates ahead of the UK General Election in May politicians of every stripe will doubtless join him in calling upon bosses to do the decent thing.

The Living Wage campaign is laudable - aside from any success in raising hourly wages it helps focus public attention on the related problems of low pay and in-work poverty. But Living Wage rhetoric also has a tendency to mislead or oversimplify policy debate on these problems, with the public hoodwinked into thinking that positive talk about the Living Wage necessarily implies we are about to see a big hike in the NMW, which would guarantee a pay rise for at least 1.2 million employees.  It’s thus helpful to consider the Living Wage in its proper economic and policy context.

Advocacy of the Living Wage, which has echoes of the concept of the Just Wage often discussed within the realm of Catholic Social Teaching, sits within a long tradition of what one might call ‘real world economics’ that parallels orthodox labour market theory.

Orthodoxy concludes that absolute and relative rates of pay are determined by the interaction of supply and demand for labour of given productivity, the observed outcome reflecting the market rate or value of that labour. There is no reason to assume that workers whose productivity places them toward the bottom of the resulting pay structure will earn more or less than what is deemed the Living Wage, nor any reason why a profit maximising employer should pay more than the market rate. Affordability is relevant only insofar as an employer must be able to meet at least the market rate since otherwise employees will go to work elsewhere. The corollary is that competition between employers ensures that the pay of workers of given productivity will always be tending toward being the same across all employers of all types, size and profitability, certainly within local labour markets and, if market conditions are sufficiently fluid, across regions and nations too.

The real world view, by contrast, is that pay rates for workers of seemingly similar productivity are often found to differ across employers, even within local labour markets. Although this can be interpreted within the orthodox framework – for example, individuals who to all intents and purposes look the same in terms of skill or experience as co-workers who are paid differently might differ in terms of personal drive or ability which affects their market value – it is normally taken to suggest that there is an element of indeterminacy in pay setting. In other words, when it comes to pay, who you work for can, at least to some degree, matter as well as how productive you are.

Such indeterminacy is sometimes explained by the relative product market power or success of some employers, which enables them to pay ‘over the odds’, sometimes by their bargaining power relative to their workers which enables them to pay ‘under the odds’, sometimes simply because they are either ‘good employers’ or ‘bad employers’. But whatever the explanation, the possibility of employer discretion in pay setting opens up the potential to make efforts to change employer behaviour.

For example, where some low paid workers are thought to lose out because less powerful than their bosses the state can step in by setting a minimum wage to even things up, as we do in the UK with the NMW. But the minimum wage confronts the problem that some workers really are of low market value, in which case requiring employers to pay too much more will mean fewer workers are hired. This explains why the independent Low Pay Commission normally exercises a degree of caution when advising government on raising the NMW, leaving the minimum well below the estimated Living Wage. In this situation the only way to further raise the pay of workers of low market value – other than increase their productivity by way of education or training – is to encourage those employers who can afford it to pay over the odds, thereby providing the impetus for Living Wage campaigns.

         

The trouble is that ‘affordability’ is a vague concept and is just as likely to be deployed by employers as justification for maintaining the status quo as for signing the Living Wage pledge.  This is precisely why even the best run campaign faces an uphill struggle to attract more than a minority of private sector employers to the cause (many of those in the initial crop of signed up employers being charitable, faith based, not-for-profit and public sector organisations). Indeed, what’s normally presented as the business case for the Living Wage – enhanced corporate reputation and a positive employer brand that aids recruitment and lowers costly staff turnover - implicitly assumes limited adherence. If all employers were Living Wage employers any relative competitive advantage would disappear.   

Consequently, although emphasis on the Living Wage adds a useful dimension to debate on low pay one should not exaggerate its role in tackling the problem. By far the most important element is and will continue to be the level of the NMW, which the economic consensus suggests could be significantly higher than the current rate without cost to jobs albeit remaining below the estimated Living Wage. Whenever politicians talk about the Living Wage what they should really be quizzed on therefore is what they intend to do about the NMW.

If a higher NMW is still considered inadequate to provide a de-facto Living Wage or income the only efficient market based solution is to increase the productivity of those workers – thereby raising their market value – the only alternative policy option being to use the tax or benefit system to top-up earnings so that the incomes of the low paid reach a minimum accepted level. In this context the principal focus of political debate should be on the relative balance of the NMW and fiscal top-ups in the policy mix, in particular to ensure that top-ups do not act as an excessive subsidy to low wage employers. Living Wage campaigns, supported by government, including adherence in all public sector bodies, should continue in tandem with this policy but as a valuable adjunct rather than the key component.   

This policy mix undoubtedly may seem rather mundane to those excited by the current widespread Living Wage rhetoric. But far better to focus on this - especially the level of the statutory NMW - than pin hope on unrealistic goals or the goodwill of a tiny minority of employers.  

Overall pace of UK labour market recovery slows but vacancies reach new record level, giving a further lift to real wages, while rise in number of people economically inactive helps lower jobless rate to 5.8% despite worrying increase in youth unemployment

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

These latest figures paint a mixed picture of the state of the UK labour market toward the end of last year. There was a clear slowing in the overall pace of job creation – the quarterly increase of 37,000 (to 30.80 million) being the smallest since spring 2013, leaving the UK employment rate unchanged at 73.0%. Similarly the quarterly fall of 58,000 in the number of people unemployed (to 1.91 million) is the smallest since late summer 2013. However, despite this slower pace of recovery a sharp quarterly increase of 66,000 in the number of people of working age who are economically inactive – i.e. outside the labour market – helped lower the unemployment rate to a six year low of 5.8%.

Full-time employees account for the entire quarterly net increase in employment, the number of people self-employed and/or working part-time having fallen slightly. There was also a fall in the number of temporary employees while the number of people working part-time because unable to find a full-time job remains on the recent downward trend to stand at 1.32 million. The level of long-term unemployment has fallen again (down 53,000 to 658,000) though youth unemployment (16-24 year olds unemployed and actively seeking work) is up 30,000 to 764,000, the number of 16-24 year olds in work dropping by 84,000.    

The most encouraging news in the latest quarterly figures is a rise of 19,000 in the number of job vacancies to a new record level of 700,000. This indicates a modest ongoing tightening of conditions in the labour market which underpins a continued increase in pay growth and a further improvement in real weekly earnings, with regular weekly pay growth of 1.8% far outstripping the CPI rate of price inflation.

As for what these figures suggest for the labour market in 2015, the message is broadly in line with expectations at the start of the year – continued improvement but at a slower pace than in the past two years and with no sign of a worrying rise in pay pressure even though low price inflation is helping to boost real wages. However, the apparent quarterly deterioration in the position of young people in the labour market is of concern and if it continues may well feature as an important issue in pre General Election campaigning.          

Talk of ‘full employment’ rings hollow in Britain’s Dorian Gray economy

With the latest monthly official UK labour market statistics due out on Wednesday this will be one of four weeks between now and the General Election is which jobs are likely to be particularly prominent in political debate. The Prime Minister, David Cameron, is due to kick things off later today in a speech setting ‘full employment’ as a policy goal, with a pledge to propel the UK employment rate – the proportion of people of working age in a job – to the very top of the developed economy league table, ahead of the likes of Germany which currently enjoys an employment rate of 74%.  

Mr Cameron is understandably keen to make much of the remarkably strong employment growth enjoyed in the past two and a half years, though as I have noted before in this blog it’s difficult to attribute this outcome to any specific policy measures introduced by the Conservative- Liberal Democrat coalition government since 2010.

The scale of job losses across both the public and private sectors resulting from fiscal austerity has turned out to be roughly what I expected following Chancellor of the Exchequer George Osborne’s first budget. What I hadn’t expected was the speed of offsetting job gains – I knew new jobs would come but thought this would take longer on the assumption that the rate of growth in labour productivity would remain close to its long-run trend. But as we now know the labour market response to deficient aggregate demand was most unusual. Pay took far more of the strain of adjustment, resulting in a prolonged productivity slump, while there was also an exceptional surge in the number of people becoming self-employed and working on very low average incomes.

Insofar as the pay squeeze and rise in self-employment is the consequence of policy effects the cause has been flexible labour market measures implemented by successive governments over the past three decades. The only policy introduced by the Conservative-Liberal Democrat coalition I think might eventually be found to have been significant is the watering down of employee rights against unfair dismissal which took effect in 2012. This was overseen by the Lib Dem Business Secretary, Vince Cable, somewhat ironically given that Dr Cable is currently talking up his worker friendly credentials with an eye to what the post-Election parliamentary configuration might bring. By making it easier to fire employees, Cable’s reform may have encouraged increased hiring during the economic upswing that began in 2013, albeit sowing the seeds of a sharp firing spree were we to see another serious downturn.

Either way, good news on jobs has been enough for some to start speculating on when the economy might reach a state of full employment – hence the Prime Minister’s bullish speech today. At a superficial level one can see why. For example, at present I expect the working age UK employment rate to reach a new record high (on current measurement) of above 73.5% at some point this year, bringing Mr Cameron’s aim clearly into view. I also expect unemployment to fall back to or below the pre-recession rate of 5.2%. However, I would not consider this as anything more than a partial step toward full-employment.

Although a 5.2% unemployment rate is in line with many estimates of the long run sustainable rate, still very muted wage pressure as unemployment has fallen rapidly to the current rate (6%) suggests that the jobless total might now be able to fall well below 5% before threatening the government’s 2% CPI inflation target. I therefore conclude that the UK will remain far short of full employment for some time yet.

Moreover, even a new record high employment rate would at present occur in a labour market characterised by a relatively high rate of underemployment, a still high youth unemployment rate, an unemployment pool with over 1 in 3 people long-term unemployed, around 2 million economically inactive people expressing a desire for work, and a large segment of the workforce employed in low productivity jobs paid at or close to the National Minimum Wage. This does not constitute a state of ‘full employment’ in any genuine sense of the concept.

On the contrary, what we currently have is a labour intensive UK economy with endemically slow growth in both productivity and pay combined with deeply ingrained pay inequality. This is in other words a Dorian Gray economy, the admired façade of seemingly approaching full employment hiding a far from perfect reality. In an economy where poverty pay and use of zero hours contracts is rife, talk of ‘full employment’ rings hollow. For all the good news on jobs, the focus of policy debate in the coming weeks should be firmly on the reality rather than the façade.

The economic consequences of cheap labour deserve more attention

This morning’s business news bulletins contained items on the adverse consequences of both falling oil and milk prices on UK producers in these respective sectors. What I find intriguing, however, is the relative lack of attention given to the long-term effect on business behaviour of the currently very low price of labour.

Although the big squeeze on real wages in the past five years has often hit the headlines, the implications of this for business have generally been considered in relation either to aggregate consumer spending or to change in patterns of spending, such as that which has benefited emerging low price supermarket chains. But surely of far greater significance is how businesses have adjusted to what is evidently a new era of cheap labour.

Few would disagree that the fall in real wages – which has now come to an end on some if not all measures of earnings – is preferable to the even sharper rise in unemployment that several years of economic slump and stagnation would otherwise have caused. Yet while this highlights the obvious merit of a flexible labour market during periods of relatively weak demand, the continued weakness of real wage growth as the economy has mounted a strong recovery suggests that one can have too much of a good thing.

The kind of flexibility that dominates the British economic model – founded on a deregulated labour market, a tough welfare to work regime and reasonably open borders to migrants – is operationally conducive to maintaining a high rate of employment but has signally failed to deliver strong growth in labour productivity. Successive supply side reforms introduced since the 1980s have been far more successful at weakening the bargaining power of workers, thereby pricing record numbers of people into jobs, than at triggering businesses to invest in new technology and skills.

Indeed, the acute degree of deregulation that underpins the British model is inimical to investment since it provides businesses with a constant drip feed of highly addictive and easily absorbed cheap labour. Moreover, with real wages in recent years falling by an amount not seen since the mid-19^th century, the level of addiction has soared.

As a result of this I think it naïve in the extreme to expect a sudden change in business behaviour to give an early strong boost to growth in productivity and pay. The best hope is that our economic recovery will be sustained long enough to enable unemployment to fall to such a low rate that labour becomes more expensive – i.e. a case of higher pay providing a spur to higher productivity. But the question then will be whether British businesses weaned and reliant on cheap labour, especially the least well managed, will be able to raise their game.     

UK labour market outlook 2015 – best year since 2007 but ‘workforce divide’ set to grow wider

Happy New Year! I’m not sure how cheerily that declaration will be received on the first Monday of 2015. Those of you just back at work after the festive season will probably be feeling at least a little of the January blues, while those without a job might be fearful of what the year has in store. I can’t say my personal mood has been lifted by the prospect of having to endure four months of politicking ahead of the General Election, though the possibility of all three main political parties taking something of a hammering come May 7 should raise the pulse rate on polling day. But what can we expect for the day-to-day world of work? This is what my crystal ball is telling me.

The pace of job creation will remain strong in 2015 – with a net rise of 400,000 in the number of people in work taking the employment rate to a new record - but be a little weaker than in 2014 on the expectation that a combination of slower GDP growth and somewhat faster growth in labour productivity will curb hiring activity.

Unemployment will fall to 1.7 million, the unemployment rate dropping back to the pre-recession rate of 5.2%. As a result the rate of growth of average weekly earnings will rise to 2.5%, upward pressure from a pick-up in labour productivity and longer working hours being moderated by labour market flexibility effects and public sector pay constraint. Although this will still leave the annual rate of nominal wage growth around 2 percentage points lower than what was considered attainable and sustainable prior to the recession, with inflation on the CPI measure forecast to remain well below 2% 2015 will nonetheless be a year of solid growth in real wages.

The coexistence of both strong employment growth and real wage growth will make the coming year the best overall for the UK labour market since 2007.  However, not all workers will notice a marked improvement in their lot.

As the market tightens there will be greater pressure on employers to increase the relative pay of some workers in an effort to recruit and retain individuals in greatest demand across the occupational skill and personal talent spectrum. Workers with particular technical skills or personal talents in high demand will begin to fare noticeably better in relative terms as will those working for organisations voluntarily prepared and able to offer low skilled workers the Living Wage. But in a labour market still oversupplied with people desperate for whatever work is on offer, employers unable or unwilling to improve working conditions will continue to have no difficulty in hiring staff into minimum wage jobs or on zero-hours contracts without any fringe benefits. This will serve to further widen what has become a clear structural ‘workforce divide’ within the UK’s ultra-flexible and lightly regulated labour market.