The UK labour market: still stuck in the mud?

Newsletter articles

1 Sep 2011

Employment Studies Issue 14

Nigel Meager, Director

Recent monthly releases of official UK employment figures have shown modest growth in employment, and small falls in unemployment (at least as measured by the Labour Force Survey (LFS); the claimant count measure of people claiming Jobseekers’ Allowance has, in contrast, started to increase again). The figures have generated a rather confused debate in media and policy circles about the extent and nature of the labour market recovery as we emerge from recession. In particular, some commentators have struggled to reconcile the apparently improving employment data with the continued weak figures for GDP growth. The press has been full of stories of the ‘remarkable’ recovery in employment, and comment about how private sector jobs growth is more than compensating for the ongoing loss of employment in the public sector.

Before turning to look at this interesting tension between the economic growth data and the employment figures, it is worth briefly putting one myth to rest: there is, to date (as at July 2011), absolutely no evidence of a sustained recovery in the labour market. To see this we need only look at Figure 1 which shows the ‘Beveridge curve’, plotting total vacancies against total (LFS) unemployment since 2008. Throughout the first year of the recession the economy tracked down the curve, with vacancies steadily falling from 700,000 to just over 400,000, while unemployment grew from 1.6m to nearly 2.5m. Since mid-2009, there has been no real change, and the Beveridge curve has barely moved, with unemployment stuck at 2.4-2.5m and vacancies fluctuating in the 450-500,000 range. This still looks like a labour market experiencing chronic demand-deficiency.

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Until we see the figures moving back up the Beveridge curve in a sustainable way, it is far too early to talk of labour market recovery, not least because the bulk of public sector job loss due to public spending cuts is still to come later in the financial year.

So what about the unusual relationship between labour market and economic trends? Well, part of the confusion stems from the understandable obsession with headcount employment figures. We get a rather different picture if we look at trends not in headcount but in total hours worked, a much better underlying indicator of labour input in the economy. When the economy goes into recession, total hours of work fall, but this reduced labour input is itself the result of two other changes: fewer workers employed (headcount), and a fall in the average number of hours worked per worker.

A key difference between the recent recession and the two previous recessions in the early 1980s and ‘90s is that the overall fall in labour input was smaller in the most recent recession; around 4 per cent compared with 8-10 per cent previously. And this was despite a larger fall in output this time round. Another important difference, however, is that whereas in the two earlier recessions most of the fall in labour input was due to falling headcount, in the most recent recession much more of the fall in labour input (two thirds or more) was due to a reduction in the average number of hours worked. Put simply, in the recent recession, employers tended to protect headcount and retain staff through measures such as the use of short-time working, and a shift towards a greater use of full-time rather than part-time staff.

Figure 2 shows, therefore, that total hours worked in the economy fell rather more than total employment both during and immediately after the latest recession. But we should also note the surprising and sharp fall in hours worked in 2011; the gap between the trend in employment and the trend in total hours worked appears to be widening again, indeed total hours are now almost back down at their 2009 level.

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Focusing on hours worked rather than headcount helps us resolve the apparent contradiction between the GDP and employment data. There is no real contradiction; both GDP growth and labour demand data suggest a rather weak performance. This picture is strengthened by the aggregate level of vacancies, which remains low and has also recently fallen back to levels close to those seen at the trough of the recession. The champagne should therefore remain on ice: rather than a labour market recovery, it seems possible that we are already facing another slackening of labour demand, to be further reinforced as the full effects of public sector cuts bite.