Sunday, November 07, 2010
Britain can avoid a 'job-loss' recovery
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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An extract from my regular column, available to subscribers on www.the sundaytimes.co.uk.

Recent economic numbers have been good, including that highly encouraging 0.8% third quarter gross domestic product (GDP) figure and last week’s better-than-expected purchasing managers’ surveys for manufacturing and services. This was the time, remember, when some warned that we would already have dropped into the dreaded double-dip.

Numbers are numbers, jobs are real. Most people do not spend time poring over the national accounts data or the surveys. Economic misery, or joy, is mainly defined by the state of the labour market.

What counts, therefore, is whether growth is converted into employment. Friday’s American job numbers have not altered a picture in which unemployment hangs like a cloud over America, a symptom of a deeper malaise reflected in the mid-term elections.

The performance of the job market helps explain why America appears more obviously and visibly damaged and depressed by the crisis than many other countries, including Britain.

Last year I mentioned the Zarnowitz rule, after the American business cycle export, the late Victor Zarnowitz, which was that deep recessions are almost always followed by steep recoveries. Some countries are obeying the rule, including you could argue Britain in the second and third quarters. America is not.

In fact, while the crisis was triggered by events in America the US economy had a milder recession than most advanced economies, GDP falling by 4.1% from peak to trough. Employment, however, dropped by significantly more, 6.1%.

Britain’s recession was deeper, with a 6.4% drop in GDP but the employment consequences were far less. At its worst, the level of employment dropped by 2.8% from pre-recession levels, since which time there has been a 1% rise. Employment is less than 2% lower than before the crisis.

The story in Germany has been even better. Germany’s unadjusted unemployment total, which five years ago rose above 5m, has just dropped below 3m. Uniquely among big economies, Germany’s unemployment rate has dropped during the crisis and recession, despite a big fall in GDP. Compared with July 2007, there are 2% more people in jobs in Germany.

That experience is not matched across the European Union, or you would have to conclude that Europe’s less flexible job markets produce better outcomes than the sometimes brutal American approach.

Helped by Germany, however, the rise in EU unemployment, a third since the start of the crisis (7.2% to 9.6%), compares favourably with the more than doubling of unemployment in America.

Returning to Britain, when the data revisions come through the recession should look less severe than it currently does. The 6.4% GDP drop in the recent recession compares with 2.5% in the early 1990s and 4.6% in the first Thatcher recession of the early 1980s (her only one if you regard the early 1990s’ recession as John Major’s).

Whatever happens to the GDP data, employment has held up better. In the early 1980s and early 1990s, the shakeout in jobs followed the recent American pattern, with drops of 6.3% and 6.1% respectively. This time, so far, has been different.

It has been different, as an analysis by the Office for National Statistics points out, because part-time employment rose through most of the recession and has risen even more strongly in the recovery. Full-time employment, in contrast, has followed the economy more closely, dropping by 5% from pre-crisis levels.

Some of that reflects employees accepting a switch to part-time hours to preserve jobs, though most of it is due to new part-timers being hired in a different part of the labour market to that where full-time workers were made redundant. So the composition of employment has deteriorated. Even so, it could have been a lot worse.

Will the job market stay different from previous recessions? Has the unemployment problem been merely delayed, rather than avoided? Every day several e-mails land in my inbox from the GMB union, detailing jobs under threat or being cut in the public sector, mainly local government.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, set the cat amongst the pigeons and provoked a row with the Institute of Directors by predicting 1.6m job losses by 2015-16.

The combined effects of public spending cuts and higher taxes, notably the January rise in Vat, will lead to 725,000 public sector jobs losses and an eye-catching 900,000 in the private sector.

He would concede that he has been too gloomy about unemployment so far, expecting something closer to normal recessionary labour market behaviour and a rise in unemployment to over 3m. As it is, while the prediction of 1.6m job losses grabbed the headlines, he also expects that the rest of the private sector will generate enough jobs over the course of the parliament to offset these reductions - which I agree with - though it may not do so in 2011 and 2012.

That is the question. Ian Harwood, chief economist at Evolution Securities, thinks the economic growth pattern of this year, when the strength of the upturn has beaten expectations, will be repeated in 2011. Most other economists remain more downbeat, however, and the very latest labour market statistics have had a slightly softer tone.

History tells us that the early phase of a recovery is when employment growth is most fragile. That is because there is slack to use up within organisations following the recession, and because employers are typically cautious about hiring.

So in the early 1980s the trough in employment was a full two years after the economy’s low point. In the early 1990s the lag was shorter, exactly a year. From 1991 to 1998 700,000 public sector jobs were lost but overall employment grew relatively strongly.

We are now four quarters into the economic recovery, so on the early 1990s’ model should be on a sustained upward path for employment. Certainly the summer saw a big rise in private sector jobs, the biggest since records began in 1971. If it is the 1980s all over again, however, 2011 could yet be difficult, the recent employment rise being a false dawn.

We will know quite soon. The job market performed a minor miracle during the recession. It would be another one if we get through the winter without some rise in unemployment. If it is a relatively modest rise, which I would expect, the damage would be limited. Anything much bigger and the government would find itself in a sticky patch.