IES Viewpoint: The UK labour market after recession and austerity: normal business resumed?

Newsletter articles

11 Mar 2015

Employment Studies Issue 21

Nigel Meager, IES Director

Nigel MeagerAs the general election approaches, it’s a good time to ask whether the labour market has emerged in good shape, eight years after the financial crisis and five years after the implementation of macro-economic ‘austerity’. Many themes pertinent to this question have been explored in previous issues of this newsletter. Among them are:

A strong employment performance. Employment held up surprisingly well in the recession and recovered remarkably fast thereafter – it fell by little more than 2 per cent during the recession, was back to pre-recession levels by mid-2012, and the current employment rate (73.2 per cent) is as high as ever. So far, so good.

Job quality, which remains a serious cause for concern. Much jobs growth during this period has been ‘underemployment’. This includes surging self-employment (which hit 4.5 million, over 15 per cent of the employed workforce), which was as likely to be part-time freelancers and ‘odd jobbers’ keeping a toehold in the labour market as dynamic entrepreneurs setting up sustainable businesses. Among employees, part-time work grew strongly, with record numbers doing this not through choice but in the absence of full-time alternatives. Arguably, if this under-employment was a temporary phenomenon keeping people in some form of work during the downturn, it may not have been a disaster. The jury is out, but it’s interesting that the past few months have seen falls in self-employment and involuntary part-time work as full-time jobs and job vacancies grew strongly. It is to be hoped that this is an early sign of ‘normalisation’ in the labour market, and an erosion of under-employment as the economic recovery continues. So far, possibly not too bad.

Concerns about labour productivity. Following a period when UK productivity was catching up with international competitors, the recession saw a major slump in output per hour (partly because employment held up so much better than GDP). What’s more concerning is that the productivity stagnation has continued long after the recession, and GDP per hour remains below its 2008 level. As noted in my Viewpoint article in Employment Studies issue 20, the ‘productivity puzzle’, and whether the slump represents a structural shift to a lower-productivity labour market or a recessionary ‘blip’, remain subjects of debate. What’s clear, however, is that the longer a productivity upturn takes to begin, the greater the gap with other countries, and the bigger the impact on the UK’s longer-term competitiveness. So far, so worrying.

Unemployment which, despite recent falls, remains a concern. It didn’t increase as much as feared in the recession (peaking at 2.7 million, still quite a lot) and it has now fallen back to around 1.8m (still a way to go to reach pre-recession levels). Despite the recovery, concerns remain about those trapped in long-term unemployment, and large numbers of school leavers whose first labour market experience has been an unsuccessful struggle to find work. These groups are likely to remain targets of government policy intervention in the labour market for the foreseeable future. So far, so familiar.

Skills shortage and mismatch in the labour market may be re-emerging. Although unemployment has fallen, it is not down by as much as we’d expect, given the upturn in labour demand. Put another way, job vacancies are currently up to around 700,000, similar to early 2008. However, unemployment remains several hundred thousand higher than in early 2008. There is now an average of ‘only’ 2.6 people chasing each available
job, compared with over five two years ago. In the economist’s jargon, the ‘Beveridge curve’ has shifted outwards, and the labour market is less efficient at matching unemployed workers to employers’ vacancies. There could be several reasons for this, but one possibility is that not enough of the unemployed have the skills and attributes needed by employers, and anecdotal evidence does suggest an upturn in skill shortages. Skills,
and the UK’s tendency to underinvest in them, are also part of the story behind the productivity puzzle, and a long-standing concern of policy-makers. So far, so very familiar.

Falling real wages and squeezed living standards have been a persistent leitmotif throughout the recession and recovery, and those in work experienced the longest fall in real wages in living memory. While the pay squeeze arguably helped retain jobs in the early stages of the downturn, this rationale is hard to sustain as the economy recovers. One concern is that the squeeze is itself deflationary (resulting in lower tax receipts, in turn a factor behind public spending constraints). Equally concerning, however, are its links to productivity: it may both result from low productivity in some parts of the economy (where employers cannot afford higher wages), and contribute to the causes of low productivity in other parts (where low wage employers lack incentives to make productivity-enhancing investments). So far, so depressing.

In conclusion, the new government in May 2015 inherits a labour market which has been resilient during, and is recovering well from, the recent downturn. Beneath the surface, however, it faces range of concerns, some familiar and some (like wages and living standards) more novel. At this stage in the economic cycle it seems that many of the policy concerns are qualitative rather than quantitative. With some targeted exceptions, the challenge is less to do with the number of jobs available in the economy, and more to do with the quality of the jobs and how much they pay, and with the skills and productivity of the people doing them. The exceptions relate to those groups in the labour force for whom the labour market and government policy have persistently failed to find sustainable employment – some groups of young people, the long-term unemployed, and people with health conditions and disabilities. This area of public policy is crying out for innovative approaches, and efforts to generate and innovation (e.g. through involvement of the private sector in public employment services) have not so far been a notable triumph.