Sunday, August 16, 2015
Productivity lift-off will keep pushing up pay
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

I did wonder if this was the week when, in the light of Corbynmania, and what appears to be the Labour party’s longest suicide vote in history, I should tackle Corbynomics. But, though a victory for Jeremy Corbyn in the Labour leadership contest is confidently predicted, I note that some of those making the predictions also assured us that Ed Miliband would now be prime minister. So I’ll hold off for now.

Fortunately, there’s plenty of other things going on. Greece is not yet out of the woods and China, as I discuss below, has grabbed the markets’ attention. We have also had some interesting job market numbers which, on the face of it, suggest the election came not a moment too soon for the Tories. Before it, employment growth in jobs was powering ahead and unemployment falling.

Since it, the figures show employment falling and, as every new bulletin told us, unemployment rising for two months in a row, something that has been as rare as hen’s teeth in recent years.

Worse, for a government committed to reducing immigration, most of the reporting of the figures suggested that the lion’s share of the new jobs is going to foreigners, particularly foreigners from the rest of the European Union.

A bit of clarification is in order. The labour market numbers can be confusing and as a result are prone to misreporting. The Office for National Statistics (ONS) takes three-month periods as its basis for the employment and unemployment numbers. The latest three-month period is April-June. The three-month period reported in July was March-May. The unemployment number for April-June, 1.852m was slightly lower than the 1.853m for March-May, not higher. Employment, 31.035m, was just over 50,000 up on the 30.982m figure reported for March-May; higher not lower.

So where did the rising unemployment-falling employment story come from? This is because the ONS compares the latest three months with the previous three months, in this case January-March. On that basis, employment was down 63,000 and unemployment up 25,000, but that is different from saying the jobless total rose for a second successive month. Indeed, unemployment on the old claimant count measure – people on jobseeker’s allowance – has fallen every month this year.

As for those jobs going to migrants, having decided to publish the numbers a few years ago, the ONS has been fighting a losing battle since to persuade people not to confuse new jobs with net jobs. It is quite possible, indeed highly likely, that most new jobs are going to natives, because they – UK nationals – account for almost 90% of people in work (for UK-born the figure is 84%).
But it is also true that when it comes to net jobs – jobs added minus jobs lost – most of the gains over the past year have gone to non-UK nationals (61%), or non-UK born (75%), overwhelmingly from the rest of the EU. The distinction is important but does not defuse the tricky politics in this debate.

Having said all that, what is the bigger picture? It is that the job market recovery is maturing, so that in the past year there was an increase of 422,000 in the number of full-time employees, easily outweighing the 63,000 rise in the number of part-timers. Self-employment, which has risen strongly in recent years, has fallen by 95,000 over the latest 12 months. That tells us that there is a shift within the job market back towards conventional full-time employee jobs and away from part-time work and self-employment.

That is important, but arguably more important is that, alongside a recovery in pay, we may finally have arrived at productivity lift-off. It has to be a tentative claim at this stage but the prolonged weakness of productivity, which has puzzled economists for years, may have come to an end.

So in the second quarter, overall employment fell by 0.2% while gross domestic product rose by 0.7%, suggesting a healthy rise of around 0.9% in GDP per worker. Compared with a year earlier, GDP was up by 2.6%, employment by 1.2%.

A similar picture emerges when we look at GDP per hour, another way of measuring productivity. Hours worked fell by 0.2% in the second quarter, when GDP rose 0.7%. Hours worked in the past year were up by 1%.

One swallow does not make a summer but if productivity is indeed reviving, why is it happening? In an important sense, it is happening because it had to. There was a limit to how much unemployment could continue to fall and employment rise without running into serious bottlenecks – in spite of the EU migration safety valve – and skill shortages. The BBC had a nice example last week of a firm which had invested in a machine and doubled a worker’s output. Most productivity-enhancing investment is not so straightforward, but it is happening.

What will rising productivity mean? Two things. The first is that the turbocharged rise in employment we have seen over the past three years will be replaced by a gentler upward trend and that, peering through the latest numbers, may be what we are already starting to see. Unemployment can fall further, though also at a slower pace than we have been used to. Do not forget that when Mark Carney took over as Bank of England governor in the summer of 2013, the Bank did not expect the unemployment rate to fall to 7% until 2016. It is now 5.6%.

The second implication is that the growth in wages will become both more entrenched and, for employers, justifiable. Indeed, many will be looking at ways of pushing through productivity improvements ahead of the introduction of George Osborne’s new national living wage of £7.20 an hour next April.
As it is, the latest figures show total pay rising at an annual rate of 2.4% (2.8% in the private sector) and regular pay by 2.8% (3.3% private sector). Most of Britain is enjoying a meaningful pay rise. Rising productivity should mean that continues.