The unemployment rate in France continues to signal trouble

It is time for us to nip across the Channel or perhaps I should say La Manche and take a look at what is going on in the French economy. This morning has brought news which reminds us of a clear difference between the UK and French economy so let us get straight to the French statistics office.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016.

Thus we note immediately that the unemployment rate is still in double-digits albeit only just. Here is some more detail.

In metropolitan France only, the number of unemployed decreased by 31,000 to 2.8 million people unemployed; thus, the unemployment rate decreased by 0.1 percentage points q-o-q, standing at 9.7% of active population. It decreased among youths and persons aged 50 and over, whereas it increased for those aged 25 to 49. Over a year, the unemployment rate fell by 0.2 percentage points.

So unemployment is falling but very slowly and it is higher in the overseas departments. It is also rising in what you might call the peak working group of 25 to 49 year olds. It was only yesterday we noted that the UK unemployment rate was much lower and in fact less than half of that above.

the unemployment rate for people was 4.8%; it has not been lower since July to September 2005

Thus if we were looking for the key to French economic problems it is the continuing high level of unemployment. If we look back to pre credit crunch times we see that it was a little over 7% it then rose to 9.5% but later got pushed as high as 10.5% by the consequences of the Euro area crisis and has only fallen since to 10% if we use the overall rate. Thus we see that there has only been a small recovery which means that another factor is at play here which is time. A lot of people will have been unemployed for long periods with it would appear not a lot of hope of relief or ch-ch-changes for the better.

Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The long-term unemployment rate is not far off what the total UK unemployment rate was for December (4.6%) which provides a clear difference between the two economies. Here is the UK rate for comparison.

404,000 people who had been unemployed for over 12 months, 86,000 fewer than for a year earlier

It is not so easy to get wages data but the non-farm private-sector rise was 1.2% in the year to the third quarter. So there was some real wage growth but I also note the rate of growth was slowing gently since the peak of 2.3% at the end of 2011 and of course inflation is picking up pretty much everywhere as the US “surprise” yesterday reminded pretty much everyone, well apart from us. Unless French wage growth picks up it like the UK will be facing real wage falls in 2017.

Productivity

There is an obvious consequence of the UK producing a broadly similar output to France with a lower unemployment rate if we note that productivity these days is in fact labour productivity. There are always caveats in the numbers but the UK Office for National Statistics took a look a year ago.

below that of Italy and France by 14 and 15 percentage points respectively ( Final estimates for 2014 show that UK output per worker was:)

My worry about these numbers has always been Japan which for its faults is a strong exporter and yet its productivity is even worse than the already poor UK.

above that of Japan by 14 percentage points

Economic growth

This remains poor albeit with a flicker of hope at the end of 2016.

In Q4 2016, GDP in volume terms* accelerated: +0.4%, after +0.2% in Q3. On average over the year, GDP kept rising, practically at the same pace: +1.1% after +1.2% in 2015. Without working day adjustment, GDP growth amounts to +1.2 % in 2016, after +1.3 % in 2015.

However the pattern is for these flickers of hope but unlike the UK where economic growth has been fairly steady France sees quite wide swings. For example GDP rose by 0.6% in Q1 so the economy pretty much flatlined in Q2 and Q3 combined. Whether this is a measurement issue or the way it is unclear. We do know however that it seems to come to a fair extent from foreign trade.

All in all, foreign trade balance contributed slightly to GDP growth: +0.1 points after −0.7 points. ( in the last quarter of 2016).

But as we look for perspective we do see an issue as for example 2016 should have seen two major benefits which is the impact of the lower oil price continuing and the extraordinary stimulus of the ECB ( European Central Bank). Yet economic growth in 2015 and 2016 were both weak and show little signs of any great impact. If we switch to the Euro then its trade weighted value peaked at 113.6 in November 2009 and has fallen since with ebbs and flows to 93.5 now so that should have helped overall. In the shorter term the Euro has rotated around its current level.

Production

With its more dirigiste approach you might expect the French economy to have done better here but as I have pointed out before that is not really so. If we look at manufacturing France saw growth in 2016 but we see a hint of trouble in the index for it being 103 at the end of 2016 on an index based at 100 in 2010. So overall rather weak and poor growth. Well it is all rather British as we note the previous peak was 118.5 in April 2008. Actually with its 13% decline that is a lot worse than the UK.

manufacturing (was) 4.7% lower when compared with the pre-downturn peak in February 2008.

Of course there are also links as the proposed purchase of Opel ( Vauxhall in the UK) by Peugeot reminds us.

Oh and those mulling the de-industrialisation of the West might want to note that the French manufacturing index was 120.9 back in December 2000.

Debt and deficits

This has received some publicity as Presidential candidate Fillon said this only yesterday. From Bloomberg.

Reviving a statement he made after becoming prime minister in 2007, Fillon said France is essentially bankrupt and warned that it can face situations comparable to those of Greece, Portugal and Italy. “You think it can’t happen here but it can,” he said.

As to the figures the fiscal deficit at 3.5% of GDP is better than the UK but of course does fall foul of the Euro area 3% limit. The national debt to GDP ratio is 97.5% and has been rising. On the 7th of this month I pointed out that France could still borrow very cheaply due to the ECB QE program but that relative to its peers it was slipping. That has been reinforced this week as for the first time for quite a while the Irish ten-year yield fell to French levels.  It may seem odd to point this out on a day when France has been paid to issue some short-tern debt but the situation has gone from ultra cheap to very cheap overall and there is a cost there.

Comment

I pointed out back on the 2nd of November last year that there were more similarities between the UK and French economies than we are often told but that there are some clear differences. We have looked at the labour market today in detail but there is also this.

There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal.

Oh and of course house prices if we look at the UK boom which began in the middle of 2013 we see that France has in fact seen house prices stagnate since then as the index was 103.03 ( Q2 2013) back then compared to 102.82 in the third quarter of 2016

The recent economic success of Spain makes a refreshing change

Back in the days of the Euro area crisis Spain found itself being sucked into the whirlpool. The main driver here was its housing market and the way that it had seen an enormous boom which turned to dust. Pick your theme as to whether you prefer empty towns or an airport that was never used. If we look back to my post yesterday on GDP I immediately find myself thinking that developments which are never used should be counted in a separate category. Of course the housing problems also caused trouble for the Spanish banks.

GDP

We do not yet have the data for the latest quarter but in recent times short-term forecasts by the Bank of Spain have been pretty accurate.

In Spain, economic activity has continued to post a high rate of increase in recent months. Specifically, in Q4, GDP is expected to have grown by 0.7%, unchanged on the rate observed in Q3 (see Chart 1) and underpinned by the strength of domestic spending.

We do have a link in that Spain seems to follow the pattern of the UK economy more than many of its Euro area neighbours and hence there might be for once some logic in using the same currency. But the main point is that such growth would continue what has been a much better phase for Spain. This meant that the official data for the third quarter told us this.

 Growth in relation to the same quarter of the previous year stood at 3.2%,

If we look back we see that the Spanish economy was hit hard by the initial impact of the credit crunch with the peak quarterly contraction being of the order of 1.5% of GDP. Then the economy bounced back but was then sent into decline as the Euro area crisis raged and quarterly economic growth did not turn positive again until 2013 moved in to 2014. However since then economic growth has been strong. If the fourth quarter does turn out to be 0.7% then it will follow 0.7%, 0.8%,0.8%,0.8%,0.9%,0.8% and 1%. Maybe a minor fading but I think that would be harsh on a country which has put in a strong performance.

If we look back for some perspective then let us compare with what sadly is often the laggard which is Italy. From Spain’s Royal Institute.

the contrast between cumulative growths is significant: 50% since 1997 in Spain versus 10% in Italy. Moreover, according to EU forecasts, in 2018 Spain will surpass Italy in per capita GDP (in PPP terms) for the first time ever.

Employment

The Euro area crisis has been characterised by high levels of unemployment so it was nice to see this in the GDP report of Spain.

In annual terms, employment increases at a rate of 2.9%, one tenth more than in The second quarter, which represents an increase of 499 thousand jobs
Equivalent to full-time in one year.

Yesterday we got a further update on this front from Spain’s statistics agency.

Employment has grown in 413,900 people in the last 12 months. The annual rate is 2.29%……….In the last year employment has risen in all sectors: in the Services there are 240,400 more occupied, in Industry 115,700, in Agriculture 37,000 and in Construction 20,800.

Not everything was perfect as the numbers dipped by 19,400 on a quarterly basis but overall the performance has been such that we can report this.

The number of unemployed falls this quarter in 83,000 people (-1.92%) and is in 4,237,800. In seasonally adjusted terms, the quarterly variation is -3.78%. In The last 12 months unemployment has decreased by 541,700 people (-11.33%).

Or if you prefer.

The unemployment rate stands at 18.63%, which is 28 cents lower than in The previous quarter. In the last year this rate has fallen by 2.26 points.

So we have a ying of lower unemployment combined with a yang of the fact that it is still high. If we return to the comparison with Italy then according to the Royal Institute the situation is better than it first appears to be.

From 1990 to 2014 female participation has risen from 34% to 53% in Spain and from 35% to only 40% in Italy (seeWorld Bank data). Hence, although there is a much lower unemployment rate in Italy, the latter’s inactivity rate is much higher than Spain’s.

The other point I would make is that whilst it is pleasing that Spain is creating more jobs the fact that the growth rate in them is similar to the economic growth means that it too will have its productivity worries.

Looking ahead

The Bank of Spain is reasonably optimistic in its latest Bulletin.

Hence, after standing in 2016 at 3.2% (the same rate as that observed a year earlier), average GDP growth is expected to ease to 2.5% in 2017 (see Table 1). In 2018 and 2019, the estimated increase in output would stand at 2.1% and 2%, respectively.

As to the private-sector business surveys Markit tells us this about services.

Rate of expansion in activity remains marked in December

And this about manufacturing.

The Spanish manufacturing PMI signalled that the sector ended 2016 on a high, with growth back at the levels seen at the start of the year.

Fiscal Position

The situation here has been summed up by El Pais this morning like this.

After missing its deficit targets for five straight years, Spain on Thursday made a commitment in Brussels to make additional adjustments “if necessary.”

If you look at its economic performance you might be wondering if Spain got it right although of course that is far from the only issue at hand. The current state of play is shown below.

Spain believes that the tax hikes slapped on companies, alcohol, tobacco and sugary drinks, as well as rises in a range of green taxes – together with strong economic growth – will be enough to keep the deficit at 3.1% of GDP. But Brussels is forecasting 3.3% instead.

If we move to the national debt it is in the awkward situation it has breached the 100% of GDP barrier. The reason this is awkward is that as described Spain has seen good levels of economic growth and the ECB has bought a lot of Spanish government debt keeping debt costs relatively low. It has bought some 150.3 billion Euros worth so far as of the end of last week and the ten-year yield is at 1.6% meaning that in spite of recent rises debt costs are very low. Thus the ratio has risen at a time when two favourable winds have been blowing in Spain.

House Prices

As this was a signal last time I can report that as of the end of the third quarter they were rising at an annual rate of 4% so relatively moderate by past standards. However as the last quarter of 2015 saw a quarterly 0% this seems set to rise. Price rises may also be capped by the fact that the bad bank Sareb is selling off some of the stock that it inherited ( believed to be around 105,000 homes). Mind you there does appear to be considerable rental inflation if this from The Spanish Brick is any guide.

The price of rental dwellings has increased in Spain by 5.8% during the second quarter of 2016, being the price of the square meter 7.8 euros per month. On an inter-annual rate, it is an 8.5% increase, according to the main property portal in Spain. ( BankInter)

Comment

There has been plenty of good economic news for Spain in recent times and we should welcome that. After all it makes a nice change from the many down beat stories that are around. But if we use the phrase “escape velocity” so beloved of Bank of England Governor Mark Carney we see that work remains to be done. If we look back and set 2010 at 100 then GDP peaked at 104.4 in the second quarter of 2008 but only reached 102.4 in the third quarter of 2016 so another just under 2% is required to scale the previous peak. Spain will need to do that relatively quickly to prevent a type of “lost decade” but even as it does so, which I expect it to do it then looks back on a decade which overall has been a road to nowhere overall.

Should Spain continue to follow the British economic pattern then worries for the UK of rising inflation affecting the economy may have a knock-on effect. As to literal links the UK Office for National Statistics has helped out a little today.

Spain is host to the largest number of British citizens living in the EU (308,805); just over a third (101,045) of British citizens living in Spain are aged 65 years and over.

UK real wage growth is even worse if you factor in house price growth

After yesterday’s higher inflation data and it was across the board as the annual rate of hose price inflation increased as well we move to the labour market today and in particular wages. Unless we see a surge in wage growth in the UK real wages are set to fade and then go into decline this year but before we get to them we have another source of comparison. Something which immediately has us on alert as it will cheer the Bank of England.

Wealth

This is what the Bank of England would call this from the Financial Times today.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group.

It will be slapping itself on the back for the success of its Funding for (Mortgage) Lending Scheme or FLS which officially was supposed to boost bank lending to smaller businesses but of course was in reality to subsidise bank property lending.  The FLS does not get much publicity now but there is still some £61 billion of it around as of the last quarterly update, since when some has no doubt been rolled into the new Term Funding Scheme. Oh yes there is always a new bank subsidy scheme on the cards.

Whilst the Bank of England will continue to like the next bit those with any sort of independent mind will start to think “hang on”.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016.

Only on Tuesday night Governor Carney was lauded for his work on “distributional issues” but here is a case of something he and the Bank of England have contributed to which is a transfer from first time buyers and those climbing the property ladder to those who own property.

If we move to wages then the UK average is still around 6% below the previous peak which poses a question immediately for the wealth gains claimed above. Indeed last November the Institute for Fiscal Studies suggested this.

Britons face more than a decade of lost wage growth and will earn no more by 2021 than they did in 2008 ( Financial Times).

There has been an enormous divergence here where claimed housing wealth has soared whilst real wages have in fact fallen. That is not healthy especially as the main age group which has gained has benefited in other areas as well.

The income of those aged 60 and over was 11 per cent higher in 2014 than in 2007. In contrast, the income of households aged 22-30 in 2014 was still 7 per cent below its 2007 level. The average income of households aged 31-59 was the same in 2014 as in 2007.

As an aside some of the property numbers are really rather extraordinary.

The value of homes in London and south-east England has topped £3tn for the first time, meaning almost half the total is accounted for by a quarter of UK dwellings. This concentration of wealth is most evident in the richest London boroughs, Westminster and Kensington & Chelsea, where housing stock adds up to £232bn, more than all of the homes in Wales, according to analysis based on official data.

Another shift was something I noted yesterday which was the fall in house prices seen in Northern Ireland where wealth under this measure has declined sharply. Has that influenced its political problems? However you look at it there has been a regional switch with London and the South-East gaining. Also there is a worrying sign for UK cricketer Jimmy Anderson or the “Burnley Lara”.

Likewise, homes in Burnley, Lancashire, declined in value over five years, even as most of the UK market boomed.

One area where care is needed with these wealth numbers is that a marginal price ( the last sale for example) is used to value a whole stock which is unrealistic.Before I move on there is another distributional effect at play although the effect here is on incomes rather than wages as Paul Lewis reminds us.

As inflation rises to 1.6%/2.5% the policy of freezing working age benefits for four years becomes less and less sustainable.

Before we move on the Resolution Foundation has provided us with a chart of the nominal as in not adjusted for inflation figures.

 

Today’s Data

The crucial number showed a welcome sign of improvement.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.8% including bonuses and by 2.7% excluding bonuses compared with a year earlier……average total pay (including bonuses) for employees in Great Britain was £509 per week before tax and other deductions from pay, up from £495 per week for a year earlier

So a pick-up on the period before of 0.2% and at we retain some real wage growth which helps to explain the persistently strong retail sales data.

Comparing the 3 months to November 2016 with the same period in 2015, real AWE (total pay) grew by 1.8%, which was 0.1 percentage points larger than the growth seen in the 3 months to October. Nominal AWE (total pay) grew by 2.8% in the 3 months to November 2016, while the CPI increased by 1.2% in the year to November.

There is obviously some rounding in the numbers above and the inflation measure used is around 1% lower than the RPI these days.

If we move to the detail we see that average earning also rose by 2.8% annually in the year to the month of November alone and the areas driving it were construction (5%) and wholesale and retail (4.2%). Sadly the construction numbers look like they might be fading as they were 8.8% but the UK overall has just seen tow strong months with 2.9% overall wage growth in October being followed by 2.8% in November.

Employment and Unemployment

The quantity numbers continue their strong trend.

There were 31.80 million people in work, little changed compared with June to August 2016 but 294,000 more than for a year earlier…….There were 1.60 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for June to August 2016 and 81,000 fewer than for a year earlier.

The next number might be good or bad.

Total hours worked per week were 1.02 billion for September to November 2016. This was 1.2 million fewer than for June to August 2016 but 4.8 million more than for a year earlier.

The fall may be troubling but as the economy grew over this period ( if the signals we have are accurate) might represent an improvement in productivity.

It is nice that the claimant count fell in December “10,100 fewer than for November 2016” but I am unsure as to what that really tells us.

Comment

We have seen today some good news which is a pick-up in the UK official wages data. This will help real wages although sadly seems likely to be small relative to the inflation rise which is on its way. However if we widen our definition of real wages we see that the credit crunch era has brought quite a problem. This is that the claimed “wealth effects” from much higher house prices make them look ever higher in real terms as we return to the argument as to how much of the rise is economic growth and how much inflation.

My view is that much of this is inflationary and that once we allow for this then we start to wonder how much of an economic recovery we have seen in reality as opposed to the official pronouncements.

Also we have my regular monthly reminder that the wages figures exclude the self-employed and indeed smaller businesses.

What a carry on from Bank of England Governor Carney

Today we find ourselves reviewing the latest data on the UK employment and wages situation. We do so noting that the inflation situation for real wages has briefly improved although one months data here compares with the 3 months over which the headline wages data is calculated. But before we get to it there were some extraordinary statements made to the Treasury Select Committee of UK Parliament by Bank of England Governor Mark Carney. Make what you will of this from the Guardian.

“The thing about forward guidance,” drawled Mogadon Mark Carney, opening one eyelid a millimetre or two, “is that it is guidance that is forward. Which isn’t to say it’s meant to be in any way accurate. Indeed, it would be surprising if it were. The most important thing about forward guidance is that the underlying economic determinants should be correct, not that it should be helpful.”

Now those who remortgaged on the back of his hints and promises of higher interest-rates or took out fixed-rate business loans may be checking the definition of miss-selling at this point as they read the section I have highlighted. Indeed Governor Carney admits that I have been right all along to point out his failures as he admits even he would be surprised if he had been right. This is very awkward for those who have placed themselves full square behind him although to be fair there is probably not much daylight where they placed themselves. I note also that Governor Carney is now a figure of fun in the Guardian, does this mean that he no longer has film-star looks and we need to be told if he is still a rock star central banker I think?

Also there was a particularly dubious statement from Governor Carney. From the Financial Times.

Mr Carney told a committee of MPs that low global interest rates and rising inequality in developed countries were driven by “much more fundamental factors”.

UK interest-rates just got lower because he cut them in August! Oh and he introduced an extra £60 billion of UK QE Gilt purchases to try to reduce Gilt yields (admittedly not going so well right now) and £10 billion of Corporate Bond buying to do the same there. His Chief Economist called this a “Sledgehammer” but Mark now seems to think it was nothing to do with that at all? Odd as he finds the time to try to take any credit he can from it.

Also the issue of rising inequality is another thing which is apparently nothing to do with Governor Carney. As of course time only started in June 2013 some may forgive him for not reading Bank of England research from August 2012.

QE has caused the price of gilts to rise and yields to fall, in turn leading to an increase in demand for, and price of, a wide range of other assets, including corporate bonds and equities.

Indeed it went further than this.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Actually we can combine both of Mark Carney’s denials as you see back in 2012 the Bank of England had the opposite view of the impact in savers.

That suggests that deposit holders are likely to have been affected much more by the cuts in Bank Rate than by downward pressure on longer-term interest rates as a result of QE.

Before I move on this from that 2012 paper was a real example of moral hazard when you review your own policies.

The paper shows that QE also has a broadly neutral impact on a fully funded ‘defined benefit’ scheme.

Now whilst they at the Bank of England may have a fully funded pension elsewhere they were in rather short supply and since then the supply has got shorter due to its actions.

Also as happens so often with Bank of England Governors Mark Carney has become keen on a lower value for the pound.

“The UK economy has … had a large external imbalance and that large external imbalance as represented by a large current account deficit needed to be righted,” he said. “The exchange rate is part of that adjustment mechanism.”

Odd that he seems to have got on that particular bandwagon so recently as you could have made that case for years and indeed decades.

Oh and here is a development which ties in yesterday’s inflation numbers with today’s wages data and provides a headache for the distributional denials of Mark Carney.

 

Today’s Data

Employment

This number has seen quite a boom as the UK economy recovers from the credit crunch and it continues as shown below. From the Office for National Statistics.

There were 31.80 million people in work, 49,000 more than for April to June 2016 and 461,000 more than for a year earlier.

There were 23.24 million people working full-time, 350,000 more than for a year earlier. There were 8.56 million people working part-time, 110,000 more than for a year earlier.

So we continue to generate jobs and this means that the employment rate of 74.5% is as high as it has been since the numbers started in 1971. Care is needed as the definition of full-time working is somewhat flexible and we would need to know population size to have an idea of employment per capita.

Unemployment

This opens well too.

The unemployment rate was 4.8%, down from 5.3% for a year earlier and the lowest since July to September 2005…….There were 1.60 million unemployed people (people not in work but seeking and available to work), 37,000 fewer than for April to June 2016 and 146,000 fewer than for a year earlier.

Also I note that unemployment for women fell which is good as last month the situation was different and seemed to be picking them out. In the silver lining there is a cloud but if you make a big deal of it you have to explain why you are pushing a series which was already discredited some 30 years ago.

For October 2016 there were 803,300 people claiming unemployment-related benefits. This was:9,800 more compared with September 2016…9,900 more than for a year earlier.

Wages

These continued as before.

Between July to September 2015 and July to September 2016, in nominal terms, total pay increased by 2.3%, unchanged compared with the growth rate between June to August 2015 and June to August 2016.

Although real wage growth dipped slightly.

Comparing the 3 months to September 2016 with the same period in 2015, real AWE (total pay) grew by 1.7%, 0.1 percentage points lower than seen in the 3 months to August.

Care is needed here though because if we use the Retail Price Index to calculate real wages we see that the growth fades significantly as it these days is around 1% more than the official measure. But if we stick with the official measure you may enjoy some perspective here.

Looking at longer term movements, since comparable records began in 2000 average total pay for employees in Great Britain in nominal terms increased from £311 a week in January 2000 to £505 a week in September 2016; an increase of 62.2%. Over the same period the Consumer Prices Index increased by 40.6%.

Comment

We find much to consider here as Governor Carney continues to twist and turn and indeed spin as he attempts to explain why he cut Bank Rate and eased monetary policy into a currency decline. A simple precis of his approach is that everything good is due to him and bad isn’t. Meanwhile the UK labour market looks like it has carried on regardless with one clear exception which is that if you have employment at a peak wage growth would in the past be much higher. Remember also that the wage growth excludes the self-employed and small businesses. Also higher employment does tend to have this effect these days.

0.2% growth in output per hour in Q3, down from 0.6% in Q2 #productivity

Speaking of numbers this is an intriguing one from Merryn Somerset Webb.

Pension Protection Fund spends £600,000 on PR. Why do they need PR? Someone explain?

 

 

As the prospect of further UK real wage growth fades what about the self-employed?

Today brings us to the labour market report for the UK. Over the period of the credit crunch the quantity numbers have performed very well and scare stories from some economists of 3 or 4 million unemployed have been replaced by record employment and falling unemployment. However we are now in a phase where we are much less sure that unemployment will continue to fall. Also the quality number or wage growth has been somewhere between poor and not so good. In spite of an economy recovery which began in 2013 wage growth has only managed about half of what we would have expected pre credit crunch.We can put this into numbers as those in the Ivory Tower of the Office for Budget Responsibility predicted this back in 2010.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

This reminds us that the long-term trend here has been for wage growth to decline. The improvement in the real wages picture which has been extremely welcome in boosting both consumption and living-standards mostly came about because consumer inflation fell to historically low levels.

What about the self-employed?

Regular readers will be aware that the official average earnings numbers exclude the self-employed and in fact the smaller businesses. This has led to concerns expressed both by me and in the comments section that there would at least be sections of those self-employed with a poorer record for wages growth (and perhaps falls) than stated in the official statistics. This has become an increasingly important issue as the number of people self-employed has grown.

Yesterday the Resolution Foundation released some new research on this subject and it did attract attention for this.

Remarkably, this data suggests that typical earnings for the self-employed were lower in 2014-15 than in 1994-95, twenty years earlier. …….. From their peak (2006-07) to trough (2013-14), typical self-employment earnings fell by 32% – £100 per week.

Ouch! So self-employed earnings have had their own private economic depression. How does this compare with the overall picture?

A fall of 15% compares to a rise of 14% in typical employee earnings

As with ordinary earnings it found that some of this was compositional as in caused by the fact that the newly self-employed were less likely to employ others and worked fewer hours leading to this conclusion.

This analysis suggests that, over the 2001-02 to 2014-15 period as a whole, compositional effects were responsible for over 60% of the fall in average earnings (and there may be other compositional factors that we have not accounted for here), with the remainder being a purer earnings effect.

That still leaves a large gap with the official average earnings series to explain. Also the grim truth is that the credit crunch era did bring outright falls in income for the self-employed.

However, between 2008-09 and 2013-14, while there was still a negative compositional drag, the large majority (86%) of the substantial fall over this period is not explained by compositional effects.

More than a few questions are posed here and some of the answers are hard to find. Some may have been happy to switch from employment to self-employment and others may have been happy to work fewer hours, but it is hard to avoid the few that some were forced to and others were involved in underemployment. As the numbers grow this becomes a bigger issue.

the number of self-employed has grown from 3.3m (11.9% of the workforce) in 2001-02 to 4.5m (14.7%) in 2014-15

There was a flicker of better news at the end which suggested that the economic recovery had finally fed through to the self-employed.

More recently, compositional changes played a positive role and together with strong growth within groups meant a rise in average income in 2014-15

So we hope that this trend continued but we do not do so. The analysis above relies on the Family Resources Survey which has considerable lags in the data it provides.

Back in the day (2008) this was all reviewed by Martin Weale latterly of the Bank of England and recently appointed a Fellow of the ONS. In all his Ivory Tower pages of maths the little people slipped through his net.

Note that firms employing fewer than 20 employees are not surveyed.

I doubt it seemed important to him at the time….

Today’s numbers

Let us open with what remains good news.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.5%, the joint highest since comparable records began in 1971…….There were 23.23 million people working full-time, 362,000 more than for a year earlier. There were 8.58 million people working part-time, 198,000 more than for a year earlier.

Thus we see that more people are employed and the growth these days is not as heavily biased to part-time work as it was. Wages growth nudged higher than we were told last month too.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.3% both including and excluding bonuses compared with a year earlier.

In the meantime so of last month’s data has been revised higher too.

Not so good news

This comes from a nudge higher in unemployment.

There were 1.66 million unemployed people (people not in work but seeking and available to work), 10,000 more than for March to May 2016 but 118,000 fewer than for a year earlier.

Actually this was a type of sexism if you note this.

There were 765,000 unemployed women, 23,000 more than for March to May 2016 but 37,000 fewer than for a year earlier.

I would welcome readers thoughts on why male unemployment fell but women’s rose?

Real Wages

There is an issue here as in spite of the fact that in the latest 3 months wage growth was 2.3% we know that inflation is on the rise. Indeed if we look at the monthly series wage growth in August was 2%. That seems to have been driven by a big swing in bonuses payments from up 8% to -6% but nonetheless we face a position where our real wage growth fades a fair bit if this continues into September and meets an official CPI inflation rate of 1%.

If you look at Retail Price Inflation (2%) then we are now facing the distinct possibility that real wage growth has either ended or faded to a low-level.

Comment

Whilst the situation remains strong overall there is an obvious concern with the rise in unemployment which whilst small overall will matter to the 10,000 concerned. Also there is the issue that we are seeing unemployment rise for women which may be a quirk but may not. But for real wages it would appear that the words of the latest Nobel winning poet are appropriate.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin’
And the first one now
Will later be last
For the times they are a-changin’.

Will that end the apparent improvement for the self-employed?

 

 

 

 

Are the principles of the Elephant Curve affecting UK wage growth?

We advance today on a new set of labour market data for the UK which will inform us more about the state of the post EU leave vote economy. However the last few days have seen the beginnings of a shift in the labour market landscape. It was only on the 8th of this month I looked at the numbers for Zero Hours Contracts but since then we have seen signs of ch-ch-changes. From the Trades Union Congress or TUC.

The TUC has welcomed the decision of pub chain JD Wetherspoon to become the latest major UK employer to offer permanent hours to staff on zero-hours contracts.

The details are below.

Founder and chairman of JD Wetherspoon, Tim Martin, said a trial earlier this year to offer guaranteed hours have proved so successful, it was being rolled out UK wide.

Mr Martin said: “We’ve already offered guaranteed hour contracts to a percentage of our workforce and they’ll all be offered one in the next three months.”

This is significant as Weatherspoons is/was a large user of ZHCs.

The pub chain employs 24,000 people on zero-hour contracts.

This is I believe more than Sports Direct. This means that we may be seeing something of a trend.

Wetherspoon joins Sport Direct and McDonald’s in offering staff on casual contracts the opportunity to become permanent employees.

In general I think that this is a good thing. However care is needed because back in the day when I was an impecunious student I worked in a pub a couple of evenings a week to earn some money and whilst the work was regular there was no permanent contract in fact only a verbal one.

Some Perspective on Wages

The UK ONS published some research in its monthly review which showed that the UK labour market is very tight.

As discussed in a previous edition of the Economic Review, there is evidence to suggest the UK may have experienced a significant tightening of labour market conditions in recent years.

Why do they think this?

In mid-2015, the unemployment-to-vacancy ratio dipped below its 2002 to 2007 average in mid-2015 for the first time since mid-2008, reflecting both falling unemployment numbers and rising vacancies for several years. It has more recently reached 2.2 in the 3 months to June 2016 – its lowest level since November to January 2005.

This matters as they consider the 2002 to 07 period to be stable on this front and of course it was the boom time. Just to give an idea of the credit crunch impact it rose to 5.7.

The ONS lose the plot a little here so let me help out by borrowing a chart used by Graeme Wearden of the Guardian.

If you look at the period since last summer you see that the rate of wage growth has been falling. It peaked back then at 3.1% on a rolling 3 month basis or 3.4% on a monthly basis yet in a tighter labour market we now have this.

Between May to July 2015 and May to July 2016, in nominal terms, regular pay increased by 2.1%, lower than the growth rate between April to June 2015 and April to June 2016 (2.3%).

Wage growth has slowed as another Ivory Tower leans like it is in Pisa and then falls. Indeed if we look back to what now seems like a golden period which is 2002 to 2007 then let me tell you what wage growth was then. It opened at 3.8% dipped for a while but saw peaks of 5.3% in February 2005, 5.5% in April 2006 and then the peak of 6.6% in February 2007. Actually on a single month basis February 2007 reached 7.6%. Could it be much more different?

This is one of the reasons that places like the Bank of England and the Office for Budget Responsibility have got the credit crunch so wrong and produced economic forecasts which would be laughable if the subject matter was not so serious. They assumed the wages world described above would return whereas it has not.

Why might this be?

There has been a lot of debate over the “Elephant Curve” of Lakner and Milanovic. Or more formally the Lakner-Milanovic global growth incidence curve

elephantcurve140916

Now this has been argued to show that the poorest are locked out of economic growth then that the middle classes in places like China are booming. Next though we get the crux of the matter for us in the UK and indeed west because it shows a poor run and indeed some decline in parts for the bit covering the developed world’s middle-class. Then, surprise surprise, a booming global elite!

Now this is contentious to say the least as it is too easy to blame globalisation for everything and this from Torsten Bell of the Resolution Foundation is true as well.

To fetishise globalisation as the cause of all our ills is to let too many domestic policy makers off the hook for decisions they make, for problems they leave unaddressed and for the lower incomes working people experience as a result.

If we move away from the exact numbers as there are issues around compositional changes over time for example and move to the principle I think that the Elephant Curve is definitely onto something. Maybe not everything but something….

Today’s data

The UK employment situation remains pretty stunning in the circumstances.

There were 31.77 million people in work, 174,000 more than for February to April 2016 and 559,000 more than for a year earlier.

It gave the UK another joint highest employment rate and led to this as well.

There were 1.63 million unemployed people (people not in work but seeking and available to work), 39,000 fewer than for February to April 2016, 190,000 fewer than for a year earlier and the lowest since March to May 2008.

So far so good then although there was a rise in the claimant count.

For August 2016 there were 771,000 people claiming unemployment related benefits. This was:2,400 more than for July 2016 and 21,300 fewer than for a year earlier.

So a rise although care is needed as this is an experimental statistic because of the shambles over Universal Credit or as it is officially put.

estimates are still being developed by the Department for Work and Pensions.

For further perspective this is the series critiqued back in 1983 in Yes Minister by Jim Hacker.

Real Wages

There is good news that these continue to rise.

Between May to July 2015 and May to July 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.7% and total pay increased by 1.9%.

However the picture is by no means as happy if we use the Retail Price Index measure of inflation which is now just under 2% in its main variants. As we expect it to rise we are likely to soon see an end to real wage growth using it unless we can manage an increase in wages. Using the official measure will take longer because it is invariably lower but in time that seems on the cards as well. That is sad because as the Resolution Foundation point out we have yet to get back to the previous peak.

Wkly earnings unchanged between Jun-July, suggests no imm. referendum effect. They remain £21 below pre-crisis peak

Comment

We have seen today that the UK labour market continues to look very strong on a quantity level albeit with a rise in the ( unreliable) claimant count. As we look to other measures we get a more worrying picture as wages are the dog that has not barked. The economic future will be grim if real wages do turn lower without reaching their previous peak. I think that the Elephant Curve has flaws but also has a point as we have to face up to the fact that the economic world has clearly changed and that maybe we should be pleased to have wage growth both real and nominal at all. If we lost it would that provide another verse for the song Turning Japanese?

 

What do Zero Hours Contracts tell us about the UK labour market?

The UK labour market situation post the credit crunch shock can according to the official figures be looked at as a game of two halves. What I mean by that is that the quantity measures such as employment and unemployment have performed well but the price measure or wages has disappointed. As I pointed out in my analysis of the 30th of August this situation is one which poses serious challenges to conventional economic theory. This is not just true of the UK as Japan has very little wage growth in spite of reaching what was considered to be the full or natural rate of unemployment.

There are two main routes where we can make progress in understanding this position. One is to note the data which is excluded from the official numbers such as wages/pay for the self-employed and the other is to dig deeper into an area mostly ignored by the UK monthly updates which is the concept of underemployment. This is a situation where people have work but would like to be able to work more. The United States makes a better fist of this than we do which is why I regularly quote their measure of un (der)employment called U-6 which includes this.

Persons employed part time for economic reasons (U-6 measure) are those working less than 35 hours per week who want to work full time, are available to do so, and gave an economic reason (their hours had been cut back or they were unable to find a full-time job) for working part time. These individuals are sometimes referred to as involuntary part-time workers.

In the UK one way we have begun to get a little more insight into the situation has been the way that we have gathered more data on those on what are called Zero Hours Contracts or ZHCs.

Sports Direct

This company has been hitting the headlines in recent times and in many respects it should not have been a surprise because we knew that the retail industry was one where ZHCs were used extensively. However maybe not this extensively. From Reuters in July

Britain’s biggest sporting goods retailer Sports Direct employs around 75 percent of its 19,000 UK workers on much criticised zero-hour contracts, its chairman said on Wednesday.

The situation in the main warehouse was exposed to be one which undercut even the use of the phrase Victorian workhouse as conditions were dreadful and the minimum wage was undercut. This was in marked contrast to other employees of the company.

Sports Direct, whose 4,300 permanent UK staff qualify for lucrative bonus share scheme payouts,

There have been changes over the past couple of days but not apparently to the main warehouse. So our eyes were opened to a company that was clearly operating what we feared which was a two class employment situation of in effect have and have-nots. Maybe some of the shop workers were students who were suited by ZHCs but it is hard to believe that the workforce at the main warehouse did on such a scale. As the workforce there was mainly composed of immigrants we also saw an example of them associated with low wages.

Today’s update on the national situation

The Labour Force Survey or LFS gives us an idea of the scale.

According to the LFS, the number of people employed on “zero-hours contracts” in their main job during April to June 2016 was 903,000, representing 2.9% of all people in employment.

And also the rate of change.

This latest estimate is 156,000 higher than that for April to June 2015 (747,000 or 2.4% of people in employment).

I guess you are not going to be surprised by who they are.

People on “zero-hours contracts” are more likely to be young, part-time, women, or in full-time education when compared with other people in employment.

We do get some direct insight also into the underemployment situation.

On average, someone on a “zero-hours contract” usually works 25 hours a week. Around 1 in 3 people (31%) on a “zero-hours contract” want more hours, with most wanting them in their current job, as opposed to a different job which offers more hours. In comparison, 10% of other people in employment wanted more hours.

Now we hit a problem which is that the LFS is a survey and thus relies on people reporting that they are on a ZHC. I have pointed out before that this is true of other areas such as full-time work where there is not the set definition you might think. But in this area where if the Sports Direct situation is any sort of guide at all we could see that an immigrant workforce may not report the situation.

Another way of looking at the state of play is to use what businesses report to the ONS.

The results from the November 2015 survey of businesses indicated that there were 1.7 million contracts that did not guarantee a minimum number of hours, where work had actually been carried out under those contracts. This represented 6% of all employment contracts.

As you can see there is quite a gap between the two different ways of counting as we are reminded that certainty and precision in the labour market is somewhere between a mirage and a chimera.

Can we define it?

It is not easy but the official UK version goes as follows.

To provide clarity and prevent confusion with the other estimates of “zero-hours contracts”, the remainder of this article refers to estimates from our business survey as no guaranteed hours contracts.

The Resolution Foundation

This has tried to offer more insight by breaking down the numbers after excluding those who are likely to be keenest on the flexibility of ZHCs such as students.

For workers aged over 25, more than two in three workers on ZHCs (400,000) have been with their current employer for more than a year.

They also argue this.

The Foundation notes that for many of these workers, fixed-hour employer contracts, which offer a guarantee of paid work and paid holiday and sick leave, would be more appropriate.

This really opens a can of worms as what if the jobs would not exist on such terms? But we also have the example of Sports Direct where an unscrupulous employer has exploited the situation to drive higher profits and bonuses for the few. I wonder how long someone in the Sports Direct warehouse would have to work to get the wad of £50 notes that Mike Ashley pulled out of his pocket yesterday?

Comment

The credit crunch era has made us look more closely at the data we are given on the labour market and the truth is that what were previously regarded as cracks are in fact fissures. The wages numbers exclude the self-employed and those at small businesses for example. But we have to face the fact that the idea of a single labour market is a fantasy and we have in fact a multitude of them. For some such as those in receipt of Sports Direct bonuses it is a really nice place to be. But if we exclude them what is the state of play of the majority?

Also if we now move specifically to ZHCs they are part of a trend which I think that the Resolution Foundation is right to specifiy.

The Foundation adds that while ZHCs still make up a small share of the labour market – less than a million workers are on one – they form part of a wider growth of atypical employment, including self-employment and agency work, which often lack the rights and security that employees receive.

So a decent slug of the labour force is in a quite different situation as we think of businesses like Uber and indeed the “gig” economy. This will not be bad for everyone as some it will suit but many it will not. It would be revealing I think to see how wages have performed for these people. Also it is hard to see anyone being keen on this.

In April to June 2016, 15% of people on “zero-hours contracts” worked no hours in the week before their LFS interview compared with 9% of other workers

Yet we are supposed to have so much employment legislation aren’t we?