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Jobs miracle or low-pay disaster? Andrew Lilico and David Blanchflower debate

14 December 2015

10:00 AM

14 December 2015

10:00 AM

Dear David,

From Q2 1979 to Q1 1981, quarterly real GDP fell in the UK by 5.5%. Unemployment rose rapidly, from 1.4m in Q2 1979 to 2.4m by the end of the recession, then continued rising through to its peak of 3.3m in 1984 – 12% of the workforce. Unemployment stayed above 3m for 51 straight months. This is the pattern economists expect in a serious recession. Unemployment rises, then stays persistently high, falling back only well into the recovery.

It has also been the experience of much of the developed world since the Great Recession of 2008/09. So, for example, whereas US unemployment was below 5% in 2007, it rose to about 10% in 2010, falling back only gradually over several years thereafter. Similarly, in Spain unemployment rose from 8.4% in 2007 to 27% in 2013.

The UK’s experience with unemployment during the Great Recession has, however, been very different – indeed, almost unique, internationally. Despite our contraction in GDP being worse (at least initially) than that in either the US or Spain, unemployment here rose much less — from around 5% in 2008 to 8% in 2009, where it stayed steady until 2012 before falling back to 5% again now. Whereas in past severe recessions, UK unemployment rose rapidly and stubbornly refused to fall, this time it rose only modestly and then fell back as soon as steady growth returned.

This was not expected by economists — neither by you nor me. Would you not agree that one might reasonably characterise this as a “jobs miracle”?

Regards,

Andrew Lilico

 

Dear Andrew,

You are right that the rise in the unemployment rate in the UK in the Great Recession was less than everyone expected, including me. This time around, unemployment rose to a peak of 8.5% in 2011, which was less than in the United States where it reached 10% in 2009. But real wages in the UK have declined and are still 4% lower than at the start of the recession, whereas in the US they increased.

In the UK, wages, rather than unemployment, took the strain. Underemployment is up: the proportion of workers who say they have a temporary job and want a permanent job is up by 210,000. Fifty-five percent of the jobs created since 2008 are part-time. And 15% of part-time workers now say they are part-time is because they could not find a full-time job, compared with 10% pre-recession.

There has also been a sharp rise in the self-employment rate which is up 700,000, but more self-employment doesn’t seem to be better. A typical self-employed person is paid less than a typical employee. The incomes of the self-employed are down 22% since the start of the recession. The self-employed are especially likely now to say they are underemployed.

Seventy-nine percent of the employment increase is among the non-UK born. The increase in the numbers of workers from the A10 Accession countries alone is nearly twice as large as the increase from those who are UK-born. It looks more like a labour market disaster to me than a miracle.

Regards,

David Blanchflower

 

Dear David,


So far we’ve both quoted lots of statistics, and doubtless we or others might quibble over them. But isn’t the key lesson from your data that the fall in unemployment was the product of labour market flexibility and of job creation? Whereas in previous recessions almost everyone initially employed either remained in full-time work or become unemployed and the real incomes of those remaining in work rose whilst others experienced unemployment, in our modern labour market there is more of a continuum. Some people initially employed accepted wage cuts; others had less overtime; others worked part-time; others became self-employed; yet others took on zero-hours contracts.

At the same time the labour market also absorbed additional workers from abroad, re-absorbed a number of the longer-term unemployed, through measures such as the Work Programme, and even coped with significant public sector job cuts. UK labour market flexibility was much greater than in the past and much greater than in other developed economies affected by the Great Recession. Fears that the Thatcherite labour market reforms had been undermined by New Labour proved unfounded, and those that doubted public spending could be cut without unemployment or doubted the efficacy of the Coalition’s own labour market measures were proved wrong.

You might justly point out that labour market flexibility has downsides as well as upsides, but you surely should not deny that in its own terms of trying to make the UK’s labour market one in which unemployment did not rise rapidly and in which unemployment would fall without inflation, the reforms of the past 30 years have proved stunningly effective.

Regards,

Andrew Lilico

 

Dear Andrew,

I do agree that the UK labour market has been remarkably flexible downwards but as you say that has downsides as well as upsides. Wages have fallen more than ever in recorded history and that is supposed to be a reason to celebrate? Those at the top end, especially in London, have done well but those at the bottom haven’t and we know that relative things matter. The jobs that have been created are not good jobs and they aren’t well paid.

Labour productivity levels remain about 15% below an extrapolation of pre-downturn trends. Output per hour is 20% below the average for the rest of the G7 major advanced countries and a third lower than that of France. Some miracle. The scale of the shock was immense, which meant that the Bank of England had to inject unprecedented levels of monetary stimulus that I voted for, which still remain in place.

This has been the slowest recovery in a century, measured by the time it took to restore output to starting levels. There is even historical evidence to suggest it is the slowest since the South Sea Bubble. It took the UK 66 months to restore lost output compared with under 48 for every recovery in the last 100 years.The shock was insulated by the drop in mortgage interest payments but the impact is going to be devastating when rates rise. The labour market reforms have been stunningly successful in lowering the living standards of the hard-working man on the Bradford omnibus.

Regards,

David Blanchflower

 

Dear David,

Since productivity is simply the ratio of output to employment, saying that productivity growth has been poor recently is just another way of saying that employment has grown more rapidly than expected, relative to output. Poor productivity growth is a form of the jobs miracle, not a refutation of it.

My understanding is that the jobs created since 2010, at least, have been overwhelmingly full-time employed jobs – not self-employment or part-time work. Furthermore, in total post-tax income terms, my understanding is that those employed on low incomes have had amongst the fastest post-tax income rises. Overall income inequality (including benefits, tax etc as well as wages) has been steady in the UK for about two decades, apart from a modest fall recently. It is simply incorrect to characterise the situation in the UK as one in which jobs growth has come at the expense of jobs being of poor quality or failing to be associated with income growth.

A job gives people a stake in society, self-respect, a reason to get up in the morning, and the opportunity to learn and progress on the job. Those in continuous full-time employment have had much more rapid wage rises in recent years than the average worker overall. Across Europe, many societies have been blighted by high unemployment and its social consequences — as indeed the UK was in the 1970s and 80s — not only in economic and personal social terms but also in the poisoning of their political debates and in deep tensions (even violence) between communities. Through some ill-understood combination of wise, long-standing policy decisions, more recent policy decisions that worked out okay and a fair dollop of luck, the UK economy this time has been a jobs engine, keeping unemployment low. I believe we should count our job market blessings.

Regards,

Andrew Lilico

 

Dear Andrew,

Glad to see you concur that the jobs that have been created are disproportionately low paid, temporary, part-time and self-employed. There has also been a rise of nearly half a million in the employment of those over 65 who were unable to retire due to the deterioration in the size of their retirement savings. Since May 2010, around 42% of the jobs that were created were either self-employed or part-time employees. These are not good jobs so creating them clearly does not constitute a miracle.

Of particular concern is that the young have been hit by a double whammy. They can’t find jobs but when they do they are low paid, temporary and have fewer hours than they would like. This hardly looks like a miracle. It is surprising that the young have been so compliant given that their relative position versus the old, as a direct result of government policy to buy votes, has deteriorated sharply. This surely will not continue for ever. Unemployment when you are young creates permanent scars.

Average Weekly Earnings shows that real total pay including bonuses is down 9.5% since its peak in February 2008. It is down 2.5% since May 2010 despite its recent rise, principally due to the UK moving to deflation. There is little or no sign of any wage pickup. Wage settlements have remained unchanged during 2015 at 2%. Those in continuous employment have done well, but we know from behavioural economics that relative things matter.

I do agree with you that unemployment hurts. My own research has examined the impact of a one percentage point rise in unemployment versus a similar increase in inflation on well-being across European countries. I find that unemployment hurts five times more than an equivalent rise in inflation. But poverty in work creates unhappiness too.

There is no sign that the UK has rebalanced away from financial services and construction, and it is even more exposed to a financial market shock today than it was in 2008 when interest rates could be cut by a lot. One of the main reasons the UK has performed better than most other EU countries is that it has its own central bank and currency. So much of the credit for the relatively low levels of unemployment should go to Gordon Brown and Ed Balls who kept the UK out of the Euro. But now we are in deflation with a new round of totally unnecessary austerity about to hit. This baby isn’t over.

Regards,

David Blanchflower

 

 

This exchange first appeared in Bright Blue’s magazine Centre Write.

 


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