One of the features of economics in the pre credit crunch era was confidence about concepts concerning the labour market. We had the concept of full employment which is defined below from the Financial Times lexicon.
When labour supply and demand in an economy are balanced at market wages. This does not mean everybody in the labour force is employed (see frictional unemployment) but in theory, it is the highest possible level of employment in a market economy.
It is hard not to have a wry smile at the way that full employment does not mean full (100%) employment. A bit like the way many central bankers define “price stability” as an inflation rate of 2% per annum. But we have an allowance for people changing jobs ( frictional unemployment) and often an allowance for a mismatch between skills and jobs which is called structural unemployment.
In terms of numbers here are some estimates. From the BBC.
William Beveridge, the man who inspired Britain’s post-war welfare state, said full employment meant a figure of under 3%.
Other estimates tended to be higher than this and William T Dickens did some work in the US which estimated it as being around 5% in the pre credit crunch period. Also Mr. Dickens added quite a bit to the debate by publishing a graph showing that his work had a lower bound of 2% and an upper bound of 7%. That narrows it down.
Also the definition had shifted somewhat as the phase full employment became pretty much interchangeable with the cumbersome phrase the non-accelerating inflation rate of unemployment or NAIRU. Estimates of this I saw pre credit crunch tended to be of the order of 4.5% for the unemployment rate.
A modern challenge
This comes as so often in the modern era from Japan where the Statistics Bureau has reported this today.
The unemployment rate, seasonally adjusted, was 3.0%.
So below the natural rate and now in the full employment zone? We can see what is on the quantity measures an improving situation.
The number of employed persons in July 2016 was 64.79 million, an increase of 980 thousand or 1.5% from the previous year……. The number of unemployed persons in July 2016 was 2.03 million, a decrease of 190 thousand or 8.6% from the previous year.
As you can see unemployment is on the edge of two thresholds here as we wonder if it will dip below 2 million and the rate fall below 3%. A rising employment situation is also strong when we remind ourselves that the population is shrinking although some care is needed as we are given numbers for the labour force which are amazingly constant.. If we dig deeper we see that those who have involuntary employment are a relatively mere 540,000, is that structural unemployment? Even youth unemployment ( 15-24) is a lowly 4.7%.
Why aren’t wages rising quickly?
A problem for the theorists in their ivory towers has been the behaviour of wages in Japan. They should be rising strongly as we have passed the NAIRU but they continue to struggle. Indeed figures for workers households today hint at possible moves in the opposite direction.
The average of monthly income per household stood at 574,227 yen, down 2.2% in nominal terms and down 1.8% in real terms from the previous year…. The average of consumption expenditures per household was 302,422 yen, down 3.9% in nominal terms and down 3.5% in real terms from the previous year.
Employment is not what it used to be
There has been a structural change in employment in Japan over time. Back in September 2014 Fathom Consulting told us this.
Since the depths of Japan’s economic crisis in the late 1990s there has been a marked switch away from full-time into part-time work. The old ‘job-for-life’ culture is just that…….There are more people now working part-time in Japan who would rather work full-time than there are unemployed people. On that basis Japan has a much larger ‘underemployment’ problem than either the US or the UK.
If we look at the latest data we see that there are 33.57 million regular employees in Japan and 20.25 million irregular employees. If we switch to hours worked per month we see that regular employees get 188 of them but for irregular employees get a much lower 120.
The wages situation is rather divergent too as Japan Macro Advisers point out. There was good news for salarymen and women.
The regular (basic and overtime) part of wages was flat, only up by 0%, but the bumper bonus, up by 3.6%, pushed up the overall paycheck in June. It is going to be a good summer for all those army or loyal company men (and women) in Japan.
But not so good news for others.
The talk of good summer bonus must be a pain for irregular workers in Japan though. Over 1/3 of employment in Japan are irregular workers, and most of them are not eligible for bonuses. In June, wages of part time workers were only up by 0.4% year on year, compared with 1.5% year on year rise for full time workers.
The number of regular jobs was falling but that has changed albeit marginally as 19,000 have been created over the last year. However we found ourselves looking at irregular jobs for the majority of jobs growth.
A difference in the sexes
The situation for Japanese women has been lauded as a success for Abenomics and employment has risen from 23.24 million in 2013 to 24.57 million in July of this year. However proportionately much more women are irregular workers with 13.79 million of them now and 830,000 of the employment growth just discussed being in that category.
Now there are issues here as to type of work and perhaps some would only want part-time work which is more likely to be in the irregular category but we also have to face up to the fact that a difference between treatment of the sexes may well be a feature of the new Japanese employment structure.
What is life like for an irregular employee?
Back in March 2015 the Wall Street Journal gave us some insight.
Mr. Kinoshita is a member of Japan’s large and growing army of so-called nonregular workers—temporary, often part-time employees who are usually paid less than their “regular” counterparts. Like many of them, the 49-year-old Mr. Kinoshita has been unable to find permanent employment for years and struggles to make ends meet, despite working nearly full time. His new job pays ¥1,000 ($8.25) an hour, well below the ¥1,400 he earned in his last position at an auto-parts maker.
Oh and he does not seem to be too keen on plans to raise the inflation rate.
Everything is expensive,” he said. “A bag of tangerines costs ¥400.”
How can things be expensive in a place that has not had any inflation for years and indeed decades?
The example of Japan shows us that Ivory Tower concepts of full or natural rates of employment are full of more holes than a piece of Swiss cheese. For a start they completely miss the concept of underemployment. Then they fail to allow for the trend towards newer jobs being on worse terms than established ones. This is not only in wages but in hours worked and conditions.
If we move geographically away from Japan we have seen similar effects at play in other countries where the unemployment rate has fallen such as the US and UK. The obvious signal is the way that wage growth has been slow with levels of unemployment at what was considered to be the natural rate level and in some cases below it. The UK ONS has done work which suggests that like in Japan wage growth has been held back by the fact that newer jobs have been at lower wages. Also we note that in the UK wages for younger workers have been disproportionately affected which is exactly the opposite of where we should be now.
Of course we also need to allow for the fact that the information we get is much less than some would claim. There are wide margins of error in the two US labour market surveys which frequently contradict each other. In the UK we know so little about what is happening in the growing self-employment sector and know almost nothing about their wages.