Wednesday, 12 August 2015

Further signs of hiatus in UK jobs recovery

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months April to June 2015.

Although these quarterly data refer to the spring and early summer they convey a picture befitting August and the summer holiday season, since nothing much appears to have happened.

Admittedly, the number of people in work fell by 63,000 in the quarter to 31.03 million, while the number unemployed increased by 25,000 to 1.85 million. But as the ONS notes the employment rate (73.4%), the unemployment rate (5.6%) and the economic inactivity rate (22.1%) were all ‘little changed’.

Nonetheless, this is the second consecutive month of weak employment data, which suggests the UK jobs recovery ran out of steam in the spring. What’s less certain is whether this represents a temporary pause, perhaps due to employers’ caution over hiring around the time of the General Election in May, or a clear break in the previous trend of sharply falling unemployment. Either way it now looks as though it will take a little longer than previously expected for unemployment to fall back to the pre-recession rate (5.2%).

The most disappointing feature of the latest data is that the apparent hiatus in the jobs recovery is not offset by faster pay growth - the rate of growth of regular pay, excluding bonuses, for employees remaining unchanged at 2.8% - which might have indicated a pick-up in labour productivity. A combination of jobs standstill and lack of momentum in pay therefore makes this the least positive set of UK labour market figures for some considerable time.

Wednesday, 15 July 2015

Faster pace of average real weekly pay growth plus slight fall in employment and slight rise in jobless rate - might the UK economy be embarking on a productivity revival?

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months March to May 2015.

The strong jobs recovery looks to have taken a pause in the spring. Although the number of people in work fell by 67,000 in the quarter to 30.98 million and the number unemployed increased by 15,000 to 1.85 million these changes are tiny relative to the magnitudes involved. Better therefore to think of the employment rate (73.3%), the unemployment rate (5.6%) and the economic inactivity rate (22.2%) as, to use the ONS’ phrase, little changed.

Indeed the quarterly fall in employment is almost entirely due to fewer people in self-employment (down 55,000), the number of employees in fact increasing by 5,000. The level of vacancies remains high at 726,000 (albeit down 17,000 on the quarter). Moreover, youth unemployment fell by 13,000 and there was also a small monthly fall (in June) of 2,500 in the number of people claiming Jobseeker’s Allowance. No need therefore to panic.

However, if the jobs recovery has paused the opposite is true for the pay side of the labour market. Total pay for employees is rising at an annual rate of 3.2%, higher than at any time since spring 2010, and regular pay (excluding bonuses) by 2.8%, the highest rate since winter 2009. With the CPI inflation rate close to zero between March and May this year these represent real pay increases, mimicking what one would see if the economy were still enjoying the pre-recession trend rate of productivity growth prior to the productivity slump.    

While it’s far too soon to conclude that these figures overall indicate a change in the recent UK labour market trend, a faster pace of wage growth plus slightly weaker jobs and unemployment performance might suggest an economy that for several years has preferred more jobs to higher pay is at last embarking on a productivity revival.

On the positive side, the slightly weaker jobs and unemployment figures may ease pressure on the Bank of England to raise interest rates for the time being despite mounting concern over the possible inflationary effect of stronger real wage growth. On the negative side, a slowdown in the pace of the jobs recovery is bad news for jobseekers for whom the availability of work is more important than what’s happening to pay.

Thursday, 9 July 2015

The ‘National Living Wage’: is the Chancellor gambling with low paid jobs?

Chancellor of the Exchequer, George Osborne, ended his budget speech to Parliament yesterday with what has come to be the customary clever twist. Having told MPs he’d be removing or reducing tax credits from several million ‘hard working families’ he sweetened the pill by announcing a big hike in the statutory national minimum wage for employees aged 25 and over, which will rise to £7.20 per hour from April next year and to £9 per hour by 2020, thereby forcing employers to cough up extra cash in order to make up the cut in the taxpayer subsidy to low paid employment.

Moreover, by rebranding the enhanced wage the ‘National Living Wage’ he not only disguised the fact that for many employees the guaranteed wage hike will be smaller than the tax credit cut, leaving them worse off, but also wrong-footed potential critics who find it hard to oppose the language of the Living Wage even though Mr Osborne’s version is a lot less generous than the figure campaigners calculate individuals need to cover the basic cost of living. This is currently estimated at £7.85 per hour, or £9.15 in London where living costs are higher, albeit both these figures will rise considerably once the effect of tax credit cuts are taken into account.  Living Wage campaigners have thus at one and the same time had to welcome the Chancellor’s move, question it for not going far enough, and been left having to persuade employers who might otherwise have decided to opt for the full fat Living Wage not to settle for Mr Osborne’s Living Wage Lite.

Consequently, the main voices of opposition to the Chancellor’s belief that ‘Britain needs a pay rise’ have so far come from sections of the business community who appear happy to accept the austerity rhetoric of ‘all in this together’ if this means mass downsizing of the public sector but not if their own finances are put on the line.

To be fair, not all business organisations are complaining and even those that are have been fairly measured in their response to a government whose ideological stance they in general support. Contrast this with what was being said only a few months ago when most of these same bodies declared the Labour Party ‘anti-business’ for advocating an £8 per hour national minimum wage by 2020.  Nonetheless, the CBI still considers Mr Osborne’s pay plan ‘a gamble’ which might cost jobs and thinks the jury is out on the wisdom of his move. So just how much of a gamble is the Chancellor taking?

A lot depends on whether pay at the bottom end of the labour market is determined purely by the interaction of demand for and supply of workers of given productivity or instead to some extent reflects a power imbalance between employers and individuals. If the former conditions exist employers are price (i.e. wage) takers in the labour market – which increases the risk to jobs from a high statutory minimum wage – if the latter, employers are price makers, in which case there is less risk to jobs.

It’s not clear whether the Chancellor’s decision to introduce the National Living Wage is based on some such assessment of the workings of the labour market but he does say he has been influenced by the findings of an independent commission set up in 2013 by the Resolution Foundation think tank to look into the future of the national minimum wage and the role of the Low Pay Commission (LPC) under the chairmanship of Sir George Bain, who was first Chair of the LPC when it was formed in the late 1990s. The commission published its detailed recommendations in March 2014 (and here, as a member of the commission, I should declare an interest).

After an extensive review of available evidence the Resolution Foundation commission concluded that there was a strong case for government to ask the LPC to be more ambitious in its approach to raising the minimum wage and it now appears that the Chancellor agrees. This doesn’t of course mean that one can take a gung-ho approach to the minimum wage, nor indeed that politicians should from now on feel free to raise the minimum without reference to the LPC (a fear expressed by some in the past 24 hours, though I think the Chancellor’s actual intention is in fact to enhance the LPC’s remit). But regardless of this my view is that any risk to jobs from the National Living Wage (NLW) at the level proposed by the Chancellor is minimal, although the policy does raise a variety of attendant considerations.

In keeping with the consensus of econometric analysis, the employment impact of the NLW as measured by jobs is likely to be close to zero. This is mainly because the NLW does not cover young workers (i.e. under 25s), the group most adversely affected by high minimum wages.  The initial estimate of the Office for Budget Responsibility (OBR) thus suggests a negative employment impact of around 60,000 – tiny in a UK labour market of 33 million people which is currently creating jobs at a very fast rate - and a 0.1 percentage point increase in the estimated structural unemployment rate. Jobs at greatest risk are those in sectors with the highest incidence of low paid workers – in particular retail, hospitality and care – while over 25s may lose out relative to younger workers (a potentially beneficial job displacement effect given the high rate of youth unemployment).  

It is possible, indeed likely, that employers will adjust to the NLW by cutting hours of work instead of, or in addition to, cutting jobs, which for those affected will to some extent offset the effect of a higher hourly wage on people’s weekly or annual earnings. The other adjustment alternative, raising labour productivity at given hours so that the NLW ‘pays for itself’ sounds good in theory but rarely shows up in econometric evidence.  

This effect of minimum wages on hours is very difficult to assess (the OBR reckons the NLW will reduce hours worked in the economy by 4 million per week) but I think a big potential concern is that the NLW might act as a further incentive to employers to increase their use of zero-hours contracts – which are already very prevalent in sectors where the NLW will bite hardest - in order to minimise the impact on total labour costs. Such a perverse effect would flout the spirit of the new NLW but is an outcome one might expect in a lightly regulated labour market where it remains easy for employers who so wish to hire workers on the cheap whatever the level of the legal minimum wage.   


Wednesday, 17 June 2015

Inflation free/jobs rich economy delivering above ‘normal’ rate of average real weekly pay growth despite flat-lining productivity – but this exceptional combo is unsustainable

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months February to April 2015.

The strong labour market recovery continues. The number of people in work increased by 114,000 to 31.05 million in the quarter – despite public sector employment falling by a further 22,000 in Q1 to a new record low of 5.37 million on comparable figures - though against the backdrop of a rising population and an increase in the number of people participating in the labour market the employment rate dipped a little to 73.4%. According to the ONS’ quarterly workforce jobs measure, the service sectors as a whole averaged a rate of jobs growth of 2.2% in Q1 2015, compared with 1.3% in manufacturing, 0.4% in construction and 0.5% for the economy as a whole.  

Unemployment meanwhile fell by a further 43,000, the unemployment rate down to 5.5 per cent, ever closer to the pre-recession low. With job vacancies also at a near record high the rate of growth of average weekly earnings growth (both including and excluding bonuses) has increased to 2.7 per cent, excluding bonuses faster than at any time since the depth of the recession in early 2009, against a backdrop of near zero CPI price inflation. Average weekly pay increased by 3.2% in the private sector and 1.0% in the public sector, the rate of growth being relatively strong in construction (4%) and wholesaling, retailing, hotels and restaurants (3.9%).  

For the time being therefore the UK economy is delivering more than what prior to the recession was considered a ‘normal’ rate of real wage growth of around 2.5% even though labour productivity is still effectively flat-lining.  However, this exceptional combination of circumstances is unsustainable. With price inflation at some point set to rise back toward 2% a continuation of real wage growth at the current rate will have to be earned by a return to a more normal rate of productivity growth; if not there will eventually be renewed upward pressure on prices and, ultimately, interest rates. In recent months UK workers have benefited from an economy merely mimicking a strong underlying recovery. We should enjoy this while we can. But a genuine sustained recovery will need to be based on higher productivity.

Tuesday, 26 May 2015

UK Conservatives hold all the economic and political cards – for now

I’ve been out of action for most of the time since the UK General Election. Here, just in time for tomorrow’s Queen’s Speech setting out the new Conservative majority government’s legislative programme, is my somewhat belated reflection on the outcome, which was clearly devastating for both the Labour Party and the Liberal Democrats.

From an economic perspective, the Conservative party had the strongest hand of cards to play, in large part because of fortuitous circumstances. I remain of the view that phase one of Chancellor George Osborne’s fiscal policy regime from 2010 to 2012 delayed the economic recovery. But whether by luck or judgement the inevitable upswing came at just the right time politically. Better still for Mr Osborne, the improvement in aggregate demand coincided with, and was supported by, a slump in global oil prices which caused consumer price inflation to eventually fall to zero before polling day. As result, an economy experiencing an unprecedentedly long period of weak productivity growth and anaemic nominal average pay rises began to deliver real wage gains that mimicked what would be achieved if productivity was increasing in line with the historical trend. Add in the fact that the flip side of low-productivity and low nominal wage growth was a surge in employment to a record high rate and a positive economic narrative was there for the taking, even if government policy had actually done little to underpin it. As the Chancellor and the Prime Minister David Cameron have proved therefore, it does pay to put lipstick on a pig.

The consequence of all this is that the other main English political parties were probably on an electoral hiding to nothing, albeit they also had to contend with other factors that continue to bedevil them.         

Nick Clegg and co., for example, remain in denial that they made the wrong call in entering a formal coalition with the Conservatives in 2010 rather than offer support in a looser form that would not have meant ditching key manifesto pledges. The Lib Dem poll ratings throughout the past five years showed many people considered this the action of unprincipled careerists who seized a once in a lifetime opportunity to gain high public office. And although there are still some who argue that the experience of life under an untrammelled Conservative majority government will demonstrate the positive restraining role played by the Lib Dems after 2010, this ignores the fact that the coalition formed the bridgehead for this year’s Conservative victory. The only hope for the rump of Lib Dem MPs is to depart from the so-called Orange Book neo-liberalism that led them to disaster under Clegg and choose a leader who will tack back to the centre-left ground that served them well until the mid-2000s.

The task facing the Labour Party is far more difficult. Ed Miliband failed to appeal either to the party’s one time working class core – most notably, though far from exclusively, in Scotland - or to middle England. While much has been said about Miliband’s personality as a factor in this the key dilemma is that traditional social democracy is a hard sell in 21st century England which has bought into a post-Thatcherite north American view of the world that broadly tolerates marked income inequality, scorns welfare recipients and is sceptical of the merit of any form of tax funded social provision other than the NHS. Whoever leads the Labour Party from this autumn will have little option but to build a policy platform that reflects this dominant ideological reality; simply confronting it with pious denigration will not work, as Miliband found to his cost.

However, a more coherent centrist policy platform is unlikely on its own to challenge the current dominance of the Conservatives. The necessary additional condition is an event big enough to demolish the Conservative’s reputation as being the party of competent economic management.

Throughout my adult lifetime there have been periods when one or other of the two largest political parties has been described as ‘the natural party of government’. In both cases supposed perennial supremacy has been swept away almost overnight by economic events. John Major’s Conservative government lost its reputation for economic competence during the ERM crisis of 1992. The global financial crisis of 2008 did the same for Gordon Brown’s labour government. The fact that in both cases these governments made the correct policy calls is immaterial. The (misguided) public perception was that the government in charge either caused these crises or mishandled the aftermath.

As night follows day there will come a time when the current Conservative government will suffer a hit to its economic reputation too, whether self-inflicted (perhaps a hubristic approach to fiscal austerity, or in the welter of the forthcoming EU referendum) or by way of an external shock to the system. The bad news for the opposition parties is that no-one knows when that day will come – next month, next year, next decade. All they can do is prepare so as to be in a position to offer a credible political alternative when the tide finally turns.          

Wednesday, 13 May 2015

UK average weekly wage growth on the up, especially in low pay sectors, as jobless rate edges ever closer to pre-recession low

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months January to March 2015.

This month’s labour market figures bring good news for jobseekers and wage earners alike. Another large quarterly increase of 202,000 in the number of people in work in the UK has lifted the employment rate to a new record high of 73.5%. More than two-thirds of the additional jobs are full-time, mostly for employees. The unemployment rate meanwhile has fallen to 5.5%, including a substantial fall of 50,000 (to 588,000) in the number of long-term jobless. Despite this, the overall quarterly fall in unemployment (35,000) is modest compared to the rise in employment due to a corresponding rise of 167,000 in the number of people participating in the labour market. Part of this latter rise is in turn due to a fall of 69,000 in the number of economically inactive people of working age.  

With the unemployment rate edging closer to the pre-recession low (5.2%) and both employment and vacancies (up 34,000 to 745,000 in the quarter) at record highs, there is also clear evidence that wage growth is at last gaining momentum. The rate of growth of average regular weekly pay (excluding bonuses) has increased from 1.9% to 2.2% against a backdrop of zero price inflation. The increase is far higher in the private sector (2.7%) than the public sector (0.9%). Most encouraging of all, however, pay is rising fastest in low wage sectors, averaging 3.1% across wholesaling, retailing, hotels and restaurants, offering a welcome boost to real wages for the lowest paid workers.

Friday, 17 April 2015

Remarkably strong quarterly surge in employment helps boost regular pay growth

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

The remarkably strong quarterly 248,000 rise in employment indicates a surge in the pace of job creation at the end of last year, helping to cut unemployment by a further 76,000 to a rate of 5.6%. People working full-time account for two-thirds of the total rise in employment this quarter, most of whom are employees on permanent contracts. With the number of people in work now above 31 million the working age employment rate has risen to 73.4%, a new record.

The fact that very strong employment growth had only a relatively modest impact on unemployment in the quarter is explained by a large fall of 104,000 in the number of economically inactive people, itself likely to be an indication of improved labour market opportunity.

A further fall in unemployment combined with both a record employment rate and record job vacancies (up 32,000 in the quarter to 743,000) has also given a boost to the rate of growth of regular pay (i.e. average weekly earnings excluding bonuses) which has increased from 1.6% to 1.8%. Regular pay growth is a better indicator of underlying wage pressure than total pay (including bonuses), the rate of which fell from 1.9% to 1.7%.  

Together with zero price inflation, the jobs boom is helping improve real incomes despite the fact that nominal wage pressure remains subdued. However, the rise in employment and real wages continues to mask severe underlying weakness in labour productivity. This will have to improve markedly if the current recovery in living standards is to be sustained into the medium and long-term.