Sunday, July 30, 2006
Poles apart - explaining Britain's job market conundrum
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

This is a good time to be settling down with a relaxing drink and a whodunnit, so let me try to solve a nagging set of puzzles, all to do with Britain’s job market.

Why is unemployment rising, with the claimant count set to go above 1m soon, when employment is also growing? What, related to this, has been the effect of large-scale immigration over the past couple of years from eastern Europe?

How much of Britain’s generally successful labour market performance of recent years has been due to Gordon Brown’s public spending splurge? And, finally, who have been the job market winners and losers?

Employment and unemployment are usually opposite sides of the same coin. When one rises the other falls, and vice versa. Between 1990 and 1993, when unemployment almost doubled from 1.6m to nearly 3m, employment fell from 26.1m to 24.5m.

In the past year, however, the broadest measure of unemployment, based on the Labour Force Survey, has risen by 224,000 to 1.65m; its highest for six years. But at the same time employment has risen, to 28.9m, representing an increase over 12 months of 223,000.

The simple answer for why this is happening is that the workforce is growing. The economy generated 223,000 jobs but it needed double that number, 447,000, to keep unemployment from rising.

Earlier this year the Department of Work and Pensions released a detailed working paper, “The impact of free movement of workers from Central and Eastern Europe on the UK labour market” which concluded that the rise in unemployment on the traditional claimant measure (up 93,000 to 957,000 in the past year) could not be attributed to immigration from Poland and other new eastern European members of the EU.

Their methodology was sound, and hard to challenge. Sometimes, however, if a thing looks like a duck and quacks, it probably is a duck. Migration has been a prime factor in workforce growth - nearly 400,000 people from the new EU countries have applied for work permits and that probably understates the number of arrivals. Last year alone, 662,000 National Insurance numbers were issued to foreign nationals.

We cannot know what would have happened in the absence of these people; the Bank of England might have been forced by wage pressures to put on the brakes on with higher interest rates. There are also other reasons why the workforce is growing, including rising female participation and measures to bring the long-term sick into jobs. More people - 80,000 in the past year - are staying on beyond normal retirement age, possibly depriving working-age unemployed of jobs.

But migration is the biggest single explanation of workforce growth. David Frost, director-general of the British Chambers of Commerce, wrote last week that “UK companies are increasing their use of legal migrant labour at an enormous rate”. He, like others in business, is worried a proposed Home Office clampdown on the use of illegal immigrants could backfire, and even deter employers from using legal migrant workers.

The problem, as he described it, was that too many young British people are entering the job market without qualifications or aptitude. Migrants aren’t taking the jobs of existing workers but may be taking the jobs that in the past would have eventually been done by these “no qualifications and no work ethic” young people. In this respect, as Frost put it, we may be storing up problems for the future.

Workforce growth explains simultaneously rising employment and unemployment. Migration is the main explanation for workforce growth. By process of Holmesian deduction, migration answers the puzzle of simultaneously rising employment and unemployment.

Let me turn now to those public sector jobs. We know the public finances are in a mess, and Gordon Brown has promised that the next comprehensive spending review, next summer, will be tough. We know the chancellor has promised, and claims to have delivered, civil service job reductions, though the evidence is thin.

How important has the public sector been in bolstering jobs growth? The urban myth is that the only new jobs in recent years have been in central and local government, plus the various quangos and agencies. A glance at the job ads in The Guardian, some say, tells you everything you need to know about Britain’s labour market.

Before I give you the figures, let me enter one small caveat. There are many who work in the private sector but whose livelihood, as consultants and contractors, relies on the public purse, so it is possible the numbers undestate the effect.

What the numbers do show is that public sector employment has indeed risen strongly in recent years, from a low of 5.16m in 1998 to a recent peak of 5.86m, an increase of 700,000. This has been a period, however, in which the private sector has also been generating jobs; up from 21.6m eight years ago to just over 23m now.

There have been twice the number of private sector jobs created, in other words, as in the public sector. The state’s employment share has increased, but relatively modestly, from 19.3% to 20.4%.

The public sector’s role has not, however, been insignificant, and has been huge in some regions, as a new report from the think tank Reform points out. Economists will debate the extent to which the state’s expansion has “crowded out” private sector employment.

But a simple reading suggests unemployment would be some three-quarters of a million higher if not for the public sector expansion. That expansion is slowing, to just 24,000 over the past 12 months. The boom is ending and that will have job market consequences.

Finally, who have been the job market winners and losers? Manufacturing employees have been losers, the number of people employed in the sector now at a record low of just over 3m. Business services - accountancy, advertising, consultancy, etc, - is the big growth area, with more than 2m new jobs in 15 years, as a recent report from the Centre for Economics and Business Research highlighted.

The job market losers by age are the under-34s of both sexes. The winners are the over-65s (men) and over-60s (women). I’m all for a bit of age equality, but surely that can’t be healthy?

PS It’s going to be a cliffhanger. For the first time in many months, this week’s decision by the Bank of England’s monetary policy committee (MPC) looks too close to call. I made the case for holding rates last week and that, just, is where the balance of opinion among economists lies, but a hike would surprise nobody.

The “shadow” monetary policy committee (SMPC), whose deliberations are available on the Institute of Economic Affairs (www.iea.org.uk) and Lombard Street Research (www.lombardstreetresearch.com) websites, votes 5-4 for a quarter-point rate hike.

The SMPC’s meeting, which I attended as an observer, was a lively one. Tim Congdon voted for a hike because of his concern about the further acceleration of broad money, M4, now growing by nearly 14%. David B Smith, no relation, pointed to the rising trend of international rates. The European Central Bank is expected to hike this week, as is Australia.

They, together with, Philip Booth, Kent Matthews and Anne Sibert voted to hike. Only Matthews, a professor at the Cardiff Business School, and Smith offered the hope that this could be a one-off move, with no need to hike again.

Of the four on “hold”, Patrick Minford, Andrew Lilico, John Greenwood and Peter Warburton, two - Lilico and Greenwood - suggested the stay of execution could be brief. Looks like an interesting Thursday at the Bank.

From The Sunday Times, July 30 2006

Comments

I think that you hugely underestimate the effect of the public sector spending splurge. For example, if you are in pharmaceutical sales (i.e. selling to the NHS) these are boom times. Public sector spending also finds its way into the rest of the economy through public sector wages - hence the retailing boom (which is where many of the new private sector jobs have been).

If you are in a business that has to compete internationally, the last few years have been very difficult (as the trade deficit illustrates).

Posted by: HJHJ at August 9, 2006 10:47 PM
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