Thursday, 17 March 2016

Skills mismatch, job quality and the productivity puzzle

The UK’s very poor recent trend productivity performance features prominently in debate following yesterday’s Budget, with pessimism over prospects for improvement a key reason for downward revisions to GDP growth forecasts. The so-called ‘productivity puzzle’ continues to exercise the minds of economists and has yet to solved. But some insights might be gleaned from figures just released by the Office for National Statistics (ONS) estimating the extent of skills mismatch in the UK labour market i.e. the proportion of people either overeducated or undereducated for the jobs they are doing.

The ONS has looked at how well the level of educational attainment of people in work matches with the average educational attainment of the occupation they are employed in. Mismatch is an indicator of how efficiently labour is allocated within the economy, which will in turn affect productivity since people will perform best in jobs suited to their skills.  

By the end of 2015 just over two thirds (68.7%) of people of working age (16-64) were considered matched to their employment. Of the remainder who were mismatched (ostensibly ‘in the wrong job’) 16.1% were overeducated and 15.1% undereducated.

Over time (the ONS look at the period Q2 2002 to Q4 2015) the match rate has generally been on upward trend but found to fluctuate. The rate peaked prior to the recession, fell during the recession, recovered to just above the pre-recession peak by the end of 2012, and then fell again to the end of 2015 figure of 68.7%. In other words, mismatch was on the increase during much of the jobs boom of recent years, which we also know was a time of generally poor growth in labour productivity. Moreover, while by the end of 2015 the under-education rate was around 1.5 percentage points below the pre-recession high the over-education rate was around 2 percentage points above the pre-recession low.

Put together, these figures show that while the UK labour market serves to match the vast majority of people to the ‘right job’ in terms of their education the dominant trend is that toward a higher rate of over-education. This is worrying and suggests the UK is underusing an increasing proportion of available talent, with women and people in part-time jobs in particular employed in occupations for which they are overeducated. When one acknowledges waste of available talent on this scale it’s no wonder UK productivity performance is struggling to improve.

Be clear, however. The response to over-education should be intensified policy efforts to increase demand for skills and promote better quality jobs. The response should not be to cut the supply of high level skills to the labour market, for example as advocated by commentators who think the UK is nowadays producing ‘too many graduates.’ A high productivity economy needs both better jobs and more highly educated workers.    

Wednesday, 16 March 2016

Pace of UK jobs market recovery slows ahead of ‘quarter of uncertainty’ for businesses

It’s Budget day in the UK so less focus than usual on the latest official labour market numbers published earlier this morning by the Office for National Statistics (mostly covering the three months to January 2016). Good news on jobs will doubtless get at least a passing reference from Chancellor George Osborne in his statement to the House of Commons, helping to offset what’s likely to be somewhat less upbeat news from the Office for Budget Responsibility on the overall economic and fiscal outlook. However, the Chancellor would be advised to highlight the general trend of the jobs market over the past year rather than dwell on the most recent figures.  

While the UK labour market remains healthy the pace of the jobs recovery has slowed a little with both the latest rise in employment (up 116,000) and the fall in unemployment (down 28,000) smaller than in recent quarters. Moreover, the number of job vacancies has also dipped slightly (down 10,000 to 768,000 in the three months to February 2016) and although the rate of growth of regular average weekly earnings has picked up from 2% to 2.2% in nominal terms real average weekly earnings growth is little changed at 2% (up from 1.9%). Taken together these figures could indicate that employers are becoming more cautious over hiring decisions as they approach what will be a ‘quarter of uncertainty’ for the economy, including the introduction of the National Living Wage at the start of April and the EU referendum toward the end of June.

Wednesday, 17 February 2016

Latest official numbers show record UK employment remains a mixed blessing for economy

Economic growth may have slowed in the final quarter of last year but, as the Office for National Statistics informed us earlier today,  this didn’t prevent a further big quarterly rise in employment of 205,000 (0.7%), almost all full time, split roughly equally between employees and self-employed people. This helped keep the unemployment rate steady at 5.1% - the number of jobless people actively seeking work fell by 60,000 but 88,000 previously economically inactive people of working age entered the labour market while the overall economically active population (aka the total labour supply, including people above working age and migrants) increased by 145,000.
Despite the good news on jobs the juxtaposition of another record setting quarter for the working age employment rate (which has now reached 74.1%) and somewhat softer economic growth suggests deterioration in the UK’s already dire underlying labour productivity performance (though we won’t have figures to confirm this until later in the year).. This, along with strong growth in the active labour supply enabling employers to fill most job vacancies without too much difficulty, helps explain why average weekly earnings excluding bonuses are still rising at an annual rate of only 2%.
For the time being low consumer price inflation is protecting workers from the consequences of weakness in UK productivity and pay. But we face a rude awakening on jobs and real living standards once the price level starts accelerating at a more normal pace (i,e, moves back toward the Bank of England’s target rate of 2% CPI inflation) and/or if economic growth slows more sharply than forecasters at present expect.   

Wednesday, 20 January 2016

UK unemployment falls to decade low rate of 5.1% but rate of annual regular pay growth falls below 2% - we need to rethink what we mean by ‘tight labour market’

We’ve just had the latest official UK jobs market figures from the Office for National Statistics. This is the first set of 2016, though the data mostly cover the three months September to November of last year. And the picture is broadly in line with the recent trend.

Employment continues to very grow strongly, with 267,000 (+0.9%) more people in work compared with the previous quarter. Employees account for 60% of the latest quarterly increase, full-time employees for 42%. The overall rise takes the total number of people in work to 31.39 million, lifting the working age employment rate to 74%, higher than at any time since comparable records began in 1971. Unemployment meanwhile is down 99,000 on the previous quarter, to 1.675 million, alongside a fall of 93,000 (to 8.92 million) in the number of economically inactive people of working age.

The unemployment rate (5.1%) is now lower than at any time for a decade but still not triggering higher wage pressure. Indeed the rate of annual nominal pay growth has slowed again (down to 1.9% excluding bonuses, which is the best measure of underlying pay pressure). This suggests that the rate of unemployment consistent with the Bank of England’s 2% inflation target has fallen significantly over time; a generation ago most economists reckoned this so-called sustainable unemployment rate was around 10%. Consequently we need to rethink what we mean by a ‘tight labour market’.

Some commentators continue to talk as if the labour market is already very tight, citing indicators such as unfilled job vacancies (currently standing at around 750,000) and employers’ reports of mounting skills shortages. The implication is that the Bank of England ought to be considering raising interest rates sooner rather than later, notwithstanding caution induced by the state of the global economy as highlighted only yesterday by the Bank’s at present dovish Governor Mark Carney. But the pay data simply don’t support a hawkish view. Unemployment may now have to fall to a very low rate, perhaps below 4%, before we see strong upward pressure on pay. For the time being the labour market isn’t tight, just recovering. Monetary policy should support this not stymie it.

Wednesday, 16 December 2015

It’s ‘payja vu’ in the UK labour market

This is one of those days when the eyes of most economic commentators will be fixed on what the United States Federal Reserve decides to do to the interest rate rather than the latest UK job market figures. The Office for National Statistics (ONS) data, mostly covering the three months August to October 2015, nonetheless provide another twist in the tale of the labour market trend on this side of the Atlantic.

After a brief hiatus in the spring, the UK jobs boom is clearly back in full swing with (according to the household Labour Force Survey) 207,000 (+0.7%) more people in work compared with the previous quarter and 505,000 (+1.6%) more than a year earlier. On an annual basis employment of employees increased in percentage terms by 1.9%, somewhat more than self-employment 1.6%. Within these totals, in percentage terms part-time employment (+2%) increased by more than full-time employment (1.5%). At the sector level, construction recorded by far the largest annual increase in jobs (+111,000 or 5.3%) in a big employment sector.

The ONS’s alternative quarterly Workforce Jobs series, mostly based on a survey of employers, offers a slightly different but broadly consistent picture of job growth of 1.2% in the year to September 2015. The ONS also finds that in the year to September private sector employment increased by 2.2% while public sector employment fell by 1.1%.  

The rise in LFS employment takes the total number in work to 31.30 million and the working age employment rate to 73.9%. Both the latter are new records but less noteworthy this month than two other landmark figures. First, total hours worked each week in the economy have topped 1 billion for the first time ever. Second, unemployment has at last returned to the pre-recession rate of 5.2%. Yet after a period of much better news on pay, the rate of average regular weekly wage growth (i.e. excluding bonuses) for employees has fallen sharply to just 2% in the year to October, down from 2.4% in the year to September. The slowdown is particularly marked in the private sector (down from 2.8% to 2.3%), the rate in the public sector actually rising slightly (up from 1.2% to 1.3%). The ONS notes that the drop in the overall figure reflects a high single month growth rate for July of 2.9% falling out of the latest three month average and being replaced by a much lower single month growth rate of 1.7% for October.  

There is thus a palpable sense of what a punster might call ‘payja vu’ in the UK labour market at present, a reminder of the initial phase of the economic recovery characterized by a jobs boom alongside weak productivity and pay growth. What’s most surprising it that for all the talk of mounting skills shortages employers in most sectors (with the exception of construction where very strong job growth has pushed wage growth well above 6%) appear perfectly capable of hiring at will without having to hike pay rates. This will please jobseekers and Bank of England interest rate setters even though it means employees are now enjoying real wage gains only because almost zero consumer price inflation is nowhere near the Monetary Policy Committee’s target rate of 2%.

Wednesday, 11 November 2015

UK jobs market sending out mixed signals but no need yet to ring ‘overheating’ alarm bells

You can come up with almost any narrative you want from the latest UK job market figures released earlier this morning by the Office for National Statistics (ONS), mostly covering the three months July to September 2015.

The good news story is a very healthy quarterly rise of 177,000 (to 31.21 million) in the number of people in work, taking the employment rate to yet another new record high of 73.7%, and a big drop of 103,000 (to 1.75 million) in the number unemployed, lowering the unemployment rate to 5.3%, only slightly higher than before the recession.

And yet there is also more than enough disappointing news for the pessimist to latch onto. Most of the rise (82%) in total employment in the latest quarter is in part-time jobs with the result that total hours worked in the economy have fallen (by 0.1%). Meanwhile the number of unfilled job vacancies is, as the ONS says, ‘little changed’, albeit still at a very decent level of around 740,000. This combo of falling hours and stable vacancies may help explain why the rate of average weekly regular pay growth (i.e. excluding bonuses, the best regularly available official measure of underlying nominal wage inflation) has fallen to 2.5% in the year to September (down from the 2.8% figure recorded for the year to August). This is still very good when set against zero consumer price inflation but suggestive of an overall easing in the strength of demand for labour.

Some amount of demand easing might also account for a slight rise of 3,300 between September and October in the number of people claiming unemployment related welfare benefits. However, as former senior member of the Government Economic Service and labour market expert Bill Wells has noted this morning, the headline claimant count total might be being affected by administrative delays associated with the introduction of the new out of work Universal Credit system (the number of unemployed people claiming the long standing Job Seeker’s Allowance benefit fell by 11,200 between September and October).

What therefore does an overall reading of these data tell us? My view is that while we can continue to take comfort in the general good health of the UK employment situation these latest data do not provide evidence to suggest the labour market is overheating. Neither do they lend weight to the view that the Bank of England should start to raise interest rates sooner rather than later. For the time being at least the alarm bells can remain silent.  

Wednesday, 14 October 2015

UK’s topsy turvey jobs market trend confounds narrative of mounting recruitment difficulties

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months June to August 2015.

It’s proving to be a topsy turvey year for the UK jobs market. The first six months were characterized by relatively slow employment growth, a fairly stable unemployment rate but much better pay figures, overall suggesting an improvement in labour productivity. However, between June and August the number of people in work leapt by 140,000 to 31.12 million, reaching a record working age employment rate of 73.6%, the unemployment rate fell from 5.6% to 5.4%, close to the pre-recession low, while the pace of regular (i.e. underlying) pay growth eased back from 2.9% to 2.8%.

The explanation for this apparent flip in behaviour is unclear, though it’s possible that recruiters were cautious in the first half of the year because of political uncertainty surrounding the General Election in May. What is clear is that hiring picked up strongly from June onward with the number of employees rising by 120,000 in the three months to August, full-timers accounting for more than half (70,000) this increase. Interestingly, this outcome contrasts with the popular narrative of recent months which explains the labour market trend at the start of the year in terms of mounting recruitment difficulties and increased competition for talent. Whatever the validity of this argument, employers don’t seem to have had too much difficulty hiring staff between June and August, and didn’t have to put more into regular pay packets to do so.