The recent employment figures released show that 200,000 new jobs were generated in the UK in the three months to June. Ian Brinkley ponders these figures in light of the continuing contraction of the UK’s economy, explaining some of the factors that may explain this puzzle.
The labour market figures that came out yesterday are both very good and very surprising. If you only had these figures to guide you about the state of the economy, you would conclude we were in good shape with a sustainable recovery under way. The labour market generated over 200,000 new jobs in the three months to June compared with the previous three months, two thirds were full time and 80 per cent were permanent. This is a not a blip. Employment has been increasing for three successive quarters.
In contrast, most other economic indicators we have show the economy either contracting or flat-lining. According to the National Institute of Economic and Social Research (NIESR) the economy has been contracting since the end of last year, with GDP falling 0.7 per cent in the three months to June. There are very few if any precedents of an economy apparently in recession generating large numbers of private sector jobs. And if output is falling and the number employed is going up then productivity has to take the strain. Productivity measured by output per hour has been falling since the third quarter of 2011.
So how do we account for this puzzle? Why are allegedly red in tooth and claw capitalists taking on more people even though the overall demand for good and services is contracting and on average each worker is becoming less productive? Part of the explanation must lie in “labour hoarding” – where employers hold on to more labour than they currently need either because they do not want to lose the skills and experience of key workers or because they anticipate that demand will pick up in the future and they want to be ready to meet it.
A recent survey of CIPD members supports this idea. It is also consistent with longer run changes that have seen the workforce becoming better educated and jobs becoming more knowledge intensive – changes that mean the costs of short- term “hire and fire” policies have risen. Moreover, firms are in a better position to avoid costly workforce reductions until they have a better idea of future trading conditions as profitability was at an historical high at the start of the recession. Some firms have built up cash reverses rather than investing and low wage rises have meant pay bill pressures have been very modest. So many companies can afford a wait and see policy – for a while.
The problem with the labour hoarding story is that it has been going on for several years – and it doesn’t really explain the rise in employment. Firms are unlikely to hoard significant numbers of workers for a prolonged period. In the 2008-2009 recession firms laid off far fewer workers than we would have expected given the huge fall in GDP and the experience of the 1980s and 1990s recessions. For them still to be hoarding labour in 2012 starts to look a little strained.
Moreover, private sector employers have been hiring robustly – not just in the latest figures but since the end of the recession. This is a very job-rich recovery – far more so than in the first years of recovery from previous recessions. Labour hoarding can explain why employment held up well in the face of the recession and subsequent weak growth, but looks much less convincing as an explanation for why employers are expanding their workforces. We might think of the labour market as consisting of a) firms which are facing testing market conditions but hanging onto their workforces, and b) firms whose markets are still growing and who are recruiting extra people. But the problem here is that labour market churn – the rate at which people are moving from unemployment and inactivity to employment – does not seem to have changed very much since 2007.
Some commentators think there has been a pre-Olympics effect (remember these figures cover the three months to June, before the Olympics started). For example, extra construction workers might have been hired to help finish off the Olympic Park and firms would have started to make more temporary hires for people to staff the Games (volunteers are not counted as employees). It is true that 50 per cent of the new jobs in the three months to June were in London, and some may be associated with Olympic activity.
But I am sceptical that the rise in employment can be explained by a short-term Olympic effect. If that were true, we would expect it to show up in the GDP figures as well as the employment numbers. We can also see no significant increase in the number of temporary workers across the economy. Finally, other parts of the UK also saw significant growth in jobs, such as the North West and the South West.
Another possibility is that the GDP numbers are too pessimistic and that the economy has been growing, albeit slowly, rather than contracting. It is usually much easier to count people in work than add up the many different forms of economic activity that make up GDP. GDP figures are often revised, so it would be no surprise to see them revised upwards as better information reaches the ONS. But it would take quite big revisions to show that the economy has in fact been expanding over the past six months rather than getting smaller.
Another possibility is that the big rise in self-employment since the end of the recession has increased the share of jobs associated with the “cash in hand” economy recently berated by government ministers. Such jobs might be picked up in the labour force surveys but not in the GDP statistics. However, we have no hard evidence that this is happening, and even if it was, it is unlikely that it would be on a sufficient scale to distort the GDP figures significantly.
Government employment and training programmes have been expanding and where people on them have a contract of employment they are counted as part of the workforce. However, they increased by just 22,000 in the three months to June, or about 11 per cent of the total. Such supported jobs have had a more important role in sustaining overall employment levels over the past year, but it is still a minority contribution.
It is a conundrum. But with little prospect of a strong home grown recovery and the likelihood of even worse news from the Eurozone and the world economy, the chances of the UK labour market continuing to defy gravity must be falling. When labour hoarders become labour shedders, we could see the labour market go sharply into reverse. I therefore still expect unemployment to rise before the end of 2012. But then I thought that at the start of 2012, and unemployment did the exact opposite. The puzzle of the UK’s labour market performance remains to be fully solved. The best conclusion I have seen (on the BBC website) is that it may be all of the above factors and maybe something else we haven’t yet identified.
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Ian Brinkley is Director of The Work Foundation. www.theworkfoundation.com