Combination of rising job vacancies and falling unemployment at last breathing life into pay

The Office for National Statistics (ONS) has released the latest set of UK labour market data, mostly covering the three months November 2013 to January 2014.

The employment figures continue to be strong, up by a net 105,000 in the latest quarter, though a big rise in self-employment (which increased by 211,000) masked a surprising fall of 60,000 in the number of employees in employment. The latter figure appears odd when set against the broader range of data and should therefore be treated with caution, especially since the entire fall is due to fewer employees working part-time, which was partly offset by an increase in the number of employees working full-time. Moreover, the level of job vacancies increased by 23,000 on the quarter and at 588,000 is 92,000 higher than a year earlier and getting ever close to the pre-recession level.  

Total unemployment on the headline ILO measure fell by 63,000 in the quarter, the unemployment rate falling from 7.4% to 7.2%. The unemployment trend thus remains downward albeit because the ONS calculates change in unemployment on the basis of a quarterly rather than monthly comparison the headline unemployment rate is the same as that published in February. Youth unemployment (16-24 year olds) fell by 29,000 and long-term unemployment (people unemployed for more than a year) fell by 38,000. The administrative count of people unemployed and in receipt of Jobseeker’s Allowance fell by 34,000 between January and February.

Perhaps the most significant news from the latest labour market statistics is that we are at last seeing signs that the economic recovery is breathing life into the pay figures. The combination of job vacancies rising back toward the pre-recession level and falling unemployment has lifted pay growth to within sight of price inflation, especially in the private sector where the real pay squeeze eased markedly around the turn of the year. Regular pay (excluding bonuses) in the private sector is now increasing at an annual rate of 1.6%, not too far off the corresponding 1.9% rate of consumer price inflation. In the public sector regular pay is growing much more slowly (averaging 0.6%), though the figure is higher (1.1%) when financial services organisations are excluded. It is therefore now very likely that the average real pay squeeze will end in the coming months, with private sector workers set to enjoy real pay rises for the first time since 2009.

The better news on pay reflects the changing balance of employment growth. Adjusting for statistical reclassification, the private sector added 118,000 jobs in the final quarter of 2013 while the public sector shed 13,000 jobs. The immediate labour market outlook is thus one of much better news on jobs and pay for private sector workers but continued job cuts and an ongoing severe real pay cut for public sector workers.  

The UK’s jobs rich recovery – how many cheers for the Chancellor?

On Wednesday the UK Chancellor of the Exchequer, George Osborne, will present his fifth Budget to Parliament. Informed media speculation ahead of the event has been relatively silent on what Mr Osborne might say about jobs – though fresh measures targeted at youth unemployment are likely - but his preamble will almost certainly refer to the strength of employment growth since he entered HM Treasury in May 2010.

At the end of 2013 the number of people in work in the UK stood at 30.14 million - 1.34 million (4.7%) higher than in the first quarter of 2010. Full-time employment accounts for three quarters of the net increase and full-time employees for more than half (54%) of the increase. Of the additional employees in employment (full-time and part-time) more than 8 in 10 were employed on permanent contracts. During the same period there was a net reduction of 170,000 in the total number of people unemployed and looking for work, including a net reduction in youth unemployment (16-24 year olds) of 27,000, although the total number of people long-term unemployed (jobless for a year or more) increased by 80,000.

Despite this broadly positive story the level of unemployment remains high at 2.34 million (an unemployment rate of 7.2%), youth unemployment is still close to 1 million and long-term unemployment above 800,000. However, the outcome is much better than I expected in 2010, and I dare say the same goes for most economists. Following Mr Osborne’s first Budget I forecast that unemployment would at first rise and then fall to around 2.5 million by the spring of 2015 (the date of the next UK General Election). Based on this forecast it was my view that anything less than 2.5 million unemployed in 2015 could be considered a significant achievement for the coalition government and, were that to be the outcome, I would be the first to congratulate the Chancellor and his colleagues. With unemployment falling rapidly and now likely to be closer to 2 million than 2.5 million by the time of the General Election, I am happy to fulfill my pledge.

Yet while I congratulate Mr Osborne, I remain uncertain as to how many cheers he deserves. The economy has not performed better than I expected in 2010. On the contrary, whereas I expected a return to growth in 2012 and a return to the pre-recession level of GDP by the end of 2013, the recovery took far longer to emerge. Similarly, it is not that fiscal austerity has been less harmful to jobs than I had expected, the Office for Budget Responsibility at present projecting a net reduction in public sector employment of more than 700,000 between 2010 and 2015. What I failed to anticipate is the prolonged weakness of labour productivity and pay since 2010 which has enabled a struggling economy to sustain a far higher level of employment.

It is hard to attribute this ‘jobs rich/pay poor’ economic trajectory to anything the Chancellor or anyone else in the coalition government has done. The outcome is instead the consequence of three decades of labour market reforms implemented by successive Conservative and Labour governments. The underlying rationale for this reform process was to weaken the ability of workers to preserve the relative and real value of pay in the context of either structural or cyclical shocks to the economy. The erosion of relative wage resistance became apparent in the 1980s and 1990s before being stemmed to some degree by the introduction of the National Minimum Wage which has proved to be the only serious exception to the rule of labour market deregulation in a generation. The erosion of real wage resistance took longer to notice and thus came as a surprise with the sharp, prolonged and at present still ongoing fall in real wages since 2009.

When Mr Osborne address the House of Commons and the nation on Wednesday he would therefore be wise not to take credit for the UK’s recent jobs performance but instead acknowledge it as part of his neo-liberal inheritance. I don’t expect him to do so of course, not least because the implications of a labour market model designed to churn out jobs at any price may not bring him as many cheers as a look at the headline jobless figures might suggest.           

A ‘guaranteed day’s pay’ to ease the fundamental injustice of zero-hours contracts

There’s less than a week left to respond to the coalition government’s consultation on zero-hours employment contracts (the closing date is next Thursday, 13 March). But you’ll be wasting your time if you propose an outright ban on this controversial and increasingly widespread type of ultra-flexible on-call working which is now used in most sectors of the economy, especially retail, hospitality and public services, and right across the occupational spectrum.

The Office for National Statistics (ONS) estimates that between 2004 and 2012 the proportion of people employed on zero-hours contracts in the UK doubled from 0.4% to 0.8% of total employment. This represents around 250,000 people in the latter year, though the ONS is unsure whether the estimate, obtained from the Labour Force Survey (LFS), fully reflects the incidence of zero-hours contracts because respondents to the LFS may not always be aware of their exact contractual status. The ONS therefore intends to publish estimates based on a broader methodology and will start to publish these in due course. My estimate is that around 750,000 people were employed on zero-hours contracts in 2012, 2.5% of total employment.    

The government consultation, launched last December by the Business Secretary, Vince Cable, is open to the possibility of placing restrictions on the way zero-hours contracts are used.  However, the basic principle at the heart of the controversy over zero-hours contracts – i.e. that employers should be able to hire people on contracts that offer no guarantee of work - has not been questioned. As a result of this limited scope, the consultation process is flawed because it addresses neither the fundamental injustice of a practice which looks suspiciously like a 21^st century version of the master-servant relationship or the various economic drawbacks associated with it.

The Secretary of State it seems is content to accept the argument of the employers lobby that zero-hours contracts have been ‘unfairly demonised’. On this view the contracts are said to be good for jobs and add to the happiness of many people employed in this way who like the flexibility of choosing when they work; the quid pro quo for no guaranteed hours of work is no obligation to accept work offered. For example, the UK Commission for Employment and Skills (UKCES) last week published the findings of a survey of which suggests that two-thirds of people on zero-hours contracts are satisfied with their jobs.   

Supporters of the practice admit that some bosses abuse the contracts, for example by offering work at very short notice and then penalising people unable to meet the request by not offering work on other occasions. The UKCES survey finds that 45% of people on zero-hours contracts have only ‘a little, not very much or no control’ over how many hours they work while 60% have to accept work if their employer offers it. Supporters of zero-hours contracts are therefore not entirely opposed to reform, albeit attributing abuses to poor management practice which a suitable code of conduct or a bit of enlightened leadership and management training would overcome.

Consequently, the employers lobby is fairly relaxed about what might emerge from the current consultation even though Dr Cable is using it to examine whether to legislate against exclusivity clauses in zero-hours contracts which prevent people from working for more than one employer, as well as looking at how best to make these contracts transparent so that people on them are clear about precisely what they have signed up to.

Yet aside from acknowledging some problems, the consultation document adopts a generally favourable stance towards zero-hours contracts, emphasising the flexibility and choice they bestow on labour market participants, without subjecting the practice to proper analytical scrutiny. In particular, the consultation document fails to acknowledge that zero-hours contracts represent a clear departure from what have commonly been found to be more economically efficient and socially just forms of employment relationship.

Ideally employers should employ people on a permanent or temporary basis, at an agreed rate of pay for an agreed usual number of hours subject to the uncertainty of possible short and/or long-run change in economic or market conditions.  Employers implicitly accept they will bear the cost of any very short-run or mild fluctuations in activity by continuing to pay staff even if fewer than usual hours are required. Those employed in turn implicitly accept that they will bear the cost of more prolonged or permanent reductions in required hours, either in the form of job loss, a reduction in usual hours, a lower rate of pay for usual hours, or some combination of these outcomes.

This type of relationship is both just and efficient. The financial burden associated with uncertainty is shared. People in work have the security of knowing they will be paid in the event of short-run or mild fluctuations which reduce the amount of hours their employer can offer. And by ensuring an element of fixed wage cost into the employment relationship employers have a greater incentive to increase the productivity per hour of those they employ. Zero-hours contracts, by contrast, are unjust and inefficient.

Zero-hours contracts are unjust because employers bear none of the cost of uncertainty while those they employ have no guarantee of work and thus no security of income (the UKCES survey cited above finds that 57% of people on zero-hours contracts find it difficult to budget from month to month). Zero-hours contracts also flout the spirit of the National Minimum Wage (NMW). Although people on zero-hours contracts are legally entitled to the NMW for the hours they work, the entitlement is worthless at times when no work is offered. 

Zero-hours contracts are in turn inefficient because productivity suffers from their increased use.  People on these contracts are always nominally in work, adding to employment, but not necessarily always at work, depressing measured productivity. It is no coincidence that the continued rise in zero-hours contracts since the start of the recession has been accompanied by a slump in productivity. Moreover by establishing the employment relationship on as casual a basis as possible it is far less likely that employers will invest in productivity enhancing training and development for people on zero-hours contracts, an outcome also highlighted by the UKCES survey finding that 17% of zero-hours contract workers have to fund their own training if they want to progress in the labour market. Supporters of zero-hours contracts who in the same breath stress the importance of investment in human capital to raise labour productivity thus appear to be suffering from a severe bout of cognitive dissonance.  

The negative impact of zero-hours contracts on productivity clearly places a question mark over the value to the economy of the additional jobs their use has been said to generate. This is especially true when one considers that the impact of zero-hours contracts on unemployment is probably far less than whatever impact they have on jobs. These contracts are most attractive to people without dependents and/or who aren’t reliant on their zero-hours contract job for their entire regular income, notably full-time students, who the UKCES survey finds account for 1 in 4 people on a zero-hours contracts, and also older people who may use the occasional bit of casual work to supplement their pension. But the situation is very different for those unemployed people who need the security of a steady job that pays a regular wage. These are at risk of being effectively blocked out of work if their only alternative to a pitiful but secure welfare cheque is the insecurity of a zero-hours contract job.

All this suggest that the best policy response to the rise of the zero-hours contract is not, as the Business Secretary is proposing, to tackle abuse of the practice but instead to actively discourage it. How might this be done? One approach would be to outlaw zero-hours contracts by requiring all employment contracts to stipulate guaranteed minimum hours. However, this would effectively reduce flexibility and choice both to employers and those they employ. A preferable alternative would be to allow the use of zero-hours contracts but require employers to guarantee a day’s pay per week to people employed in this way.

The statutory guaranteed pay level would normally reflect the agreed rate for the job in question but could be no less than the NMW times 7.5 hours (i.e. the current UK standard statistical definition of a day’s employment). At present this would represent a minimum weekly wage of £47.32 for an adult on a zero-hours contract in any week where no hours are offered. For people on zero hours contracts who usually work fewer than 7.5 hours in a week, the pro-rata equivalent would be a guarantee of 1.5 paid hours per week. HMRC would inspect the payment as part of the normal process of minimum wage inspection, so no significant additional red tape would be imposed on employers.  

The merit of a guaranteed day’s pay is that by adding a small element of fixed wage cost to zero-hours contracts (over and above any non-wage employment costs employers might already incur) it eases the injustice and reduces the inefficiency the contracts cause without harming the flexibility they give to the labour market. In so doing it also removes the fig leaf defence that the rationale for using zero-hours contracts is to maximise flexibility rather than simply to minimise costs by employing people on the cheap.  

Opponents of this idea will doubtless still argue that the proposed increase in wage costs might result in job cuts. But given the minimal size of the cost increase any negative effect on jobs is likely to be negligible, especially when considered alongside the potential offsetting social and economic benefits. A more legitimate concern is that employers might attempt to claw back any increase in wage costs by offering fewer hours to zero-contract workers or lowering pay rates for hours actually worked. However, the ability of employers to behave in this way will, as always, depend on the state of the labour market and the relative bargaining power of workers. Either way, the guaranteed day’s pay at least provides people with some modest degree of wage security and the dignity which goes with that.                

In this respect, one should also remember that ‘it will be bad for jobs and the jobless’ has been the default position of opponents of progressive labour market reform since time immemorial, most recently in the period before introduction of the hourly NMW. The same voices today defending zero-hours contracts were arguing against a statutory wage floor in the 1990s and on very similar grounds. A minimum wage would cost jobs and all we needed were more trained and progressive bosses who would see the business case for ‘doing good’ by their employees. However, in a labour market which at the time included employees on less than £1 per hour it eventually came to be accepted that in a world where not all employers aspire to be good, or are under constant economic pressure not to be, the very last thing you should do is make life easy for the bad employer.

Opponents of the NMW in the 1990s were on the wrong side of history. The same is true of those today who think it right that people can be employed on zero-hours contracts without any guarantee of if or when they will be paid. On the contrary, it is entirely right that zero-hours contracts be demonised in a civilised society. Sadly, Dr Cable’s timid consultation will not lead to the end of the practice but one can but hope that the end will not be too far away.  

Britain's increasingly stressed-out workforce

The Office for National Statistics (ONS) has just released its latest figures for sickness absence in the UK labour market, covering the period from 1993 up to and including 2013   

The good news is that the overall incidence of sickness absence from work continues to fall. The number of working days lost to sickness (which fell from 134 million to 131 million between 2012 and 2013) has, apart from a slight upward blip in 2012, been on a clear downward trend for more than a decade. The number is now much lower than the 178 million recorded in 1993 despite a much higher number of people in work. As a result the sickness absence rate – the percentage of working hours lost to sickness – has fallen even more rapidly, for men down from 2.7% in 1993 to 1.6% in 2013 and for women down from 3.8% to 2.6%. Similarly, during that period the number of working days lost per worker has fallen from 7.2 days to 4.4 days.  

However, while this downward trend is evident for the two main causes of sickness absence (minor illness and musculoskeletal problems) more working days are now being lost to the common mental health problems of stress, depression and anxiety, which reached 15.2 million days lost in 2013, up from 11.8 million in 2010. Given the possibility that people may cite other reasons for absence due to mental health issues because of the social stigma attached to such conditions the underlying problem is likely to be even worse. Moreover, sickness absence statistics don’t detect people suffering from common mental health problems who soldier on at work for fear that highlighting a condition might put their job at risk.

While common mental health problems still account for only 8% of total sickness absence this disturbing upward trend indicates that the UK workforce is becoming increasingly stressed out, with pressure from bosses to get the job done ever more intense at a time when falling real wages mean most workers are struggling to make ends meet. Critics are wrong to dismiss such absence as merely symptomatic of a ‘sickie culture’ and should instead direct their attention to the excessively controlling management practices and insecure labour market conditions, such as the rising incidence of zero hours contracts, that are causing increasing numbers of workers to crack under the strain.

UK productivity gap with G7 economies even wider than first thought

The Office for National Statistics this morning published its latest estimate of how labour productivity in the UK compares with the other major industrialised economies (the G7).      

We know UK labour productivity has been dire since the start of the recession. We now know our relative performance is even direr than first thought. Output per hour worked in 2012 was 21 percentage points below the average for the G7 major industrialised countries – the widest ‘productivity gap’ for two decades – while output per worker was 25 percentage points lower. Moreover, even though the UK economy has recovered since 2012 there is no evidence to suggest that the productivity gap is likely to have narrowed, leaving the UK still staring up the international productivity league table.

According to the ONS output per hour in 2012 was 3 percentage points lower than in the pre-recession year of 2007 and would have been a whopping 16 percentage points higher had the pre-recession rate of growth been maintained. Though some of this latter growth may have been ‘illusory’ in that it was propelled by an unsustainable boom, the UK economy clearly needs in particular a strong resurgence of business investment in order to both start closing the productivity gap and to trigger a rise in real wages for people in work.   

Ups and downs in the jobs figures but the underlying trend in unemployment still firmly downward amid tentative signs of upward movement in pay

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

Today’s jobless figures proved to be one of those occasional statistical oddities that arise because of the way the ONS measures the headline unemployment number. The unemployment rate fell sharply from 7.6% to 7.2% in the three months to December 2013 when compared with the three months to September but the headline rate was slightly higher than the figure of 7.1% published in January which was based on a comparison of the three months to September with the three months to June. The ONS thus says that the main conclusion to be drawn from this is that the pace at which unemployment is falling appears to have slowed. But putting the statistical quirks to one side, the underlying trend in unemployment is firmly downward and the headline rate remains well on track to fall below 7% in the coming months.

Falling unemployment and a rise in job vacancies is now aiding all categories of jobseekers, including young people (youth unemployment was down 48,000 in the final quarter of 2013) and the long-term unemployed (down 45,000), while the problem of underemployment is also starting to ease slightly. The number of part-time workers who want a full-time job, while still above 1.4 million, fell by 29,000, with the entire 193,000 net rise in employment in the final quarter coming from full-time jobs (though again this was heavily weighted to self-employment which increased by 172,000).

Perhaps most significant of all, however, there are tentative signs of upward momentum in pay growth in these latest figures. Regular pay (excluding bonuses) increased by an annual rate of 1% in December, up from 0.9% in the previous month. The rate rose from 1.1% to 1.3% in the private sector and from 0.3% to 0.5% in the public sector. This isn’t yet anywhere near strong enough when compared to price inflation (running at 1.9% on the CPI measure in January) to end the real pay squeeze but the direction of travel is at last starting to look more encouraging.

Will 2014 be the year of the pay rise?

This morning I took part in an event at The Resolution Foundation looking at the UK pay outlook for 2014 and beyond. My fellow panellists were David Smith, Economics Editor at the Sunday Times, Nicola Smith, Head of Economics and Social Affairs at the TUC, and Ian Stewart, Chief Economist at Deloitte. The Foundation’s chief economist Matthew Whittaker provided a statistical background to the discussion, covering the various available data sources and charting recent trends in real and nominal earnings, and the Foundation’s Chief Executive Gavin Kelly moderated debate between the panellists and other attending participants.

The opening contributions from the panellists and subsequent questions from the floor provoked a wide-ranging discussion. Here is my initial contribution:      

“When last December I published my labour market projection for 2014, I concluded that this would be a ‘year of slim pickings’ for most UK workers.

By this I meant I expected to see an increase in the rate of growth of nominal regular pay (on the measure of average weekly earnings, excluding bonuses, as published each month by the Office for National Statistics) that would be sufficient to enable growth in pay to outstrip CPI inflation. This might not be enough to make workers feel much better off but it would mark the end of the post-recession fall in average real earnings.  

Some commentators thought this too pessimistic a view, other too optimistic. On what premise therefore do I base what is thus best described as my relative optimism?

For most of the period since 2008 the UK labour market has had to deal both with the effects of a large and prolonged deficiency in aggregate demand for goods and service in the economy and a large increase in the effective supply of labour. Given the UK’s current configuration of labour market and welfare institutions, a far greater than usual part of the market response to these changes in demand and supply has emerged in a fall in real wages, with a correspondingly smaller than usual part emerging as a rise in unemployment.

Although the fall in real wages has supported demand for labour and employment – a socially preferable form of adjustment – it has not supported aggregate demand and output, resulting in the much commented upon fall in labour productivity. Given this it is my view is that both the fall in real wages and productivity in recent years - sometimes referred to as ‘the productivity puzzle’ - is entirely the consequence of the prolonged deficiency of aggregate demand.

The corollary of this conclusion is thus that a substantial and sustained increase in aggregate demand will eventually restore the labour market to the same combination of employment, real wages and productivity (and by extension rates of growth in these variables) prevailing prior to the recession.

This raises three questions to each of which I will here offer a brief answer:

1.     When might we see the first signs of the move back to the pre-recession norm?

2.     How long might this process take?

3.     And should we be satisfied with the norm to which we will return?

My answer to the first question is sometime this year, given that we have already passed a tipping point in the pattern of employment growth, with demand for labour now being increasingly driven by an improvement in aggregate demand for goods and services rather than solely the (lower) level of real wages.

In this respect it’s useful to remind ourselves that the substantial and surprising rise in UK private sector employment since 2010 was for much of that time primarily the result of an unusually low outflow rate from employment rather than any marked increase in the rate of hiring. The level of job vacancies remained remarkably low during the period of the so-called ‘jobs boom’, much lower than before the recession, which explains why strong employment growth had until quite recently only very a muted effect on unemployment, especially youth unemployment.

However, since around the spring of last year, when a rise in aggregate demand for goods and services began to show a noticeable improvement (as evident in far stronger growth in real GDP), there has been a sharp and sustained rise in in the level of job vacancies, which is now approaching the pre-recession level, and a much faster fall in the rate of unemployment. Moreover, independent employer surveys suggest that this improvement is continuing as we move further into 2014.  

A rise in vacancies relative to unemployment is almost certain to put upward pressure on nominal pay growth. Whether this will be enough to result in real wage growth this year is, admittedly, uncertain. The job matching process looks to be working really well, contrary to popular wisdom the incidence of skills shortages is low, and actual unemployment (at around 7% of the active workforce at the end of 2013) is still far in excess of most estimates of the NAIRU (i.e. the normal, or underlying structural rate of unemployment). All this suggest that it may take quite a lot of momentum to provide any real oomph to pay,  and we certainly shouldn’t expect to see anything that could be described as ‘wage inflation’ for a long while yet. But a growth rate of regular weekly earnings moving upward toward CPI inflation is not a totally unrealistic expectation for 2014.    

Either way I expect more momentum on relative wages this year than at any time since the start of the recession, with an increase in job vacancies providing improved opportunities for individual workers with aptitudes most attractive to employers. These workers will benefit from a combination of better pay offers to attract them away from their current employers and counter offers to persuade them to stay. This should raise mean earnings, if not necessarily median earnings.

As for my second and third questions, it’s probably not unreasonable to expect a return to normality by the end of this decade, though this depends crucially on the sustainability of the present recovery in aggregate demand and the degree to which both monetary and fiscal policy support growth. But however long it takes you’ll probably gather from what I’ve said that I don’t think we are looking at a so-called long-run ‘new normal’ that is significantly worse in terms of employment, real wages and productivity than experienced prior to the recession.

Rather than concern ourselves with the ‘new normal’ debate, my view is that we should instead be reviewing whether we should be satisfied with a return to the ‘old normal’. The immediate pre-recession years may have looked good in terms of structural unemployment but were nonetheless characterised by low productivity in many sectors of the economy and correspondingly modest growth in real wages compared with earlier decades.

Therefore, although current policy debate is, perhaps understandably, dominated by the ‘cost of living crisis’, what we should really be focusing on is how to generate a long run secular improvement in productivity and real wages. This will not only require greater attention to the hardy perennial of raising business investment (including skills training) in the UK but also a debate on the kind of labour market institutions needed to ensure that workers’ obtain a fair and proper share of any gains in productivity.”