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.”

Soaring UK employment and big fall in unemployment still barely registers in pay figures so no need for early interest rate rise

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

In terms of the pace of employment growth, these latest figures could hardly be better. Many more people in work (up 280,000 in a single quarter), the rate of unemployment already down to 7.1%, fewer young people without work (down 39,000 on the quarter), fewer long-term jobless (down 18,000), rising job vacancies and a fall in redundancies. The number of unemployed people on Jobseekers Allowance has also fallen (by 24,000 in December)

The rise in employment is fairly evenly split between employees and self-employed people. Full-time employment accounts for the bulk (80%) of the total increase and the number of part-timers who want a full time job, one measure of underemployment in the economy, has at last fallen (down by 12,000). The unemployment rate has fallen in every nation and region of the UK except South West England (where there has been an increase of 0.5 percentage points) and Northern Ireland where the rate is unchanged.   

However, all this good news is yet to significantly boost the economic feel good factor for most workers because soaring employment is still barely registering in the pay figures. Average weekly earnings are rising at an annual rate of only 0.9%, still well below consumer price inflation of 2%.   

It’s now inevitable that unemployment will soon fall below the Bank of England’s forward guidance rate of 7%, though precisely when remains uncertain (although the headline three month measure of the unemployment rate fell to 7.1 in November, the latter month itself saw the rate tick-up to 7.4% on the volatile single month measure). But despite this the weakness of pay growth suggests there is still a considerable amount of slack in the labour market which for the time being remains an inflation free zone. Better than expected news on jobs is no reason for an early rise in UK interest rates.

Racial inequality a key factor in structural youth unemployment for some ethnic minorities

The Department of Work and Pensions was uncharacteristically sotto voce yesterday when it released figures on the labour market status of Britain’s ethnic minorities for the 20 year period up to and including September 2013. Those looking for a brief summary had instead to wade through a series of data spreadsheets in order to single out the key headlines for themselves.

My attention was drawn to the figures on youth unemployment, which has yet to be significantly affected by the emerging economic recovery. Although the vast majority (8 in 10) of the almost 1 million young unemployed people in Britain at present are white, it’s clear from an interrogation of the data that youth unemployment is disproportionately affecting at least some of Britain’s ethnic minorities. 

The headline unemployment rate for whites aged 16-24 (19% in September 2013) is much lower than that for blacks (45%), young people of mixed race (26%), Indians (34%), Pakistani/Bangladeshis (46%) and Chinese (29%). As is well known, however, our perspective of youth unemployment is affected by the fact that so many young people participate in full-time education – which reduces the size of the active workforce and raises the measured unemployment rate – and includes young people in full-time education who are looking for work.

If instead one looks at unemployed jobseekers not in full-time education as a proportion of all young people in the 16-24 age group the adjusted ‘youth unemployment rate’ for whites is measured at 10.4% rather than 19%. Moreover, since people from different ethnic groups have different propensities to enter education or to look for work this adjustment likewise alters our view of youth unemployment rates for the other ethnic groups, in some cases markedly: 12.1% for blacks, 10.1% for young people of mixed race, 10.9% for Indians, 15.3% for Pakistani/Bangladeshis, and 5.4% for Chinese.

Unlike the headline youth unemployment rates, the adjusted rate suggests that only two ethnic minorities, blacks and Pakistani/Bangladeshis, fare much worse than whites, while young Chinese fare much better. However, some commentators object to this adjustment for a variety of reasons, notably because it excludes young inactive jobless people not in full-time education. Adding these people to young unemployed job-seekers (to obtain a figure broadly approximating to that for young people not in employment, education or training, or ‘neet’) is problematic since not all jobless people want to work or study at any given time. But while doing so shows ‘neet’ rates to be higher than adjusted unemployment rates they also offer a different perspective on ethnic minority joblessness  than that conveyed by the headline youth unemployment rate: 19.3% for whites, 19.9% for blacks, 17.7% for young people of mixed race, 19.1% for Indians, 26.9% for Pakistani/Bangladeshis and 14.2% for Chinese.  

A positive aspect of these figures is that they show relatively little change in the relative position of the various ethnic groups since before the recession in 2008. But the persistence of an ‘unemployment gap’ between black, Pakistani/Bangladeshi and white youths on all these various measures suggests that there is a larger structural element to the problem of youth unemployment for some ethnic minorities that won’t be solved by a stronger economic recovery alone.

It remains my view that around half the current total level of youth unemployment is due to weak demand for labour. As a result we should start to see a substantial and welcome fall this year if, as I now expect, job vacancies return to the pre-recession level. However, while urgent improvement in skills and employability is needed to reduce the remaining structural component of the problem, with ethnicity such a significant feature of youth unemployment for some groups more has to be done to tackle the racial inequality that also appears to be a key underlying causal factor. This receives too little attention in policy discussion of solutions to youth unemployment and ought to be highlighted.  

UK productivity: ‘gap’, ‘puzzle’ and the disappointing HRM narrative

Another New Year and self-help professionals are in full-swing, urging us all to get into better physical or emotional shape. Enthusiasts for Human Resource Management (HRM) are joining in too, calling upon organisations to ‘work smarter’ and engaging employees to boost labour productivity. UK HRM commentators are especially exercised about this at present in the belief that improved people management is the key to reversing the big (and still puzzling) fall in UK productivity since the start of the recession which has widened the productivity gap with other major developed economies. However, it’s important not to overhype the significance of HRM in the UK’s productivity story and also to ask what role HRM should play in promoting productivity, so a brief analytical perspective is useful.

The most recent comparative data published by the Office for National Statistics (ONS) show that in 2012 UK output per hour was 29 percentage points lower than in the United States, 24 percentage points below Germany and France, 3 percentage points below Italy, 1 percentage point below Canada, but 16 percentage points above Japan. The 16 percentage point difference between UK output per hour and the average of these countries is the ‘productivity gap.’

The consensus of studies of the causes of the gap indicate that the entire difference between productivity in the UK and the major European economies is entirely explained by the UK’s relatively low level of investment in physical and human capital. By contrast, half the productivity gap with the United States is due in addition to less effective use of physical and human capital in the UK.  This latter deficiency is in part due to deficient management in the UK, though this involves management in general not solely people management. Moreover, insofar as people management helps explain part of the United States success story on productivity this isn’t because US organisations are applying the kind of ‘high engagement’ people management strategies beloved of HRM enthusiasts. US workplace management practice is commonly very hardball by European standards, with levels of employee engagement often very low even by current UK standards, an observation that undermines the frequently asserted link between engagement and productivity. Overall therefore the role of HRM in closing the productivity gap is thus far from straightforward and not necessarily good news for workers.

As for the productivity puzzle, this refers to the unexplained absolute and relative fall in UK productivity in recent years. The productivity gap in 2012 was wider than at any time since 1994, with UK output per hour 2 percentage points below its pre-recession peak and 15 percentage points lower than if productivity had continued to grow at the average pre-recession rate.

Economists are divided on the causes of the fall in productivity. Some consider it a temporary phenomenon caused by weak demand in the economy that will disappear over time as the economy recovers. Those holding this view explain the fall in terms of workers accepting cuts in their real pay to avoid unemployment, encouraging organisations to produce any given level of output in more labour intensive ways. Eventually, falling unemployment will put upward pressure on pay, thereby encouraging organisations to become more productive so as to curb labour costs. Other economists by contrast think there has been a permanent, or at least long lasting, hit on the productive potential of the economy reflecting the damaging structural impact of the financial crisis. And there are those who combine demand and structural explanations, suggesting that real wage cuts in the wake of weak demand have acted as a disincentive to capital investment which will lower productivity growth over the longer term.

HRM probably played an integral role in the UK's recent productivity story by wisely encouraging organisations to seek alternatives to redundancy during tough economic times and persuading employees to put jobs before pay rises. Not surprisingly, however, the HR profession, which puts an awful lot of effort promoting itself as a key source of organisational performance, has been somewhat reluctant to see headlines proclaiming ‘HR achieves welcome fall in UK productivity’. As a result we instead continue to see lots of assertion that HR will drive the UK to future prosperity, although even here the message is confusing, with calls for higher investment in human capital often buttressed by apologias for bad employment practices, such as the use of zero hours contracts, that only serve to the increase the appetite for low cost, low productivity production.

The HRM narrative on UK productivity remains disappointing. The millions of people stuck in low productivity jobs with poor pay and conditions deserve more than the current diet of simplistic management consultant nostrums of engagement and empowerment which take no account of the reality of life in most organisations. In particular we need HRM models that are truly about people, for people and involve people, which in an honest way advocate improvements in pay and workplace conditions, recognise that proper engagement requires genuine employee consultation and questions deregulation as the solution to our poor productivity performance.