Employment is rising because labour is cheap

The latest employment figures confirm the buoyancy of the UK labour market.  In the quarter April-June of this year, employment rose by 167,000 on the previous quarter, to an all-time high of 30.60 million.  Unemployment also fell, by no less than 132,000.  Taking a somewhat longer perspective, the low point for employment was reached in the first quarter of 2010.  Since then, the total has expanded by no less than 1.8 million, a 6 per cent rise.  The same is true for total hours worked, which are up by 8.4 per cent over the same period.

Many commentators see this as something of a paradox.  Total output, GDP, has only risen by similar amounts.  The trough for output during the recession occurred in the middle of 2009.  Employment changes tend to lag behind output, as companies take time to adjust to new conditions.  But even juggling around with the dates, it is clear that the overall productivity of the economy, whether in terms of output per employee or output per hour worked, has essentially been flat for four or five years.  This is certainly very unusual.  Productivity tends to rise rather quickly during a recovery, with output changes running ahead of increases in employment.

A simple explanation is that the price of labour has fallen sharply.  Since the start of 2008, just before the start of the recession, average weekly earnings have only increased by 10 per cent.  There is a variety of ways to measure inflation, but broadly speaking prices have risen by 20 per cent over the same period.  So in real terms, the cost of employing someone has fallen by around 10 per cent.  The ultimate expression of this is of course the notorious zero hours contracts, with an estimated 622,000 people, or 2 per cent of total employment, being on them.

The political economy of the earnings figures is intriguing.  In January 2008, average weekly earnings were £434.  But the earnings of both the public and private sectors were very similar, with the private sector being just £6 a week ahead.  By the time of the General Election in May 2010, this had altered dramatically.  Gordon Brown essentially tried to gerrymander the election by stuffing money into the pockets of the group most likely to vote for him, workers in the public sector.  Their average weekly pay rose to £466, compared to only £449 in the private sector.  The coalition has been trying to close the gap, and to some extent has succeeded.  But on the May 2014 estimates, average public sector pay is still £11 a week more than in the private sector.

Developments in the labour market present Ed Miliband and Ed Balls with a challenge.  Balls in particular committed himself firmly to the view that there could be no recovery under austerity policies.  But despite the weakness in average earnings, it is almost always true that people are better off in employment than on benefits.  The real paradox is that Britain’s cut-price labour market is actually reducing inequality.

As published in City AM on Tuesday 19th August

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e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.


Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.