Monday 19 January 2015

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.

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