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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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