Unless we see a pick-up in productivity growth soon then the UK risks much slower growth, and lower living standards, in the future.
The headline news from the labour market this month was strong – employment up, unemployment down, under-employment down, youth and long-term unemployment down and a better regional picture than in recent months.
But there remain two, very much linked, causes for concern – what is happening to wages and what is happening to productivity.
The labour market is simply not behaving as many expected it to and there are increasing signs that recession and recovery may be reshaping it.
Employment is up by 450,000 over the last year whilst unemployment is down by 172,000.
In the most recent period the number of people working part-time who want a full-time job or on a temporary contract but wanting a permanent fall fell by 32,000. Youth unemployment fell by 39,000 and the number of people out of work for more than a year was down by 61,000.
There is still an awful long way to go – the employment rate remains below its pre-recession peak and unemployment is well above pre-crisis levels but the direction of travel looks better.
The biggest disappointment came from average weekly earnings. Total growth was just 0.9 per cent, well below the level of inflation. One small bright spot here was the revising up of pay estimates for October and September, but the picture remains grim.
The biggest medium terms question is what is happening to productivity (the measure of how effective we are at turning inputs into outputs). The chart below shows labour productivity since the start of the century and demonstrates the pre-recession trend.
It has fallen by 4.4 per cent since early 2008 and is around 15 per cent below the previous trend.
This chart only goes up to Q3 2013 and we wouldn’t have Q4 data until March but there are indications it is not set to surge anytime soon. Total hours worked in last quarter (until November) rose by 1.1 per cent, whilst NIESR estimate that the economy grew by 0.8 per cent. This would imply a further fall in output per hour.
Back in 2008/09 many expected unemployment to rise by far more than it did. Despite a much more severe recession than in the early 1990s or early 1980, unemployment rose (proportionately) much less than many feared.
Given this one could reasonable expect (and this was certainly the mainstream view amongst economic observers) that any pickup in growth would see weak job growth. The logic was that employers had reacted to a downturn in demand by cutting wages and hours rather than staff and so once the upturn came they could simply increase hours and get more output from their workforce rather than hiring new people.
This hasn’t happened – the recovery over the past year has been employment intense.
So we are left with what economists call the productivity puzzle – output is still 2 per cent below its peak but the number of people in work is higher.
Broadly put there are two distinct ways this could be explained – either we have all generally become less productive at our jobs over the last five years or there was been some sort of change in the composition of the labour market.
I happen to think the latter is more likely to be correct.
Whilst more people in are in work, they are more likely to be lower productivity jobs than in they were in 2008. To take one example, whilst the number of people in work is up by 600,000 since the start of 2008, the number of people in employed in manufacturing (a high productivity sector) is down by more than 300,000.
A similar trend is visible in finance with the number employed down by 66,000. There are 214,000 fewer people employed in the construction industry.
If one just looks at headline jobs figures then one risks missing a big change in the underlying composition of the jobs market.
More people in work is certainly better than fewer people in work, but if they are working in lower productivity and lower waged industries then this is far from the ideal outcome.
A jobs intensive recovery in output is better than stagnating output and rising unemployment (the pattern in 2011 and early 2012), but unless we see a pick-up in productivity growth soon then the UK risks much slower growth, and lower living standards, in the future.
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