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.

Wednesday, 16 September 2015

Fresh jobs and pay figures point to better news on UK labour productivity

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

It’s now fairly clear that the UK labour market recovery changed tack in the first half of the year. The previous and prolonged ‘jobs-rich/pay-poor’ trend appears, at least for now, to have gone into reverse. The headline unemployment rate is static at 5.5% when compared with the late winter/early spring quarter while the rate of average regular weekly pay growth for employees has risen further to 2.9%.

The number of people in work increased by 42,000 in the quarter (up 0.1% to 31.095 million), much slower than the quarterly growth rates seen for most of the period since 2012, albeit enough to lift the employment rate from 73.4% to 73.5%. But with the working age economic inactivity rate also dropping slightly (down from 22.2% to 22.1%) this modest improvement in employment was unable to lower the headline unemployment rate (the level of unemployment indeed rising by 10,000 to 1.823 million).

These latter figures are of course drawn from the household Labour Force Survey (LFS). The ONS’ alternative, largely employer survey based Workforce Jobs (WJ) data series (published each calendar quarter) complicates the picture somewhat by indicating a much stronger rate of net job creation in the second quarter (to June). The total number of Workforce Jobs is found to have increased by 102,000 in the quarter (up 0.3%), almost 90% of the increase accounted for by jobs for employees.

Historically, movements in the LFS and WJ series do diverge at times, which is not surprising since they are obtained from different constituent respondents and cover slightly different time periods. Generally, however, these series tend to offer a consistent view of the underlying employment trend when viewed over a number of quarters and years. On the face of things the latest divergence might be explained by a combination of a relatively large quarterly increase in part-time jobs but with some of these being taken by people who already have another job, either as an employee or self-employed. But while close examination of the latest LFS data do indeed show a relatively strong quarterly rise in part-time working (up 0.6%, the number of people working full-time unchanged in percentage terms) the number of people with second jobs actually fell quite sharply (by 0.2%).

Putting aside such statistical puzzles and looking solely at the picture painted by the LFS and average earnings data, the good news is that the latest employment/unemployment/pay combo provides further evidence that the much needed improvement in labour productivity may at last be underway. This will be welcomed by employers, wage earners and economic pundits, not to mention interest rate setters at the Bank of England. But the news is not so good for jobseekers because it now looks as though it will take a little longer than previously expected for unemployment to fall back to the pre-recession rate (of around 5.2%).

Public sector workers will also be feeling less than chipper. Their average weekly pay is rising at a rate of 1.3%, almost three times slower than the average rate of pay growth in the private sector, while the first half of the year saw an underlying fall (adjusting for statistical reclassification effects) of 22,000 in the number of people employed in the public sector. 

Wednesday, 12 August 2015

Further signs of hiatus in UK jobs recovery

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

Although these quarterly data refer to the spring and early summer they convey a picture befitting August and the summer holiday season, since nothing much appears to have happened.

Admittedly, the number of people in work fell by 63,000 in the quarter to 31.03 million, while the number unemployed increased by 25,000 to 1.85 million. But as the ONS notes the employment rate (73.4%), the unemployment rate (5.6%) and the economic inactivity rate (22.1%) were all ‘little changed’.

Nonetheless, this is the second consecutive month of weak employment data, which suggests the UK jobs recovery ran out of steam in the spring. What’s less certain is whether this represents a temporary pause, perhaps due to employers’ caution over hiring around the time of the General Election in May, or a clear break in the previous trend of sharply falling unemployment. Either way it now looks as though it will take a little longer than previously expected for unemployment to fall back to the pre-recession rate (5.2%).

The most disappointing feature of the latest data is that the apparent hiatus in the jobs recovery is not offset by faster pay growth - the rate of growth of regular pay, excluding bonuses, for employees remaining unchanged at 2.8% - which might have indicated a pick-up in labour productivity. A combination of jobs standstill and lack of momentum in pay therefore makes this the least positive set of UK labour market figures for some considerable time.

Wednesday, 15 July 2015

Faster pace of average real weekly pay growth plus slight fall in employment and slight rise in jobless rate - might the UK economy be embarking on a productivity revival?

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

The strong jobs recovery looks to have taken a pause in the spring. Although the number of people in work fell by 67,000 in the quarter to 30.98 million and the number unemployed increased by 15,000 to 1.85 million these changes are tiny relative to the magnitudes involved. Better therefore to think of the employment rate (73.3%), the unemployment rate (5.6%) and the economic inactivity rate (22.2%) as, to use the ONS’ phrase, little changed.

Indeed the quarterly fall in employment is almost entirely due to fewer people in self-employment (down 55,000), the number of employees in fact increasing by 5,000. The level of vacancies remains high at 726,000 (albeit down 17,000 on the quarter). Moreover, youth unemployment fell by 13,000 and there was also a small monthly fall (in June) of 2,500 in the number of people claiming Jobseeker’s Allowance. No need therefore to panic.

However, if the jobs recovery has paused the opposite is true for the pay side of the labour market. Total pay for employees is rising at an annual rate of 3.2%, higher than at any time since spring 2010, and regular pay (excluding bonuses) by 2.8%, the highest rate since winter 2009. With the CPI inflation rate close to zero between March and May this year these represent real pay increases, mimicking what one would see if the economy were still enjoying the pre-recession trend rate of productivity growth prior to the productivity slump.    

While it’s far too soon to conclude that these figures overall indicate a change in the recent UK labour market trend, a faster pace of wage growth plus slightly weaker jobs and unemployment performance might suggest an economy that for several years has preferred more jobs to higher pay is at last embarking on a productivity revival.

On the positive side, the slightly weaker jobs and unemployment figures may ease pressure on the Bank of England to raise interest rates for the time being despite mounting concern over the possible inflationary effect of stronger real wage growth. On the negative side, a slowdown in the pace of the jobs recovery is bad news for jobseekers for whom the availability of work is more important than what’s happening to pay.

Thursday, 9 July 2015

The ‘National Living Wage’: is the Chancellor gambling with low paid jobs?

Chancellor of the Exchequer, George Osborne, ended his budget speech to Parliament yesterday with what has come to be the customary clever twist. Having told MPs he’d be removing or reducing tax credits from several million ‘hard working families’ he sweetened the pill by announcing a big hike in the statutory national minimum wage for employees aged 25 and over, which will rise to £7.20 per hour from April next year and to £9 per hour by 2020, thereby forcing employers to cough up extra cash in order to make up the cut in the taxpayer subsidy to low paid employment.

Moreover, by rebranding the enhanced wage the ‘National Living Wage’ he not only disguised the fact that for many employees the guaranteed wage hike will be smaller than the tax credit cut, leaving them worse off, but also wrong-footed potential critics who find it hard to oppose the language of the Living Wage even though Mr Osborne’s version is a lot less generous than the figure campaigners calculate individuals need to cover the basic cost of living. This is currently estimated at £7.85 per hour, or £9.15 in London where living costs are higher, albeit both these figures will rise considerably once the effect of tax credit cuts are taken into account.  Living Wage campaigners have thus at one and the same time had to welcome the Chancellor’s move, question it for not going far enough, and been left having to persuade employers who might otherwise have decided to opt for the full fat Living Wage not to settle for Mr Osborne’s Living Wage Lite.

Consequently, the main voices of opposition to the Chancellor’s belief that ‘Britain needs a pay rise’ have so far come from sections of the business community who appear happy to accept the austerity rhetoric of ‘all in this together’ if this means mass downsizing of the public sector but not if their own finances are put on the line.

To be fair, not all business organisations are complaining and even those that are have been fairly measured in their response to a government whose ideological stance they in general support. Contrast this with what was being said only a few months ago when most of these same bodies declared the Labour Party ‘anti-business’ for advocating an £8 per hour national minimum wage by 2020.  Nonetheless, the CBI still considers Mr Osborne’s pay plan ‘a gamble’ which might cost jobs and thinks the jury is out on the wisdom of his move. So just how much of a gamble is the Chancellor taking?

A lot depends on whether pay at the bottom end of the labour market is determined purely by the interaction of demand for and supply of workers of given productivity or instead to some extent reflects a power imbalance between employers and individuals. If the former conditions exist employers are price (i.e. wage) takers in the labour market – which increases the risk to jobs from a high statutory minimum wage – if the latter, employers are price makers, in which case there is less risk to jobs.

It’s not clear whether the Chancellor’s decision to introduce the National Living Wage is based on some such assessment of the workings of the labour market but he does say he has been influenced by the findings of an independent commission set up in 2013 by the Resolution Foundation think tank to look into the future of the national minimum wage and the role of the Low Pay Commission (LPC) under the chairmanship of Sir George Bain, who was first Chair of the LPC when it was formed in the late 1990s. The commission published its detailed recommendations in March 2014 (and here, as a member of the commission, I should declare an interest).

After an extensive review of available evidence the Resolution Foundation commission concluded that there was a strong case for government to ask the LPC to be more ambitious in its approach to raising the minimum wage and it now appears that the Chancellor agrees. This doesn’t of course mean that one can take a gung-ho approach to the minimum wage, nor indeed that politicians should from now on feel free to raise the minimum without reference to the LPC (a fear expressed by some in the past 24 hours, though I think the Chancellor’s actual intention is in fact to enhance the LPC’s remit). But regardless of this my view is that any risk to jobs from the National Living Wage (NLW) at the level proposed by the Chancellor is minimal, although the policy does raise a variety of attendant considerations.

In keeping with the consensus of econometric analysis, the employment impact of the NLW as measured by jobs is likely to be close to zero. This is mainly because the NLW does not cover young workers (i.e. under 25s), the group most adversely affected by high minimum wages.  The initial estimate of the Office for Budget Responsibility (OBR) thus suggests a negative employment impact of around 60,000 – tiny in a UK labour market of 33 million people which is currently creating jobs at a very fast rate - and a 0.1 percentage point increase in the estimated structural unemployment rate. Jobs at greatest risk are those in sectors with the highest incidence of low paid workers – in particular retail, hospitality and care – while over 25s may lose out relative to younger workers (a potentially beneficial job displacement effect given the high rate of youth unemployment).  

It is possible, indeed likely, that employers will adjust to the NLW by cutting hours of work instead of, or in addition to, cutting jobs, which for those affected will to some extent offset the effect of a higher hourly wage on people’s weekly or annual earnings. The other adjustment alternative, raising labour productivity at given hours so that the NLW ‘pays for itself’ sounds good in theory but rarely shows up in econometric evidence.  

This effect of minimum wages on hours is very difficult to assess (the OBR reckons the NLW will reduce hours worked in the economy by 4 million per week) but I think a big potential concern is that the NLW might act as a further incentive to employers to increase their use of zero-hours contracts – which are already very prevalent in sectors where the NLW will bite hardest - in order to minimise the impact on total labour costs. Such a perverse effect would flout the spirit of the new NLW but is an outcome one might expect in a lightly regulated labour market where it remains easy for employers who so wish to hire workers on the cheap whatever the level of the legal minimum wage.   


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.