Wednesday, 17 June 2015

Inflation free/jobs rich economy delivering above ‘normal’ rate of average real weekly pay growth despite flat-lining productivity – but this exceptional combo is unsustainable

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

The strong labour market recovery continues. The number of people in work increased by 114,000 to 31.05 million in the quarter – despite public sector employment falling by a further 22,000 in Q1 to a new record low of 5.37 million on comparable figures - though against the backdrop of a rising population and an increase in the number of people participating in the labour market the employment rate dipped a little to 73.4%. According to the ONS’ quarterly workforce jobs measure, the service sectors as a whole averaged a rate of jobs growth of 2.2% in Q1 2015, compared with 1.3% in manufacturing, 0.4% in construction and 0.5% for the economy as a whole.  

Unemployment meanwhile fell by a further 43,000, the unemployment rate down to 5.5 per cent, ever closer to the pre-recession low. With job vacancies also at a near record high the rate of growth of average weekly earnings growth (both including and excluding bonuses) has increased to 2.7 per cent, excluding bonuses faster than at any time since the depth of the recession in early 2009, against a backdrop of near zero CPI price inflation. Average weekly pay increased by 3.2% in the private sector and 1.0% in the public sector, the rate of growth being relatively strong in construction (4%) and wholesaling, retailing, hotels and restaurants (3.9%).  

For the time being therefore the UK economy is delivering more than what prior to the recession was considered a ‘normal’ rate of real wage growth of around 2.5% even though labour productivity is still effectively flat-lining.  However, this exceptional combination of circumstances is unsustainable. With price inflation at some point set to rise back toward 2% a continuation of real wage growth at the current rate will have to be earned by a return to a more normal rate of productivity growth; if not there will eventually be renewed upward pressure on prices and, ultimately, interest rates. In recent months UK workers have benefited from an economy merely mimicking a strong underlying recovery. We should enjoy this while we can. But a genuine sustained recovery will need to be based on higher productivity.


Tuesday, 26 May 2015

UK Conservatives hold all the economic and political cards – for now

I’ve been out of action for most of the time since the UK General Election. Here, just in time for tomorrow’s Queen’s Speech setting out the new Conservative majority government’s legislative programme, is my somewhat belated reflection on the outcome, which was clearly devastating for both the Labour Party and the Liberal Democrats.

From an economic perspective, the Conservative party had the strongest hand of cards to play, in large part because of fortuitous circumstances. I remain of the view that phase one of Chancellor George Osborne’s fiscal policy regime from 2010 to 2012 delayed the economic recovery. But whether by luck or judgement the inevitable upswing came at just the right time politically. Better still for Mr Osborne, the improvement in aggregate demand coincided with, and was supported by, a slump in global oil prices which caused consumer price inflation to eventually fall to zero before polling day. As result, an economy experiencing an unprecedentedly long period of weak productivity growth and anaemic nominal average pay rises began to deliver real wage gains that mimicked what would be achieved if productivity was increasing in line with the historical trend. Add in the fact that the flip side of low-productivity and low nominal wage growth was a surge in employment to a record high rate and a positive economic narrative was there for the taking, even if government policy had actually done little to underpin it. As the Chancellor and the Prime Minister David Cameron have proved therefore, it does pay to put lipstick on a pig.

The consequence of all this is that the other main English political parties were probably on an electoral hiding to nothing, albeit they also had to contend with other factors that continue to bedevil them.         

Nick Clegg and co., for example, remain in denial that they made the wrong call in entering a formal coalition with the Conservatives in 2010 rather than offer support in a looser form that would not have meant ditching key manifesto pledges. The Lib Dem poll ratings throughout the past five years showed many people considered this the action of unprincipled careerists who seized a once in a lifetime opportunity to gain high public office. And although there are still some who argue that the experience of life under an untrammelled Conservative majority government will demonstrate the positive restraining role played by the Lib Dems after 2010, this ignores the fact that the coalition formed the bridgehead for this year’s Conservative victory. The only hope for the rump of Lib Dem MPs is to depart from the so-called Orange Book neo-liberalism that led them to disaster under Clegg and choose a leader who will tack back to the centre-left ground that served them well until the mid-2000s.

The task facing the Labour Party is far more difficult. Ed Miliband failed to appeal either to the party’s one time working class core – most notably, though far from exclusively, in Scotland - or to middle England. While much has been said about Miliband’s personality as a factor in this the key dilemma is that traditional social democracy is a hard sell in 21st century England which has bought into a post-Thatcherite north American view of the world that broadly tolerates marked income inequality, scorns welfare recipients and is sceptical of the merit of any form of tax funded social provision other than the NHS. Whoever leads the Labour Party from this autumn will have little option but to build a policy platform that reflects this dominant ideological reality; simply confronting it with pious denigration will not work, as Miliband found to his cost.

However, a more coherent centrist policy platform is unlikely on its own to challenge the current dominance of the Conservatives. The necessary additional condition is an event big enough to demolish the Conservative’s reputation as being the party of competent economic management.

Throughout my adult lifetime there have been periods when one or other of the two largest political parties has been described as ‘the natural party of government’. In both cases supposed perennial supremacy has been swept away almost overnight by economic events. John Major’s Conservative government lost its reputation for economic competence during the ERM crisis of 1992. The global financial crisis of 2008 did the same for Gordon Brown’s labour government. The fact that in both cases these governments made the correct policy calls is immaterial. The (misguided) public perception was that the government in charge either caused these crises or mishandled the aftermath.

As night follows day there will come a time when the current Conservative government will suffer a hit to its economic reputation too, whether self-inflicted (perhaps a hubristic approach to fiscal austerity, or in the welter of the forthcoming EU referendum) or by way of an external shock to the system. The bad news for the opposition parties is that no-one knows when that day will come – next month, next year, next decade. All they can do is prepare so as to be in a position to offer a credible political alternative when the tide finally turns.          


Wednesday, 13 May 2015

UK average weekly wage growth on the up, especially in low pay sectors, as jobless rate edges ever closer to pre-recession low

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

This month’s labour market figures bring good news for jobseekers and wage earners alike. Another large quarterly increase of 202,000 in the number of people in work in the UK has lifted the employment rate to a new record high of 73.5%. More than two-thirds of the additional jobs are full-time, mostly for employees. The unemployment rate meanwhile has fallen to 5.5%, including a substantial fall of 50,000 (to 588,000) in the number of long-term jobless. Despite this, the overall quarterly fall in unemployment (35,000) is modest compared to the rise in employment due to a corresponding rise of 167,000 in the number of people participating in the labour market. Part of this latter rise is in turn due to a fall of 69,000 in the number of economically inactive people of working age.  


With the unemployment rate edging closer to the pre-recession low (5.2%) and both employment and vacancies (up 34,000 to 745,000 in the quarter) at record highs, there is also clear evidence that wage growth is at last gaining momentum. The rate of growth of average regular weekly pay (excluding bonuses) has increased from 1.9% to 2.2% against a backdrop of zero price inflation. The increase is far higher in the private sector (2.7%) than the public sector (0.9%). Most encouraging of all, however, pay is rising fastest in low wage sectors, averaging 3.1% across wholesaling, retailing, hotels and restaurants, offering a welcome boost to real wages for the lowest paid workers.

Friday, 17 April 2015

Remarkably strong quarterly surge in employment helps boost regular pay growth

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months December 2014 to January 2014.

The remarkably strong quarterly 248,000 rise in employment indicates a surge in the pace of job creation at the end of last year, helping to cut unemployment by a further 76,000 to a rate of 5.6%. People working full-time account for two-thirds of the total rise in employment this quarter, most of whom are employees on permanent contracts. With the number of people in work now above 31 million the working age employment rate has risen to 73.4%, a new record.

The fact that very strong employment growth had only a relatively modest impact on unemployment in the quarter is explained by a large fall of 104,000 in the number of economically inactive people, itself likely to be an indication of improved labour market opportunity.

A further fall in unemployment combined with both a record employment rate and record job vacancies (up 32,000 in the quarter to 743,000) has also given a boost to the rate of growth of regular pay (i.e. average weekly earnings excluding bonuses) which has increased from 1.6% to 1.8%. Regular pay growth is a better indicator of underlying wage pressure than total pay (including bonuses), the rate of which fell from 1.9% to 1.7%.  


Together with zero price inflation, the jobs boom is helping improve real incomes despite the fact that nominal wage pressure remains subdued. However, the rise in employment and real wages continues to mask severe underlying weakness in labour productivity. This will have to improve markedly if the current recovery in living standards is to be sustained into the medium and long-term.

Tuesday, 14 April 2015

Record jobs but we’re only just back to normal hours

During the course of the UK General Election campaign the Conservatives and Liberal Democrats have pointed to the number of jobs created since 2010, while Labour and many of the minority political parties instead emphasise the squeeze on real earnings. As a result, I’m often asked why a record employment rate has yet to trigger an obvious economic feel good factor. There are several ways of looking at this but something that is often overlooked is the average amount of work people are doing, which has only just returned to what was considered normal prior to the recession.

At the start of 2008, just before the recession struck, UK workers were on average working 32.2 hours per week. This was around the average for most of the 2000s and around an hour less than the average for the 1990s, the fall over the decade due to a shift toward jobs offering shorter hours. At the time of the last General Election in 2010 this figure had, in the wake of the recession, fallen to 31.6 hours – a loss equivalent to almost a week’s work over the course of a year, which is clearly enough to make the average worker feel worse off.

Since then average hours have risen again but (by the end of 2014) were only back to where they were just before the recession i.e. 32.2 hours per week. This is despite lots more jobs being created and a record employment rate, reflecting the fact that there has been a further shift toward jobs offering shorter hours. However, for most of the period during which average hours were returning to normal the amount people were on average earning for each hour they worked was also falling in real terms. The lack of a noticeable feel good factor is therefore understandable.


For the average worker to feel as well off as before the recession we will thus have to see either an increase in the length of the average working week (say taking it back to where it was in the 1990s) or higher productivity per hour worked in order to boost hourly earnings. Assuming that most people would prefer to work smarter rather than harder (i.e. enjoy an improvement in their overall economic and social well-being) this suggests that measures designed to raise productivity and pay per hour should be at the centre of the General Election debate. Sadly, despite lots of rhetoric about the situation of ‘hard working families’, such measures are a best only implicit in much of what we have heard from our politicians in the election campaign so far.    

Monday, 23 March 2015

Pick and mix politicians should spare us detailed manifestos

Although it has being going on for months, the UK’s General Election campaign doesn’t officially start until next week. I doubt I’ll be alone in wishing it was all over already but just as many people seem excited by the prospect. However, something I won’t be doing this time is giving much attention to the various political party manifestos, the magazine-style documents the political parties publish detailing their policy platforms. These used to offer a guide to who to vote for but seem far less meaningful in an era of ‘pick and mix’ coalition politics.

While manifestos have always represented the outcome of ideological horse-trading within parties they usually contain some degree of internal policy coherence. But compromise between parties effectively destroys this. The 2010 General Election, for example, produced a Coalition with a programme for government that didn’t appear in either the Conservative or Liberal Democrat party manifestos. Nobody voted for the policy mix subsequently pursued and we’ll never know if the quickly cobbled together package of measures has produced superior economic and social outcomes to what would have occurred if the Conservatives had governed alone as a minority administration. Either way, however, the possibility of another hung Parliament and thus some kind of post-Election arrangement between one or more parties makes it harder to take manifestos in the traditional sense at face value.

In my view political parties should only publish detailed manifestos if they also rule out a formal coalition or some other informal post-electoral pact in the event of a hung Parliament. Otherwise parties should simply issue a short statement of overall intent – akin to an organisational mission statement – along with a clear list of red line policies they would either not deviate from or not sign-up to following any post-Election agreement with other parties.

Politicians who wish to garner public trust should demonstrate that they are more interested in policy than politics. The best way to lose trust is to stand for office on a detailed policy agenda merely to ditch this once the votes have been counted.

      

Wednesday, 18 March 2015

Disappointing pay figures show why Chancellor can't take credit for rise in real wages

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data. These mostly cover the three months November 2014 to January 2015 but also include estimates for public and private sector employment in Q4 2014.

The jobs figures continue to be strong, with employment up 143,000 on the quarter (to a total of 30.94 million people in work) and unemployment down 102,000 (to 1.86 million). The working age employment rate has reached a new record of 73.3%. Full-timers account for more than two thirds of the quarterly rise in employment, all the net rise due to more employees in employment (the number of self-employed fell by 9,000). Excluding the effect of major statistical reclassifications, the number of people employed in the private sector increased by 148,000 to 25.64 million in the final quarter of 2014, while the number employed in the public sector fell by 5,000 to 5.23 million.  

There was a quarterly fall in both the unemployment rate (down from 6% to 5.7%) and the working age inactivity rate (down from 22.3 to 22.2%). The number of people long-term unemployed (i.e. unemployed for more than 12 months) fell by 55,000 in the quarter (to 629,000). Youth unemployment fell by 12,000 to 743,000 in the quarter and has now fallen below 500,000 if full-time students are excluded from the total (the overall youth unemployment rate down from 16.6% to 16.2%). The number of people claiming Jobseeker’s Allowance fell by 31,000 to just over 791,000 in the month to February 2015.  


But the average weekly earnings figures disappoint yet again, the rate of growth in both average weekly total pay (down from 2.1% to 1.8%) and regular pay (i.e. excluding bonuses, down from 1.7% to 1.6%) slowing slightly. Although pay is now growing faster than the 0.3% rate of consumer price inflation this nonetheless dents Chancellor of the Exchequer George Osborne’s positive Budget day narrative. Real wages are rising only because low global oil prices, which Mr Osborne can't take credit for, are pushing the economy toward zero inflation; in our high employment/low productivity jobs market pay packets still aren't benefiting from the so-called ‘long-term economic plan’.