Sunday, November 20, 2011
Job carnage as firms give up on recovery
Posted by David Smith at 09:00 AM
Category: Thoughts and responses

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It was not the rise in youth unemployment to more than 1m last week which shocked me. It has been predicted so long its arrival had lost the capacity to surprise. I shall return to that in a moment.

No, it was another number from the Office for National Statistics (ONS). In the July-September period, the number of employees in Britain fell by 305,000.
That is a big number. So big, in fact, that it was, as the ONS said, “the largest quarterly fall in the number of employees since comparable records began in 1992”.

In the latest three months. in other words, there was a bigger fall in employees than during the 2008-9 recession (the worst in the post-war era) or for that matter any other three-month period in the past two decades; when the curren labour market series began.

The fall in employment - 197,000 - was somewhat smaller but mainly because the ranks of the self-employed apparently swelled by 100,000 over the summer and early autumn.

I think we are entitled to be a little bit suspicious of this 100,000. If self-employment soars at a time when firms are cutting back sharply on jobs, it probably does not tell us there has been a sudden outbreak of entrepreneurialism.

Instead, it is likely to be involuntary self-employment: people doing consultancy or freelance work, working for themselves, having lost or being unable to find a job.

The big picture is of a labour market, having behaved itself well in recent years, taking a dive. Unemployment, apparently stuck at 2.5m, is now 2.62m and rising.

Britain’s unemployment rate, having been a couple of percentage points - at least - below eurozone and American levels, is now 8.3%. It is rising at a time when US unemployment may be about to embark on a sustained fall.

So what explains this sudden deterioration? A very silly political debate has been running about whether to blame Britain’s disappointing growth performance on the eurozone crisis or on other factors.

The fact is that the weak recovery, and by extension a weak job market, has many authors. It reflects the banking hangover and weak bank lending (particularly as the Engineering Employers Federation points out, to small manufacturing firms). It reflects high inflation and the intense squeeze, which persists, on real incomes.

It undoubtedly reflects the government’s fiscal tightening, as it would have reflected Alistair Darling’s tightening (deep spending cuts and National Insurance and income tax hikes) had Labour retained power last year.

It is inconceivable, however, that it does not also reflect a eurozone crisis that has been running since May last year and intensified in the spring of this year. That was when Portugal had to be rescued and serious talk emerged of a Greek default and possible exit. It was also when Britain’s exports to the rest of the European Union, in volume terms, began to fall.

The eurozone crisis reached panic proportions in the summer. It provides at least a partial explanation, along with the August riots, of why employment took such a dive. Given the huge monthly and daily turnover in the job market, firms have only to stop recruiting for there to be a drop in the number of employees.

For a full explanation of what has been happening, however, it is necessary to look at the mentality of employers. The surprise, over the past year or so, has been strongly rising private sector employment, alongside a drop in the number of public sector jobs.

In the year to June, for example, public sector jobs fell by 240,000, while private sector employment rose by 264,000. We do not yet have a public-private breakdown for the third quarter, but the scale of the fall suggests both public and private employers cut back agressively.

Public sector job cuts are easy to explain, though they appear to be occurring at a far faster rate and in much greater numbers than the independent Office for Budget Responsibility expected.

As for the private sector, the fact that employment fell by less than expected in the recession (and in previous recessions) and has risen quite strongly - until now - in the recovery, is part of the same general story. Firms have been betting on recovery.

They did not want to get rid of workers only to have to hire them again when things picked up. They were keen to recruit, so as to be well placed as the recovery built up momentum.

So what we have seen in recent months, I fear, is capitulation on both fronts. Businesses that hoarded labour have come to regret it and are now throwing in the towel. Those that recruited are no longer doing so and in some cases are laying people off. Confidence in the recovery has evaporated, and with it the hopes for many in the job market. The crisis in the eurozone has contributed to that.

Can it be turned round? Every business I meet talks of not knowing what will come next. Until firms feel more secure, more bad news on jobs is inevitable. They need to feel more secure about recovery.

Which brings me to youth unemployment and the breaching of the 1m barrier. It is interesting to me that a rise from 269,000 to 286,000 in the number of full-time students seeking work was enough to push the total above 1m.

It is also interesting - and worth bearing in mind next time you are resisting the urge to attack the television when you see Ed Balls or Ed Miliband talking about their plan for jobs and growth - that youth unemployment rose by nearly 200,000 between 2001 and 2007 when the economy was growing well.

Young people are suffering from a cyclical but also a structural problem. They have been losing out in compeition with migrant workers but they have also been hurt by the minimum wage, high employment and training costs and mismatches betwen their skills and what organisations are looking for This is not, in other words, a short-term problem.

Employers need more of an incentive to take them on. It remains to be seen whether the November 29 autumn statement tries to offer one.