What are the implications of the current state of the UK labour market?

We have seen this morning another example of what is in many ways a very good performance from the UK labour market. It continues to perform in a manner which is quite different to the official economic growth statistics which have shown -0.4%,-0.3% and -0.4% in the last three quarters. So we have the conundrum of a shrinking economy apparently provided increased employment and less unemployment. Let us examine the situation.

UK Employment

Whilst the media concentrate on unemployment numbers in fact it is employment numbers that are the most significant number and they are not as interlinked as you might think. For example there is also the category marked inactivity which can grow or shrink so that the relationship between unemployment and employment can vary and that is before we get to population changes.

If we look at the latest situation for the UK we see this.

The employment rate for those aged from 16 to 64 was 71.3 per cent, up 0.5 on March to May 2012 and up 0.9 on a year earlier. There were 29.59 million people in employment aged 16 and over, up 212,000 on March to May 2012 and up 510,000 on a year earlier.

As you can see we have unalloyed good news here at this point as the number employed has risen. However we need to have a nuance to this as a lot of the rise is from part-time work as shown below.

 the number of people in full-time employment increased by 88,000

the number of people in part-time employment increased by 125,000

If we wish to see a greater perspective on this subject the Office for National Statistics also gave us figures for what has happened over the credit crunch era of the last five years.

the number of people in full-time employment fell by 355,000

the number of people in part-time employment increased by 724,000

So what we have been seeing over the credit crunch period is a switch from full-time to part-time work. This does begin to take a little off the gloss provided by the numbers. After all whilst many will be grateful for some work in such times I am also sure that plenty will have preferred a full-time job. Unfortunately we do not have the “underemployment” measure that is called U-6 in the United States which looks to measure such changes. It  does look though that we have a similar pattern to the United States in this respect.

So looking under the lid we have seen some growth in full-time employment but much of what we are seeing is a rise in part-time employment.

Real Wages continue to fall

If we look at the latest real wage numbers we see this.

Between June to August 2011 and June to August 2012, total pay for employees in Great Britain rose by 1.7 per cent.

So we can use yesterday’s inflation numbers to calculate that real wages are falling at a rate of 0.5% per annum if we use the official inflation target measure or at 0.9% if we use the Retail Price Index. As I explained yesterday there are good reasons to expect the annual rate of inflation to pick up in the latter stages of 2012 so it looks likely that not only will real wages continue to fall but that the rate of fall will increase.

Comment

If we look at real wages and their fall of around 4% over the credit crunch era we have to consider the question have UK workers priced themselves back into work? If we were to go back to the economic debates of the early part of the last decade this was something akin to a Holy Grail for many. However the phrase “be careful what you wish for” applies here as whilst there are parts which are indeed welcome the fact that much of the improvement is in part-time work makes the situation more complex. As part-time work is often lower paid we also have to ask what is the cause and what is the effect? Some of the fall in real wages may be caused by the switch to part-time work.

Overall if you look at our employment situation it is with the nuances discussed looking quite good in our economic circumstances. To use a phrase from the last decade it looks as though UK companies have followed the German model of “labour hoarding” to some extent.

Productivity

There is a corollary of falling output and rising employment and the latest evidence on this front is below.

Labour productivity measures the amount of real (inflation adjusted) economic output that is produced by a unit of labour input (in terms of workers, jobs and hours worked). Whole economy output per worker fell by 1.1 per cent between the first and second quarters of 2012

This issue has become a matter of concern and debate and if we look back we do see numbers which are a worry.

UK labour productivity fell by 0.9 per cent in the second quarter of 2012 on an output per hour basis.  Market sector productivity fell by 1.5 per cent on this basis, to its lowest level since 2005

We do not want to be reading that we are back to 2005 levels in an era of international competition! Also over the past year we seem to have had cost issues too.

Whole economy unit labour costs increased by 0.3 per cent in the second quarter and were 3.2 per cent higher than a year earlier.  Manufacturing unit wage costs increased by 4.0 per cent in the second quarter and were 5.7 per cent higher than a year earlier

Falling productivity and rising costs is a  combination which to quote Britney Spears is indeed toxic if true.

However I feel that a lot of this problem comes from how we record the numbers. We have seen increases in part-time work which may be an issue here due to economies of scale. Also we have seen a rise in self-employment which has lower recorded productivity levels. Also in many occupations particularly in services we have the issue of how we measure it. For example fewer customers for a hairdresser,cleaner or osteopath mean lower output but do we fully capture that they may work four days instead of five in response? I am not so sure that our statistics are good enough for that.

There are hints in the latest numbers that productivity is improving a little but is that again simply representing higher output?

Unemployment

You may note that I have left this too last. This is not out of disrespect to the unemployed simply because the other factors are the main driving force here in my opinion. It is improving in terms of both its percentage and its size.

The unemployment rate was 7.9 per cent of the economically active population, down 0.2 on March to May 2012 and down 0.3 on a year earlier. There were 2.53 million unemployed people, down 50,000 on March to May 2012 and on a year earlier.

We should welcome the fall which has taken place in recent times but we should also not forget this which is the increase in the credit crunch era.

the number of unemployed people increased by 883,000

Comment

As we break down the UK employment numbers we see that some of the difference between them and our economic growth figures disappears. We should be pleased that we are not seeing falling employment and rising unemployment right now but we also have to realise that as well as some good news there are nuances to this. For example the rise in part-time and indeed self-employed work as well as the fall in real wages we have seen.

Also one of the long running themes of this blog is that economic statistics are by no means as accurate as are claimed. For example I have been self-employed on several occasions and have never been consulted on what or how I was doing. The only information officially received was when I paid my taxes. So as Johnny Nash pointed out some years ago.

There are more questions than answers
And the more I find out the less I know
Yeah, the more I find out the less I know

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18 thoughts on “What are the implications of the current state of the UK labour market?

  1. Good analysis. The move to part-time from full-time work partly explains the fall in productivity that the OBR talks about, does it not?

    It would be good if you also split out the rise in self-employment. It’s not just productivity that is lower among the self-employed – real wages are far lower than among the employed, and self-employed people (particularly young single ones) don’t get much in the way of in-work benefits. Also, anecdotally there seems to be some evidence that job centres are pushing people who are doing bits of casual or very short-term work but don’t have a “job” as such to register as self-employed so that they don’t have to keep re-registering as unemployed every time they come to the end of a contract (which may only be a few days long). Self-employment can be disguised unemployment.

    • Hi Francis

      The ONS had an ask ONS session this afternoon on the labour market. I did ask a question and as part of the reply ( a rather long one…) here is some insight on self-employment.It starts by stating the obvious but then gets better!

      “It is possible that some of the growth in self employment has been generated by individuals who, having lost their jobs, have then set themselves up with their own businesses.

      Figures from the Labour Force Survey indicate that more than half the extra self-employed people over the last four years are working less than 30 hours a week. However between 2008 and 2011
      the majority of the increase in self-employed was among those working 1-19 hours per week. In contrast, of the 219,000 increase in self-employed over the last year, 101,000 (almost 50 per cent)
      worked 40 or more hours per week.”

      So as far as we can tell there is a basis here for your argument/hypothesis.

  2. Hi Shaun
    A belated, welcome back!
    I think your last comment sums it up, we just don’t know.
    However , as you say the US U6 stat indicates that we are following the trend of increased under-employed, part-time employed, and self-employed with lower average wage levels. I think your personal situation is indicative of a great many people and how they fall out of the stats completely.
    Population growth seems to be a particularly difficult figure to pin down accurately, and clearly affects all these numbers. Indeed on the basis of what we think the trend of increase is, the expenditure-based GDP figures would have to be expanding at a fair old lick just to stand still on an average per individual basis.
    What percentage of the population knows its being fed ‘spin’, do you think?

    • Hi JW

      Thanks. To answer your question I think that on an overall basis quite a high percentage of the population are suspicious of what they are being told. We have gone from MPs expenses to mistakes where no-one is apparently ever accountable apart from a minor functionary etc.

      To move to specifics like economics and its stats I would guess that people are unsure but simply do not know.

      Moving onto U-6 I have got some data from the ONS (amazing what you get if you bother to ask) but need to look through it some more to confirm it is on the same basis as the US. As of the second quarter they suggest it is 9.5%. However on a first reading this looks like the US U-3 measure with part-timers only added. But better than nothing!

  3. There is also the boom in zero-hour contracts – I suspect these are included in the part-time figures even though they may involve no work (or earnings) at all.

  4. Your comment about the accuracy of statistics echoes my own thoughts about what Is claimed for growth / decline of the UK economy. For many years I ran a manufacturing business as chief exec and I can tell you that we could never forecast our business to an accuracy of +/- 0.5%! I doubt that our flash monthly accounts were accurate to that degree even though it was all computerised input / sales etc. Once I became a regional V.P in charge of several businesses the errors compounded themselves. And this is all in a tightly controlled environment with direct reporting structures and deadlines. The UK economy (or any for that matter) is an infinitely more complicated entity without formal reporting responsibility therefore I believe that the margins for error must be that much greater. I take GDP flash figures and forecasts with a bucket of salt! I am also amused by the IMF who regularly make pronouncements and forecasts to decimal places and treat them as gospel! They are setting themselves up to be proved wrong and usually are. Your analysis of underlying trends is much more useful and likely to be proved more accurate in the long term. Ditto your analysis of the situation in the Euro zone. Draghi can announce all the big bazookas he likes but if the underlying economic trends continue to get worse then he’s going to loose the war. Keep up the great analysis – much appreciated!

  5. Hi Shaun,

    Welcome back to the future!

    Another great piece of analysis, I agree that employment is a much better measure, where the unemployment figures are heavily manipulated.

    The new pensions regulations are going to be very good for a massive increase in part time work for low paid service sector work at the expense of full time jobs. Employers have worked out that if they are paying somebody less than £7,475 per annum that they don’t have to enroll them into this new pension scheme. Employers start by saving 1% but this over time will increase to 3%. For a big supermarket a 3% saving on the wage bill would around £100m, so it is not trivial on what can be saved by moving more employees into part time work.

    As the new pensions act rates increase and the size of the companies that are involved decreases then this will put further pressure on employers reviewing their staff numbers or making them part time and of course with the employee contribution this is going to further squeeze on spending and growth.

    Still, I guess the good news for future governments is that in a time of a “Portuguese” style need more money, they will be able to specify that x% of savings must be in gilts. If at the time they are pumping so much QE into the system, then from the governments point of view even better if the rates or effective rates are negative as the pension pots will then be paying for the privileged to own the gilts!

    Personally, I stopping putting money into a pension after Gordon Brown’s 1997 tax raid as there were few advantages from this point onward in giving the Government effective control of my money. With what has happened to annuities since then and I can’t see them improving anytime soon, then I can get the same sort of returns from share dividends and when me and my wife die, our children get the funds less any death duties.

    • Hi Rods

      Is this the future or the past or both? I am not only jesting as I watched a fascinating Horizon tonight which is the course of an hour covered the time from the Big Bang (universe not stock market) to now. Anyway in/on it was a physicist who did an excellent series on Time also on BBC 4.

      Moving to more mudane matters such as pensions it is an area where I have lost a fair bit of faith too. How can a long-term contract work without confidence that its terms will be fairly operated? such confidence is in ever shorter supply right now.

  6. Great analysis Shaun. Very much appreciated,food for thought here – Thank you. I’m glad you’re back writing under your Notayesman identity. It was this name that originally attracted me to your blog.

  7. I know everyone thinks that part-time work for someone who wants to work full-time is considered a “bad thing” but I think the long term trend will be for people to work less and for the available work to be spread more fairly so that more people have at least some work. This means people are going to have to get used to having a bit less income. There are the compensations of more leisure time and family time. For families with young children this is a bonus so that children get to spend more time with their parents. It requires a change of mindset. Alongside this though there are others who continue to work “silly” hours or who have long commutes eg in the city (lawyers and bankers etc).

    The stats must be more and more difficult to compile with people having several sources of income and many short term contracts etc.

    • Hi Jan

      You are right to point out that some will prefer part-time work and that for them there will be advantages. What we need is an idea of how many would like full-time work but can only get part-time split from the overall numbers. However there is so much we want to find out from the data which it does not tell us.

  8. I dont mean to sound harsh but this country will never have full employment, the last time i looked there was about 450,000 to 500,000 jobs and as of todays numbers there is 2.53 million people unemployed, do the maths?
    this govertment will just have to learn to accept this and stop banging on about cutting unemployment benefits

    • Hi Matthew

      Actually this is one area where we would like to be like one of my regular subjects/themes which is Japan which has a much better performance. However there are fears that going forwards our levels of unemployment for a given level of inflation will be worse than before. Not exactly inspiring is it? There is even a new word for it.

      Hysteresis

      • Everytime i write what i have above the main stream media does not want to know the truth, it is like they have been bought

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