Economic growth this year, so far, has been exceedingly rapid at 3.2% on an annualised basis and employment has responded too, up by an impressive 286,000 since the same time last year. Yet unemployment has been broadly static, falling by just 17,000. The explanation behind this apparent paradox is going to make preventing unemployment from rising over the next few years very difficult.
The first factor is that the British population is increasing. This is coming more from natural growth than migration as the numbers of youngsters entering the working age population at the moment is strong. The increase in the working age population at just under 200,000 over the last year means that about 140,000 jobs are required to hold the employment rate at 70%.
This challenge is being added to by the way older workers are not retiring in the way they used to. Some 850,000 over 65’s now work, up nearly 100,000 over the last year and some 260,000 since the recession began. Furthermore, women aged between 60 and 65, that is above the normal retirement age now but where the retirement age is rising to over the next decade, have seen a further 80,000 increase over the last year. Hence, to cope with older workers delaying retirement means a further 180,000 jobs need to be created to hold working age employment stable; this means a total of 320,000 jobs a year. There is a slight offset from more young people staying in full-time education but job creation needs to be extremely rapid just to hold unemployment steady.
Given a likelihood of slower growth next year with tax rises and spending cuts then a rise in unemployment starts to look inevitable. With unfilled vacancies falling steadily for the last five months, and long-term unemployment rising rapidly now, up nearly 200,000 in the last year, the prospects look bleak.
The Coalition government is concerned about public sector pay and has instigated a review chaired by Will Hutton. Hutton has signalled that he will be looking at it the level of pay, both across sectors and within the public sector. However, one issue on which there have been fewer pronouncements to date is the regional variation in pay within the public sector.
Pay in the public sector for doctors, teachers, nurses, armed forces and other public sector workers is set by the Pay Review Bodies. These bodies review the state of the labour market and recommend a level of pay for to the government and the unions each year. Public sector unions often stress fairness in their wage negotiations: the commonly articulated view is that a teacher in an inner city should in Newcastle does the same job as one in inner London and should therefore be paid the same wage. Perhaps as a result of this argument the review bodies basically set one wage for all the workers they cover, regardless of where they are located in the country. There are extra increments for those located in the South East and London, but these tend to be small. The result is that wages in the public sector tend to be much ‘flatter’ across geographical space than private sector wages. As an example, the difference in the pay of a nurse located in the North East and London is around 15%. However, the difference for a private sector employee with similar skills to a nurse is in the order of 40%.
Such large gaps are likely to cause recruitment and retention problems for public sector employers in the South East as their workers live in a high cost area and as a result will be offered higher wages in the private sector. Shortages of nurses and teachers in the South East have been an ongoing and well documented problem. But is is likely that these recruitment and retention problems also have a knock on effect into the productivity of public sector services in high cost areas. Shortages of workers, high turnover rates and perhaps low levels of morale as a consequence, are likely to cause production problems. CMPO research on nurses’ pay has confirmed this intuition: centralised regulation of nurse pay caused extra deaths per year amongst patients admitted to hospital following a heart attack. They also calculated that wage regulation didn’t even save the government much in direct wage costs as the benefit of lower wages bills in the South East was offset by higher pay in the North of the country so the wage savings were small. The reason for the small wage savings were that the pay review body gets the level of wages ‘right’ on average – what they get wrong is the extent of variation across different parts of the country. These seems very plausible: the review body takes evidence from a wide variety of sources and probably therefore sets the average level correctly, but in responding to union (and perhaps also public) pressure for equality in the public sector, gives insufficient weight to regional variation.
It is likely that public sector pay regulation affects the ouput of teachers, policeman and other public sector workers in a similar way, though this is still to be confirmed.
This all suggests that in addition to examining the level of public sector pay, Hutton should be equally concerned with the variation in pay across regions. One solution might be to deregulate pay altogether and let each employer negotiate with their local workers. However, this also has costs. First, and most obviously, such wage negotiations are costly for both employers and workers in terms of time and the need for each employer to employ HR personnel skilled in wage negotiation. But second, in labour markets in which there is a shortage of workers, negotiations between single employers and their workers may simply drive up the price of labour for all local employers as employers seek to outbid each other to attract staff. This means that no single school or hospital will wish to engage in such negotiation, because any advantage they initially get from offering a higher wage, will be quickly eroded as other local employers follow suit. Whether for the first and/or the second reason, it is the case that hospitals in England, when given the freedom to negotiate local wages in various NHS reforms have generally not done so.
The solution might be therefore to retain the pay review bodies but to ensure that they allow for much large wage differentials across the country. In so doing, they will have to resist calls from the unions – and possibly the public – for equity in pay setting. But far from being fair, such equity penalises public sector workers in high cost areas, over-reward those in low cost areas and probably harm the users of the services these workers provide.
Public health provision weakens the intergenerational transmission of health in developing countries
The intergenerational transmission of health is substantially weakened by improvements in public health provision, income, and mother’s education timed around the conception and birth of the child. Turned around, this means that children are more likely to bear the penalty exerted by poor maternal health if they are conceived or born in adverse socio-economic conditions. The effects are sizeable. An extra year of education amongst mothers of children in the country and cohort of the index child lowers the intergenerational correlation of health by 17%. Attenuation of the correlation associated with one standard deviation increases in log per capita GDP and immunization rates respectively is about 29% and 18.5% respectively.
Gains from improvements in immunization are evenly distributed but gains flowing from improvements in the socioeconomic environment are greatest for children who are initially most disadvantaged by being born of relatively unhealthy mothers. This is consistent with mothers’ health acting as a shock absorber whereby events in the extrinsic environment such as recessions impact the foetus most when the mother’s absorptive capacity is weakest. While the importance of maternal health during pregnancy is well established and hence the common focus on smoking and alcohol consumption during pregnancy, our results suggest a wider focus, showing that the mother’s stock of health, accumulation of which begins at her birth is relevant to the health and life-chances of her offspring. This is pertinent in developing countries where there tends to be systematic under-investment in the health of girls from the start. The findings defend the increasing prevalence of the view that government policies to promote early accumulation of human capital should be targeted to children of disadvantaged families. These results emerge from analysis of individual data on 2.24 million children born of about 0.6 million mothers in 38 developing countries in the 31 year period, 1970-2000. They contribute unique evidence on an important and under-studied aspect of persistent inequality in developing countries, where underdeveloped markets and states result in children often being unable to escape from the family circumstances that they are born into.
Bhalotra S and S Rawlings 2009 Gradients of the Intergenerational Transmission of Health in Developing Countries. CMPO Discussion Paper 09/218.