Two high profile commentators, Stephanie Flanders of BBC and Chris Giles of the FT have noted the paradox of a stagnant economy as measured by GDP growth co-existing with an apparently booming labour market. The GDP numbers suggest that over the 6 months to March the economy registered no economic growth, but the Labour Force Survey for the 3 months to March says we added 80,000 jobs and the employer-based survey a whopping 120,000 in the same period. This disconnect between growth and jobs was also apparent through the recession. The recession was the worst since the Great Depression but the numbers of jobs lost was very modest compared to that in the lighter recessions of the early 80s and 90s (see Figure). Just 2% of jobs were lost compared to 6% previously. This labour hoarding through the recession appeared to be related to high profitability of firms prior to the recession and a maintenance of consumer spending through radical cuts in interest and VAT rates. But it raised the prospect that firms would have the potential to raise output without new workers as productivity recovered to pre-recession levels. This didn’t happen so that once growth started in late 2009 employment responded very quickly – no jobless recovery here.
So the current apparent paradox could either be just a statistical anomaly that will be reversed soon or perhaps a sign of a deeper issue that Britain can create jobs easily but at the cost of slow or non-existent productivity increases, which will knock on to slow or non-existent real wage rises until unemployment is reduced substantially. The first point of view is supported by other labour market data. The claimant count has been rising since February and at an increasingly rapid rate and vacancy levels falling since December. The rise in the claimant count has come about through a decline in numbers leaving, as is normal when vacancies dry up, rather than more new claims. This rise therefore cannot be attributed to moving people from lone parent of sickness benefits on to JSA. So there might just be a rather longer lag between the growth soft patch, as Mervyn King calls it, starting and jobs growth halting, than we have seen of late. The alternative view that we are seeing UK productivity stuck in a morass, also has merit. High unemployment is suppressing wage growth, so that it is becoming cheaper, even against price rises UK producers are securing for their output. The recession was particularly centred on a collapse in company investment and the stasis in the banking system means UK firms are still struggling to raise capital for investment. The norm used to be that almost 2% growth was need to keep employment level, as productivity rose and growth of 2.5% before unemployment fell as below that job creation only matched population growth. With so much labour to absorb in terms of a growing population, in-migration and a remarkable increase in working among people beyond normal retirement age, it is astounding unemployment has fallen over the last 6 months at the rate it has. So whilst the labour market is in all probability softening now and employment is likely to stop growing, we seem to be generating jobs with just 1% annual growth rates, which is good news in terms of unemployment but it implies that poor growth is hitting productivity more than jobs, which in turn means the prospects for a return to rising living standards in the UK may be a long way off.
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.