Record UK employment? Not until we get 2.8 million more private sector jobs

Another month, another set of mixed official figures on the UK labour market. Those who know me are aware of how desperate I am to see a return full employment. But unlike commentators with a political or commercial vested interest in talking things up, my approach is always to make a fair assessment of the state of play. And it’s not as good as some want us to think.

I have already commented publicly today on how our ‘jobs without growth’ economy is a sign of economic weakness, sustained only by falling productivity and a severe squeeze on real pay levels, not success. This can’t go on forever, and evidence of a sharp jump in redundancies at the end of 2012 – well before the current spate of job cuts announced this month – could spell the beginning of the end. But what really bugs me is constant talk of the UK’s ‘record number of people in work’. This bald statistical statement conveniently glosses over the fact that the true measure of a country’s employment performance is its employment rate, the proportion of people in work, which takes account of population.

The UK employment rate fell sharply between 2008 and 2010, stabilized between 2010 and 2011 but despite subsequent improvement remains 1.7 percentage points below the pre-2008 recession peak of 60.3%. Without any further rise in population, the total number of people in work would have to increase by more than 900,000 for the employment rate to return to the 2008 peak. However, on current official population projections a return to the 2008 peak employment rate will require a net increase in employment of 2.2 million in order to offset the effect of population growth.

Adjusting for the projection of the Office for Budget Responsibility (OBR) that public sector employment will fall by a further 600,000 between the start of 2013 and the start of 2018 the estimated number of jobs needed to restore the 2008 employment rate implies a required net increase in private sector employment of 2.8 million.  With a normal pace of employment growth this is unlikely to be achieved before 2020 even if the economy avoids further shocks before the end of the decade. Record employment? Not really. 

Beware politicians bearing stats

The coalition government’s mid-term review, published earlier this afternoon, states that ‘since we came to office more than 1 million jobs have been created in the private sector.’ This claim is somewhat misleading. Adjusting for changes to statistical classification the correct figure is 900,000. Moreover, taking account of a corresponding increase in the size of the workforce, the assertion that the labour market has been performing better since May 2010 is also misleading. In fact, both the employment rate and the unemployment rate are unchanged, female unemployment, youth unemployment and long-term unemployment are higher, real wages have fallen, and workers are producing less per hour worked.

Official data available from the Office for National Statistics show that since the quarter May-July 2010 (the first in which the coalition government was in office):

The total number of people in work has increased by around 500,000 (900,000 more working in the private sector, 400,000 fewer working in the public sector).

The employment rate (proportion of people in work) is unchanged at 58.5% - still 1.8 percentage points below the pre-2008 recession peak.

The unemployment rate is unchanged at 7.8% - still 2.6 percentage points above the pre-2008 recession low.

 The proportion of unemployed people who are long term unemployed has increased from 32.3% to 36.0%.

The male unemployment rate has fallen from 8.6% to 8.3%.

 The female unemployment rate has increased from 7.0% to 7.3%.

 The youth unemployment rate has increased from 19.5% to 20.3%.

 The average weekly wage is 2.7% lower in real terms.

 The amount of goods and services produced per hour worked has fallen by 1.28%.    

A fair mid-term assessment of the coalition’s jobs record is that the labour market has not weakened dramatically despite fiscal austerity and economic stagnation. But while ministers can take some comfort from this relatively benign outcome it should not be overplayed as a success story.

Happy New Year?

Being one of those people who really enjoy the festive season, I find the start of January hard going. My day therefore began with a look at the pristine 2013 diary to check when Easter will fall (good news, it’s at the end of March, about the earliest date possible, though I guess it might still be cold then). However, having cheered myself with that prospect, it was back to the grim reality of economic statistics, with the third quarter 2012 labour productivity statistics dampening the mood.

The UK economy may have emerged from recession in the third quarter of last year but what might be called the ‘productivity recession’ deepened, with the amount produced per hour worked falling by 0.2%. For the economy as a whole output per hour worked fell by 2.4% between Q3 2011 and Q3 2012, while for the market sector the fall was 3.9%.

The continuing and deepening productivity recession highlights the degree to which rising employment levels mask a severe underlying shortage of demand in the UK economy. This situation continues to be sustained by an ongoing pay squeeze which is helping to keep wage costs in check. Despite this, however, the annual rate of growth of unit labour costs remains well above 3% at a time when, after several years of real pay cuts, the exercise of pay restraint has probably reached workplace tolerance levels. With the economy likely to have flirted with a further contraction in the final quarter of 2012 and a slow start to 2013 on the cards, businesses will therefore be under increased financial pressure to boost productivity in the coming months. Whether this means more redundancies, less hiring or an increase in staff workloads remains to be seen. But either way it suggests the UK workforce faces an imminent reality check.

Consequently, I expect total employment to increase by only around 80,000 in 2013, less than a fifth of the increase seen in 2012. When I released this forecast last week on December 28^th a Conservative MP (Ms Harriet Baldwin, Parliamentary Private Secretary to Employment Minister Mark Hoban MP, no less) tweeted that not only I was being wildly pessimistic but also that the media should ignore my comments because I had been wrong in my prediction for employment in 2012. Hands up to the latter change – I have openly admitted I got 2012 wrong, though since my forecast for last year was in line with the consensus view of economists I am far from alone, and still no one quite understands why a contracting economy managed to create loads of jobs. However, I fervently dispute the assertion that I am relatively pessimistic about 2013 (anyone who thinks this either hasn’t read the detail of my forecast or doesn’t know what other economists are saying).

In fact my 2013 forecast is both more optimistic than the consensus view and that of the independent Office for Budget Responsibility (OBR). The OBR, for example, forecasts no net employment growth in 2013 and a rise in the unemployment rate to 8.3%, up from 7.8% at the end of 2012. By contrast, I expect unemployment to peak at 8.1% (with youth unemployment actually falling a little). Critics who consider this forecast itself too pessimistic are fully entitled to their view and I genuinely hope to be as wrong about 2013 as I was about 2012. But I’m no more of a doomster than most other practitioners of the ‘dismal science’, all of whom, like me, are eager to see the UK economy return to solid growth as quickly as possible, with rising employment and pay. Happy New Year!     

A, little, bit of festive jobs cheer

It’s freezing outside and quite Christmassy, so not the ideal day for looking at the monthly jobs stats. For once, however, they brought a bit of cheer. Not a great deal, maybe, but a bit.

On the disappointing side, the rate of UK private sector job growth, having achieved a pace in the summer that Usain Bolt would have admired, has slowed considerably following the Olympics boost. The third quarter increase of around 40,000 was only about half that achieved in the second. However, there were still easily enough net new private sector jobs (65,000) to offset continued public sector job cuts of 24,000.  This along with a rise in the number of economically inactive people resulted in a further quarterly fall in unemployment (down 82,000), with all the new jobs being full-time posts for employees with permanent contracts. Moreover, the rise in full-time jobs for employees appears to be encouraging more self-employed people to seek employers rather than go it alone (self-employment is down 23,000 on the quarter). So while the pace of job creation has slowed it looks as though underemployment, and thus the overall shortage of work, has fallen slightly.

                                        

It’s also good to see a continued fall in youth unemployment of 72,000, with the best news being for the core of youth jobless not in full-time education, who are probably being helped by the government’s Youth Contract measures. The number of people long-term unemployed has remained unchanged, though with total unemployment having fallen even more the percentage long-term unemployed has increased.

But the news is less good on the pay front. Had a sharp jump in bonus payments not boosted pay packets, the latest earnings figures would have registered a sharp fall in the rate of growth rather than a steady 1.8%. With consumer price inflation still stubbornly running well above 2%, this suggests the real pay squeeze is set to continue for some time whatever happens to jobs and unemployment.                 

A temperature check for the UK labour market

Those economists who have been proved right to be pessimistic about prospects for UK economic growth following the recession of 2008-09 have nonetheless been surprised by what’s happened to the labour market. For example, the unemployment rate, which had been widely forecast to reach 8.7% by the end of 2012, will probably end the year at below 8%. It would be wrong, however, to conclude that this means the labour market has got off relatively lightly in the period since the financial crisis first broke. On the contrary, the degree of pain inflicted on the labour market has been as severe as expected it’s just that the pain has been felt in a different way. In particular, an unprecedented post-war slump in real earnings – caused by a mix of below inflation pay rises and shorter hours working - has served to spread pain throughout the workforce rather than, as in previous recessions, seen it concentrated on the unemployed.

Consequently, while unemployment remains the key central indicator of the overall balance of supply and demand in the labour market it doesn’t provide a full temperature reading. My consultancy The Jobs Economist (www.thejobseconomist.org) is therefore publishing a Labour Market Temperature Index (LMTI), a variant on the well-known Economic Misery Index first devised by economist Arthur Okun in the 1960s. The original Misery Index was calculated by adding the unemployment rate to the consumer price inflation rate. The labour market variant instead adds the unemployment rate to the rate of change of real earnings.

The LMTI takes into account the impact of (CPI) price inflation, nominal pay increases and changes in average hours worked per person, the latter two variables determining the rate of growth of average weekly earnings. The index is in turn benchmarked against an even temperature reading for the labour market, set at zero. A sub-zero reading is a measure of deficient demand for labour assuming that the chosen even temperature benchmark reflects the sustainable (or structural) rate of unemployment and the sustainable rate of average real weekly wage growth. Sustainable in this context means the rates consistent with the official policy target of 2% CPI inflation, which on the basis of estimates currently implicit in economic modelling by the independent Office for Budget Responsibility (OBR) corresponds to an assumed sustainable rate of unemployment of around 5% and sustainable real average weekly wage growth of around 2%.

The LMTI should be considered a temperature index rather than a misery index since its purpose is to gauge fluctuation in the demand side strength or weakness of the labour market rather than measure the precise extent of human distress or misery this causes. Although any sub-zero LMTI reading will increase misery, the same overall temperature reading can give rise to a variety of configurations between pay, hours of work and unemployment, with those resulting in higher unemployment generally thought to be the source of greater misery. The post 2008 configuration is therefore likely to have been associated with less misery than the higher unemployment configurations witnessed in the wake of the 1980s and 1990s recessions.

The figure below shows how the UK’s LMTI has fluctuated since 2000. Prior to the recession of 2008-9 the overall temperature reading was close to or above zero. Unemployment at that time was likely to have been close to its underlying structural rate, with the strength of demand for labour resulting in higher real wage growth for people in work. Since then mounting labour market weakness has shown up in a combination of higher unemployment, shorter working hours and real wage reductions. Comparing 2008 and 2012 the net reduction in demand for labour as measured by the fall in the LMTI is more than twice that indicated by the rise in unemployment. The cooling shown by the LMTI is thus more indicative of the overall degree of pain inflicted on the labour market since the start of the financial crisis.       

The labour market was at its coldest in February 2009 with a LMTI reading of -13. Things warmed up a little in early 2010 but cooled again in 2011. Though the labour market temperature has improved in 2012 in response to a fall in unemployment and moderation in the squeeze on real earnings, sub-zero conditions continue. Indeed, a projection of the LMTI based on the latest OBR economic forecast, published last week alongside the Chancellor’s Autumn Statement, suggests a further period of cooling in the near term with subsequent warming to 2018 doing no more than easing the chill.  If the OBR forecast proves correct the UK labour market will eventually have suffered a sub-zero decade, still be feeling cold, and some distance from returning to the pre-financial crisis climate. 

Autumn Statement: the Octopus strikes back

I’m getting old. Set piece parliamentary events like today’s Autumn Statement only serve to bring out the cynic in me. The current Chancellor of the Exchequer seems even more adept than most of his recent predecessors at pulling the smoke and mirrors trick in order to make the fiscal arithmetic look better. And listening to him address the House of Commons this lunchtime one might even think the Office for Budget Responsibility (OBR) had painted a fairly rosy outlook for jobs. However, a closer look at what the OBR actually published today offers a rather different perspective.   

Although, as the Chancellor stated, the OBR has lowered its forecast for the peak in unemployment from 8.7% to 8.3%, it nonetheless paints a very bleak outlook for the UK labour market in 2013. The number of people in work is forecast to be unchanged between Q4 2012 and Q4 2013, the employment rate is forecast to fall from 58.4% to 58.1%, the number of people unemployed is forecast to rise by 100,000 with the unemployment rate increasing from 7.9% to 8.3%. Whatever the medium term employment impact of the policy measures contained in the Autumn Statement, the OBR clearly does not expect these to help the jobless in the short term.

The picture for the public sector is even bleaker. Again, the Chancellor stated that the OBR is forecasting that two additional private sector jobs will be created for each job lost from the public sector. What he didn’t mention was the scale of projected public sector job cuts. The OBR is now projecting that the coalition’s spending plans will eventually result in the loss of 1.1 million public sector jobs, including 700,000 in the current Parliament. Assuming the OBR is correct in forecasting 2.4 million additional private sector jobs in the coming years, the share of public sector employment in total employment is heading toward a record post war low.

When I predicted public sector job losses on this scale in 2010 I was ridiculed in many quarters, most notably by Conservative MP Michael Fallon who verbally attacked me during an oral evidence session before the Commons Treasury Select Committee suggesting that I had the professional “credibility of a dead octopus”. Mr Fallon, now a minister in the Business Department, has been doing the post Autumn Statement media round this afternoon defending the Chancellor’s policy record. He was wrong in 2010 and didn’t sound very credible today either. I suggest Mr Fallon consult the seaweed, it might offer him a way forward.   

Winners and losers in the 2011-12 jobs market

I’m slightly hesitant about naming anyone in my blog at the moment. Within days of mentioning Clive Dunn, the Dad’s Army actor died at the age of 91. Last week’s Dallas themed post was equally swiftly followed by the death of 81 year old Larry Hagman. The latter was most famous for playing the character JR Ewing, whose fictional close encounter with death a generation ago meant that “Who Shot JR?” for a short while usurped “Who Killed JFK?” as the question most associated with the Texan city. It was therefore somehow fitting that Mr Hagman passed away on November 23^rd, just one day after the 49^th anniversary of the assassination of the former United States president.

Back here at home 22 November saw the Office for National Statistics (ONS) release the latest Annual Survey of Hours and Earnings (ASHE). The results confirm the extent of the real pay squeeze between spring 2011 and 2012, with hourly median pay growth for full-time employees only around half the corresponding 3% rise in price inflation as measured by the Consumer Prices Index. But with the national minimum wage helping to support pay in the lower half of the earnings league, the top 10% of earners felt the biggest squeeze. The pay of full-time employees in the bottom tenth of the distribution increased by 2.3%, while pay for those in the top tenth fell by 0.2% (i.e. a real hourly pay cut of 3.2%).

My initial response to this was that although the pay gap between top, middle and low earners remains very wide in the UK and is still far wider than a generation ago, 2011-12 has as least turned out to be something of a ‘we’re all in it together’ year in Britain’s jobs market with pay at the top hit hardest by the double dip recession. However, I was also interested to see how pay growth between spring 2011 and 2012 compared with employment growth during roughly the same period (April-June in each year), as discussed in my blog posting of 12 November which listed the top 10 fastest growing occupations in the past year and the 10 occupations recording the biggest loss of employment.

Growing demand for certain types of labour might result in a combination of relatively strong growth in both employment and pay, or vice versa where demand is weak. But it’s also possible that faster or slower pay growth could help price some types of workers out of or into jobs, thereby causing pay and employment growth to diverge.   

Although the ASHE lists the number of jobs in each occupation as well as pay and hours these are considered indicative rather than accurate estimates, so it’s best to compare the ASHE results with the broadly corresponding Labour Force Survey employment estimates.

Listed according to their position in the Standard Occupational Classification (SOC) the 10 fastest growing occupations saw the following percentage change in median hourly earnings for full-time employees: Production Managers and Directors in Manufacturing (+1.1%), Human Resource Managers and Directors (+2.2%), Information Technology Specialist Managers (-0.5%),  Management Consultants and Business Analysts (-0.3%), Quality Assurance and Regulatory Professionals (-2.8%), Graphic Designers (+1.0%), Financial Accounts Managers (+0.7%), Credit Controllers (+0.5%), Chefs (+0.5%) and Sales and Retail Assistants (+1.9%).

The corresponding changes for the 10 occupations registering the biggest jobs losses are: Financial Managers and Directors (+0.2%), Chartered and Certified Accountants (+5.5%), Youth and Community Workers (-2.8%), Local Government Administrative Occupations (+0.8%), Typists and Related Keyboard Occupations (+1.8%),  Electricians and Electrical Fitters (+0.1%), Plumbers and Heating and Ventilating Engineers (-0.5%), Teaching Assistants (+2.5%), Nursing Auxiliaries (+1.4%), Security Guards and Related Occupations (+0.8).

Interestingly the only one of these 20 occupations to register a real hourly pay increase, Chartered and Certified Accountants, was one of the biggest job shedders (down 39,000 or 16.8% on the year), suggesting that this group was content to trade-off higher pay against jobs. The biggest losers are Youth and Community Workers, who suffered a 5.8% real hourly pay cut as well as shedding 25,000 jobs, a 30% reduction in numbers. Of the remainder, Human Resource Managers and Directors is the occupation that fares best (a modest hourly pay cut of 0.8%, alongside employment growth of 22,000, or 19.2%), indicating relatively strong demand for this group. Ironically, therefore, HR managers and directors, who are employed to deliver news about pay and job cuts to others in the workplace, have of late been keeping the best news for themselves.