Don’t expect too much from any work programme

It’s the Oscar ceremony this weekend. I watch lots of films but don’t normally tune in to awards shows. Too much nip and tuck on display. And the women are almost as bad. Much more fun are the gongs for the worst films. The latter has its equivalent in the Golden Bollock prize for rotten political gimmicks or policy ideas. Judging by this morning’s report from the House of Commons Public Accounts Committee, this year’s winner might be the government’s flagship Work Programme, which appears to be seriously underperforming relative to expectations in getting benefit claimants off welfare and into sustained employment. But is such criticism fair?

Those sticking the boot into the Work Programme reckon it’s poorly designed, with funding and contractual arrangements that put too little pressure on lead private sector providers to deliver outcomes for hard to place clients while effectively pricing specialist voluntary sector groups, familiar with helping the most disadvantaged, out of the system. The programme’s defenders retort that it’s too early to make a proper assessment of performance – the scheme launched in summer 2011 and available data only tell us how well things went in the year to summer 2012 – and, anyway, a flat-lining economy makes progress difficult.

The ‘too soon’ defence has some merit, though this can’t be sustained for too much longer and fresh information is on the way, but the economic background argument is weak given the surprising strength of employment growth in the past year. The economy may indeed have flat-lined but falling real pay has priced workers into jobs at a rate far faster than one would expect were GDP rising at or above its trend rate of growth. Many more people are finding jobs it seems, just not that many from the Work Programme.

This adds weight to the idea that the Work Programme has a design flaw. Basic to this is that the lead private sector providers invest their own money up front and only receive a payment from the government if they meet or exceed performance targets. This looks like a good deal for the providers, jobless and taxpayer alike. However, providers are finding that the amount they have to put in to make a serious difference to the job prospects of the hardest to help is higher than the financial return they are likely to make. Providers therefore focus on the most employable, some of whom would probably have job got jobs anyway, and leave the tougher nuts to one side in the hope that either job prospects for the latter will also improve or, less likely, that the government will stump up more cash to make a higher level of up-front private sector investment in the hard cases worthwhile.

This design flaw has been evident from the outset and will remain an underlying problem for the Work Programme even if, as I suspect, performance data improve as the system beds down. Yet the basic fact that both critics and defenders of the Work Programme prefer to ignore is the generic difficulty facing welfare to work schemes of this kind.

Like many employment analysts of my generation I’ve kept tabs on the long succession of employment programmes that have come on gone during the course of the past three and a half decades. They are always introduced to a political fanfare and promise to banish long-term welfare dependency as we know it. They also always disappear, usually quietly, to be replaced by an equally over-hyped grand plan. The reason is that most schemes do okay but are never able to live up to unrealistic expectations, mainly because the amount of money spent on them is always too low to deal with the numerous barriers to work confronting those they are expected to help. This universal truth holds whatever the programme and regardless of whether it is fronted by the private, public or voluntary sectors.

In all probability therefore the Work Programme will work reasonably well and will be much better for the long-term jobless than doing nothing at all. But neither it or its inevitable successor will live up to expectations so long as the palliative of helping people move off welfare into work is not accompanied by fundamental solutions to the economic and educational inequalities that makes them move on to welfare in the first place. 

Our astounding 'jobs boom, pay slump' economy

I’ve just spent another morning trawling through official statistics on the UK economy. The jobs market continues to astound. We are in a middle of both a jobs boom – all full-time in the final quarter of 2012 - and a pay slump as jobseekers struggle to gain or retain employment in a stagnant economy by pricing themselves into work. Average earnings are rising by just 1.3% against a backdrop of 2.7% consumer price inflation – and as the Bank of England warned last week inflation is going to remain stubbornly high for some time to come.   

This is unlike anything seen in this country since the Second World War, with the economy using more and more people at falling real rates of pay to produce a static level of output. For the time being this looks like a decent trade-off if the alternative is even higher unemployment. But a low productivity/low wage economy is very much a second best outcome and is just as much a sign of economic malaise as a longer dole queue.

It’s disappointing that strong quarterly employment growth of more than 150,000 did not translate into a bigger fall in unemployment (which dropped by only 14,000). But at least this indicates the success of government welfare to work measures in ensuring jobless welfare claimants leave economic inactivity to enter the labour market in ever record numbers.

Policy impacts are also evident in modest signs of improvement in the number of long-term unemployed and, in particular, a sharp quarterly increase of 66,000 in employment for young people aged 16-24 not in full-time education. The fact that this has coincided with a fall of 37,000 in employment of 16-24 years in full-time education suggests that the Youth Contract, which offers wage subsidies to employers hiring young jobless people from the benefit roll, is aiding the policy target group at the expense of other young people.

Older people are doing even better in finding employment, though this is as much a symptom of the desperate need of many to keep working in order to supplement squeezed pension incomes. But don’t be fooled that older people are taking jobs from younger jobless people. This is simplistic. Ultimately, in a dynamic jobs market like that of the UK helping more people into work helps create more work overall. The generations are collaborators, not competitors.  

The curious trend in redundancies

We get the latest official snapshot of the UK jobs market today. Whatever the figures show they can’t disguise the hard time many people are having, exemplified by yesterday’s news that 1,700 jobseekers applied for eight jobs on offer at a branch of Costa Coffee in Nottingham.

The pain felt in recent years is also highlighted in another sad statistical milestone. Around 3.5 million people have been made redundant since the start of 2008 – equivalent to 1 in 7 employees in work at the start of the recession. Of those made redundant in the past five years 63.3% are men and 36.7% women. For both men and women 2009 was the peak year for redundancies, although in terms of share of total redundancies 2011 and 2012 have been the two worst years for women, reflecting public sector job cuts. The share of total redundancies accounted for by the public administration, education and health sectors increased from 8% to 25% between 2009 and 2011, before falling back to 16% in 2012.

Yet although the rate of redundancy in the past five years has been higher than the previous five years, redundancy rates since 2008 have generally been lower than in the late 1990s and early 2000s when the economy was enjoying a healthy rate of growth (see figure, below, the ONS consistent data series only stretches back as far as the mid-1990s). Redundancy is obviously painful for those affected but is not always a sign of economic distress. On the contrary it can accompany good times if organisations are busily restructuring and boosting productivity, which helps improve prosperity. Remarkably therefore the total number of people made redundant since the start of the deepest and longest economic crisis since the 1930s is the same as the number made redundant in the five years boom years to 2003

The 1990s and early 2000s was a period of considerable organizational restructuring and relatively strong real wage growth which raised the redundancy rate to around 7% to 8% per quarter. But 2002 marked the start of a downward shift in the redundancy rate to the range of 4% to 6%, with the start of an era of weak growth in real pay key amongst the causal factors. And although the deep recession in 2008-9 triggered a sharp spike in redundancies, the redundancy rate has subsequently fallen back and at present shows no sign of rising substantially above the pre-recession rate.

The observation that what might be called the UK’s ‘normal’ (i.e. core underlying) redundancy rate fell well before the recession suggests that the lower than expected level of redundancies in recent years, which is often partly attributed to more cooperative employment relations and pay restraint triggered by the financial crisis, labour hoarding by employers, or ‘zombie’ companies kept alive by very low interest rates since 2009, is in fact symptomatic of a longer term structural change in the economic and business climate which has resulted in a lower propensity to make staff redundant.

      

The causes of the fall in the normal redundancy rate, including a long-term squeeze on real pay which has made labour relatively cheap and slowed the pace of business restructuring, are also likely to be related to the fall in labour productivity since the start of the recession. Insofar as the so-called ‘productivity puzzle’ is at least partly a reflection of underlying structural weakness in the UK economy rather than merely a symptom of deficient demand, the fall in the normal rate of redundancy might therefore indicate that the current productivity malaise is not merely a consequence of the financial crisis and resulting major recession but has its roots in economic developments prior to the crisis, which bodes ill for future growth prospects.

The UK redundancy rate 1996-2012, seasonally adjusted

 Source: Office for National Statistics

Note: The redundancy rate is the ratio of the redundancy level for the given quarter to the number of employees in the previous quarter, multiplied by 1,000.

Stronger job growth is good news for the ‘reluctant self-employed’

Given that growth in self-employment has been such an important part of the UK jobs story since the financial crisis struck in 2008, the latest stats released yesterday by the Office for National Statistics (ONS) are most welcome.

The headline breakdown of the 4.2 million self-employed people in 2012 by gender, age, occupation and hours of work more or less tells us what we already knew. The self-employed are more likely to be men, aged over 50, working in skilled trades and on average putting in longer hours than most employees. But while this grabs the attention, the really interesting figures are those that decompose the rise in self-employment from 3.8 million to 4.2 million since 2008.

Here the picture is a little different, especially with regard to hours of work. Between 2008 and 2012 the proportion of self-employed people who reported that they were working fewer hours than they wanted – what the statisticians call ‘underemployment’- increased from 6.4% to 10.8%. The corresponding rise for employees was 7.2% to 10.2%. The rise in underemployed self-employed people has thus been relatively sharp and equates to about half the absolute increase in the level of self-employment during the period.

When I last carried out my own analysis of the figures this time last year, I found that the rise in self-employment between 2008 and 2011 had been atypical of self-employment as a whole in that the newly self-employed were predominantly somewhat less skilled and, in particular, worked relatively few hours (i.e. fewer than 30 hours a week).  As a result I concluded that the new, post-recession, group of self-employed contained a large number of people who in better economic times would probably prefer to work for an employer but in a stagnant economy were hiring themselves out as self-employed ‘odd jobbers’ because unable to be hired directly by a business. The latest ONS figures are supportive of this conclusion in terms of hours, though changes in occupational classification restricts their analysis of change in the occupational mix of the self-employed to the period 2011-2012.

Interestingly, however, the ONS finds a shift in the hours of pattern between 2008-2011 and 2011-2012. In the latter sub-period, which sees around 60% of the total rise in self-employment since 2008, the increase is more typical with the majority of the most recent additions to the pool of self-employed working more than 30 hours per week. Significantly, the rise in self-employment at longer hours in 2011-2012 coincides with a faster overall rate of employment growth, with more people being hired as employees, full-time and part-time, too. This suggests that stronger demand for labour in the past year has both provided more employment alternatives to the ‘reluctant self-employed’ and enabled those who really want to ‘go it alone’ to boost their hours and income.  

With the underemployment rate for self-employed people still above 10%, and demand for labour still well down on 2008, it will still be some time before the number of reluctant self-employed odd-jobbers falls significantly. But it looks as though the balance between reluctant and enthusiastic self-employed people has already started to shift and will continue to do so long as the economy maintains a healthy overall rate of job creation. 

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!