Can Britain’s jobs miracle last? One of the most remarkable features of Britain’s four-year-old downturn is the continued resilience of the labour market.
This was perhaps not so surprising in the early part of the Great Recession, when the correction was being countered by massive fiscal and monetary stimulus.
The size of the contraction set new records for the post-war period but, after the initial, Lehman-induced shock, it really didn’t feel much like a recession. Thanks to ultra-low interest rates, many households felt considerably better off, and the mass redundancies associated with previous recessions simply didn’t happen.
The past two years have been a lot tougher. Wages have struggled to keep pace with inflation and public sector job losses have been much bigger than the Office for Budget Responsibility expected when it published its initial forecasts for the UK economy back in June 2010.
Yet, to the complete bafflement of forecasters and policymakers, the jobs market has remained relatively robust, with the private sector creating far more jobs than the public sector is shedding.
Despite the worst downturn in living memory, employment is at a record high, while unemployment is “just” 8.1pc, far lower than you would expect at this stage in the cycle. Nor is this simply down to people giving up on the jobs market unemployment is defined in terms of those actually looking for work, rather than those simply not working. In fact, employment participation remains close to record levels, too, and is among the best in the G7.
Dig a little deeper, however, and you find that it’s not all as good as it seems. Long-term unemployment those out of work for a year or more is at its highest level since the mid-1990s. And, if the economy is smaller but employment is bigger, that means labour productivity must have suffered. This is plainly bad for competitiveness. Even taking account of the fact that real wages have been falling, relative to the US the UK has been losing competitiveness. This makes the challenge of rebalancing the UK economy away from consumption and debt towards investment, exports and saving tougher still.
What’s more, much of the jobs growth is part-time or self-employment. There may also have been a substantial temporary boost from the Olympics. This is not what most people would consider “real jobs”. Does it count as employment, for instance, if a redundant banker sets himself up as a “consultant” but in truth spends much of his time on the golf course or attempting to reconnect with his wife and children?
Looking at the breakdown of the newly self-employed, you find that an awful lot of it is in construction-related activities. Britain is spawning a whole new generation of white van man plumbers, electricians and odd job men.
Some work is always bound to be better than no work, and it is surely some kind tribute to Britain’s abiding, entrepreneurial spirit that so many people have determined not to let the recession defeat them. In this regard, they are greatly helped by the internet, which has made it much easier to match producers with consumers than it has been in the past. This is the first internet recession and already it’s defying previous norms.
Other possible explanations for the relatively buoyant labour market include that there may not actually have been a double-dip recession at all. When it comes to the first estimates of GDP, the UK’s Office for National Statistics has become something of a random number generator.
Few people really believe the numbers any longer, despite their undoubted impact on the political debate. So much so, that one senior policymaker I met recently said he thought it quite possible that output was already back at pre-crisis levels. The official figures put it at more than 3pc smaller. Also, when you look at where output has undoubtedly suffered very substantially, it’s in North Sea oil production, whose shortfall has nothing to do with the recession, and financial services, which is plainly now set on seminal long-term, decline, witness the never-ending cull at UBS (NYSEArca: DJCI - news) . Strip these sectors out and perhaps the apparent fall in productivity isn’t so bad.
Nor is “austerity” proving quite the menace for growth and jobs many had anticipated. Indeed, it is questionable whether there has actually been any fiscal austerity of significance at all. Government spending was again a big positive contributor to GDP growth last quarter, as indeed it has been throughout this apparent “double-dip recession”.
Government spending is continuing to rise in cash terms, while the real terms cuts have so far been insignificant.
At a Fathom Consulting Monetary Policy Forum last week, Professor Charles Goodhart, a former member of the Monetary Policy Committee, caused some amusement by saying he wanted formally to thank Paul Krugman, The New York Times columnist, and Jonathan Portes, director of the National Institute of Economic and Social Research, for being so vociferous on how austerity was killing growth. This had had the effect, Prof Goodhart ventured, of making the austerity seem to markets much worse than it really was. It had convinced bond vigilantes that there actually was austerity, when in fact there was very little.
But there may be another, more disturbing reason for the resilience in the employment market that fits into much the same category as the very slow, long drawn-out approach to deficit reduction debt forbearance. On multiple different fronts, there is a sense in which Britain has yet to feel the full force of the economic adjustment. Lack of capital has made banks very reluctant to address their bad debt problem. Instead, fundamentally insolvent businesses and households are kept alive by a combination of very low interest rates, which makes it just about possible for them to service their debts, and debt forbearance by bankers. This in turn has prevented the sort of steep climb in unemployment which you would normally expect in a recession.
Insistence by regulators that banks hold more capital, so that they can again access market funding on reasonable terms, has paradoxically made the situation worse. In circumstances where new capital is pretty much impossible to obtain, bankers have been reluctant to destroy what capital they do have by recognising bad debt. Many banks are also still over-insuring on liquidity, in part because they fear that the Bank of England will not make alternative liquidity available to them. The combined effect has been to dampen lending to new businesses.
Britain’s jobs miracle is, in most respects, an admirable thing but it is based on some quite unsound foundations. Demand in the UK economy is still as flat as a pancake and, to the extent that it’s there at all, it is still highly reliant on Government spending.
Four years after the Great Recession began, evidence of the rebalancing the UK economy needs to return to sustainable growth remains thin on the ground, with equally little sign of the change in policy necessary in the big surplus countries to ease the process.
I don’t want to be unduly negative about Britain’s jobs miracle but it is perhaps unwise to think of it as the foundations for a sustained recovery. We are not there yet.