Employment figures strong, but underlying paradoxes still remain
16 Jul 2014
Nigel Meager, Director of the Institute for Employment Studies, comments on today's ONS Labour Market Statistics:
‘Today's ONS statistics are, once again, extremely positive, but also pose some serious questions about the state of the UK labour market. The overall employment rate is back to its peak level of 73.1 per cent (a level reached only twice before in 1974 and 2004). Unemployment is down to 6.5 per cent and the numbers unemployed are falling fast towards the 2 million level.
‘So far, so good. On the other side of the coin, however, the "productivity paradox" continues to perplex economists. The total number of hours worked in the economy has again grown faster than GDP, so labour productivity falls as the economy recovers (normally it would be increasing fast at this stage of an economic recovery). How much of this is due to under-employment in parts of the economy (including those areas where self-employment has surged), how much reflects the UK's persistently low levels of investment in both capital and skills, and how much is due to a concentration of the recovery in low productivity sectors, remains unclear. Most likely it's a mix of all of these and other factors, but as long as productivity stagnates, it's no surprise that real wages continue to fall. Today's figures yet again show very weak earnings growth (well below inflation on all the main measures).
‘The latest figures also throw up a conundrum about the relationship between unemployment and vacancies. As the economy recovers we've seen the usual pattern of unfilled vacancies growing, and unemployment falling. What's more unusual is that since the upturn started, a given level of unfilled vacancies has been associated with much higher unemployment than before. Today's figures show 650,000 unfilled vacancies, up from a low of 400,000 in the downturn. The last time vacancies were at 650,000(early 2008), unemployment was 1.6 million, more than half a million less than now. What economists call the "Beveridge curve", the relationship between unemployment and vacancies, has shifted in a way which suggests that the UK's lauded flexible labour market is not efficiently matching the unemployed to newly available jobs. This chimes with employers increasingly reporting recruitment difficulties and skills shortages. However the underlying cause remains unclear: are the unemployed in the wrong places with the wrong skills for the new jobs? Are too many of them long-term unemployed who are simply unattractive to companies now hiring? Are government employment programmes failing to prepare or train the unemployed for the new jobs? Again the answer is probably a mix of all these, but if the pattern persists it poses important questions about the appropriate policy response. And, not least, it raises yet another puzzle about how emerging skills shortages sit alongside falling real wages - if labour market mismatches are indeed emerging in the recovery, why are we not seeing more upward pressure on wages, as employers struggle to fill their unfilled vacancies?’
The Institute for Employment Studies is the UK’s leading independent, not-for-profit centre for research and evidence-based consultancy on employment, the labour market, and HR policy and practice.
About Nigel Meager
Nigel is a labour economist by training, and a well-established international expert on labour market and employment policy issues. He has worked at IES since 1984, following posts at the Universities of Bath and Glasgow. He has been Director of the Institute since 2004. He has a long and varied research track record covering the functioning of national, regional and local labour markets, unemployment, skill shortages, labour market flexibility, changing patterns of work and equal opportunity policies and practices.
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