Sunday, June 17, 2018
Why jobs are booming when growth stays weak
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.

Today, away from the parliamentary kerfuffle over Brexit, Donald Trump’s dangerous protectionist rhetoric, higher interest rates in America, the prospective end in December of quantitative easing in Europe and other momentous issues, my attempt to answer something that has been puzzling me for a while. Why is Britain’s labour market so strong when growth is quite weak?

The latest official statistics brought news of what appears to be a continuation of Britain’s jobs’ miracle. The number of people in work in the February-April period, 32.39m, was 146,000 up on the previous three months and 440,000 higher than a year earlier.

The employment rate, the proportion of 16-64 year-olds in work, remained at a record high of 75.6%, while unemployment was down 115,000 on the year and, at 4.2%, the unemployment rate is at its joint lowest since 1975.

These are remarkable figures in any context, but particularly so in the light of other economic data. A few days ago the Office for National Statistics (ONS) gave us a Black Monday of official figures, with construction output in the latest three months dropping at its fastest rate for six years, and new orders also slumping; manufacturing output also dropping at its fastest rate since 2012 and the trade deficit widening because of a drop in exports of both goods and services.

All this translated, according to the National Institute of Economic and Social Research, into likely growth of gross domestic product of a mere 0.2% in the March-May period, only a touch above the “barely there” growth of 0.1% in the first quarter. A stronger bounce was expected, including by the Bank of England, from the effects of the “Beast from the East” weather disruption of March. The ONS, it should be said, played down the effects of the weather on the weak first quarter growth.

What the weather takes away, it can also give. The influence of the second-warmest May in 108 years, as well as the royal wedding, can be seen in the May retail sales figures, which showed a jump of 1.3% on the month. That may help the second quarter growth figures but it has not lifted the cloud over retailing, and will not. N.Brown, the Manchester-based company which has been operating since the 1850s, said it has begun a consultation process to close its remaining 20 high street stores. Its brands include High & Mighty, a store I fear I may now never visit.

Retail employment, in fact, is behaving as you would expect. The number of people employed in retailing, wholesaling and related activities has dropped over the past year and, given the recent spate of store closure announcements, is set to drop further.

The big picture, however, remains a puzzling one. Growth in the economy has slowed from around 3% in late 2014 and early 2015 to a fraction over 1% now. The Institute of Chartered Accountants in England and Wales (ICAEW) has just revised down its growth forecast for this year to 1.3%, citing weak business investment.

Growth has slowed to rates that would not normally be associated with any growth in employment and with rising rather than falling unemployment. Part of the explanation for that lies with weak productivity; when output per person is not growing by very much – not at all over the past year – you need more people even to produce a modest increase in GDP.

There are, however, other aspects of the figures which help resolve the puzzle. Public sector employment is not directly related to the state of the economy, though it has been boosted by the Brexit process. After adjusting for reclassifications, the number of people employed in the public sector is up by 42,000 over the past 12 months, following years of decline. Two of the biggest increases in workforce jobs in the past year were in the categories of health and social work and public administration and defence.

I would not overstate this; 42,000 is only a tenth of the rise in employment over the past 12 months, though it is a factor. For most of the time in recent years, rising overall employment has been against a backdrop of falling public sector employment.

A better explanation lies with another labour market measure provided by the ONS, which is for the total number of hours worked in the economy. While employment rose by 146,000 in the latest three months, the total number of hours worked dropped by 4.1m to 1.03bn, an odd combination. And, while employment has grown by hundreds of thousands in the 18 months since late 2016 and early 2017, hours worked have not grown at all. We require more workers, not just to produce a given level of output, but also to put in a certain level of hours.

Regular readers will recall that I have written recently about the potential positive effect of reducing working hours on productivity. Something else, however, appears to have been happening. More than 70% of the jobs created in the latest three months were part-time. The more part-time jobs that are created, the lower the average work-week.

Even for full-timers, however, the work week is falling, from 37.5 hours a year ago to 36.9 now. Why this is not clear. Some of it may be in response to slower growth and weak demand; some because of automation. Zero-hours contracts, by their nature more responsive to demand, are part of the explanation. In addition, older full-time workers may be negotiating shorter working weeks.

Clearly this does not just apply to women but one reason for the record female employment rate, identified by the ONS, is that changes in the state pension age have resulted in more women staying in employment in the 60-65 age group. This is the plight of the so-called WASPI (women against state pension inequality) cohort.

If we measure the strength of the labour market by hours worked rather than numbers of people in work, the scales lift from your eyes. A flat picture for hours worked is consistent with an economy that has slowed significantly over the past 2-3 years.

The idea that the job market is not as strong as appears at first glance may help explain another ongoing puzzle, that of weak growth in wages. Strong employment growth and falling unemployment should be giving us bigger rises in average earnings than the current 2.5% annual rate. Stagnant hours worked, alongside low productivity, suggests that people are not necessarily feeling as secure in their jobs as the headline figures would suggest.

So a couple of puzzles solved. Thankfully that leaves plenty more.