Sunday, December 17, 2017
Fall in jobs casts a new cloud over consumer spending
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.

One fall in the number of people in work looks like a blip, two in succession and you might start to detect a trend. The fall in employment announced by the Office for National Statistics (ONS), 56,000 in the August-October period compared with the previous three months, is in the context of more than 32m people in work a drop in the ocean.

But it is worth watching, and it may signal the start of a significantly weaker trend after what has been an employment recovery in Britain since the financial crisis of 2007-9 verging on the miraculous. Even after this fall, it should be remembered that the number of people in work is 3m higher than it was in mid-2009, the crisis low point. In the context of that miracle, a fall in employment is unusual.

Part of that miracle is that private sector job creation has comfortably outstripped the loss of public sector jobs. The ratio of private sector jobs created to public sector jobs lost as a result of spending restraint has been roughly seven to one.

That has changed in recent months. ONS figures show that there was a rise of 19,000 in public sector employment between June and September, alongside a fall of 75,000 in private sector jobs. Public sector jobs are on the rise again, if modestly, while the private sector jobs’ machine has sputtered.

Why should that private sector miracle not continue? Growth and employment are intimately related. The puzzle has been that Britain’s growth slowdown was not reflected in the jobs’ figures. Now, with a lag that explains the puzzle, that slowdown effect is starting to come through. Slower growth in the economy means a fall in employment, or at least a levelling off, is to be expected.

Related to this, though it is not always foolproof, when any economic variable is at record levels, it is sensible not to expect it to keep breaking records indefinitely. We can debate the quality of employment in Britain but the numbers have been clear.

Whichever way you look at it, whether broken down by UK-born, UK nationals or the workforce as a whole, Britain’s employment rate has broken new ground. The 16-64 employment rate peaked at a record 75.3% in the spring and early summer, before slipping back to its current 75.1%.

You may ask why it is not possible to get the employment rate above 75% or so. There are 8.9m people of working age, defined as 16-64, who are officially recorded as economically inactive, and that number rose by 115,000 in the latest three months.

There are a number of reasons for inactivity: 2.4m of the economically inactive are students, 2.1m looking after family or home, 2.2m either temporarily or long-term sick and 1.2m retired. Of the 8.9m economically activity, most say they do not want a job, though 2m say they do. Matching that to the jobs available is the challenge, ands always has been. The number of economically inactive people who say they want a job has ranged between 2m and 2.5m for the past 25 years.

There is another component to the employment picture. Every survey suggests that many firms are experiencing recruitment difficulties. There are, in many cases, not the people to fill the jobs available. Though recruitment advertising is cheaper these days because of the rise of the internet, which may distort the figures higher, there are nearly 800,000 unfilled vacancies in the economy, spread across organisations of all sizes,

The supply of labour, meanwhile, is more constrained. Employment among non-UK nationals, up 88,000 over the past year, has slowed to a third of its rate in the previous 12 months. One of the reasons why employment growth is fading is demand, but another is the supply of suitable workers. For employment to continue to grow, you need the people, to do the jobs.

There is, it should be said, a more positive spin that can be put on all this, which is that, as the penny drops on slower growth, we are finally seeing the beginnings of the long-delayed rise in productivity. The latest three months saw, not just a drop in employment but a rather larger drop in hours worked, both because of fewer people in work and a decline in the average work-week, itself evidence of slower growth. So even a modest rise in output translates into a decent increase in productivity; output per hour. As it was, the ONS’s “flash” estimate of productivity showed a strong rise of 0.9% in the third quarter.

If that upturn in productivity can be sustained it is good news, which will eventually translate into rising real wages, and will help the public finances. The latest official figures showed a small strengthening of pay growth but a continued fall in real, after-inflation, wages.

The question for now is whether the pattern is changing. For several years we have seen strong employment growth against weak productivity. If that is now changing it has immediate implications for any consumer-facing businesses. While retail sales rose last month on the back of “Black Friday” deals, the trend towards slower growth in spending is unmistakeable, and stores are likely to discover that what kept the tills ringing in November will have stolen some business from this month and January. Meanwhile, underlying annual growth in retail sales volumes has slwo3ed from 6% a year ago to 1% now.

Strong employment growth kept the consumer pot bubbling during the earlier period of falling real wages. This time the prospect is for weak or falling employment, alongside falling real wages, at least until that improved productivity kicks in.

So times will be tougher for consumer businesses. More people in work has kept them going. Looking ahead for coming months, it is less likely that there will be many more people in work