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| Why is unemployment not higher? Lousy wages | Why is unemployment not higher? Lousy wages |
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| So much for the "green shoots" of recovery that the Bank of England signalled on Wednesday when the outgoing governor, Sir Mervyn King, predicted modest higher economic growth this year. The UK jobs figures released on the same day by the Office for National Statistics tell a sorry tale. Almost five years since the crisis started, we have 2.52 million people unemployed – that's 7.8% of the labour force – and the numbers for the first quarter of 2013 are up by 15,000 from the last quarter of 2012. | So much for the "green shoots" of recovery that the Bank of England signalled on Wednesday when the outgoing governor, Sir Mervyn King, predicted modest higher economic growth this year. The UK jobs figures released on the same day by the Office for National Statistics tell a sorry tale. Almost five years since the crisis started, we have 2.52 million people unemployed – that's 7.8% of the labour force – and the numbers for the first quarter of 2013 are up by 15,000 from the last quarter of 2012. |
| Slow growth has hit young people hard with now 958,000 of the 16-24 age group unemployed. What's even more worrying is the large number of people who are now long-term unemployed: more than 900,000 have been unemployed for a year or more – 36% of the total jobless. | Slow growth has hit young people hard with now 958,000 of the 16-24 age group unemployed. What's even more worrying is the large number of people who are now long-term unemployed: more than 900,000 have been unemployed for a year or more – 36% of the total jobless. |
| But hasn't the government been boasting about how great our jobs market is? The headline claim that "there are more people in work today than before the economic crisis started" is true but it is also profoundly misleading. Employment has risen a little – from 29.5 million in 2007 to 29.7 million today – but the adult population has also risen. This means that the proportion of people over 16 who are in work, the employment rate, has actually fallen from 73.1% at the end of 2007 to 71.4% in 2013. This is illustrated in chart three of the latest ONS Labour Market Statistics. . | But hasn't the government been boasting about how great our jobs market is? The headline claim that "there are more people in work today than before the economic crisis started" is true but it is also profoundly misleading. Employment has risen a little – from 29.5 million in 2007 to 29.7 million today – but the adult population has also risen. This means that the proportion of people over 16 who are in work, the employment rate, has actually fallen from 73.1% at the end of 2007 to 71.4% in 2013. This is illustrated in chart three of the latest ONS Labour Market Statistics. . |
| What's more, there is evidence of underemployment, as there has been a big rise in the proportion of part-timers, temporary workers and "zero-hours" contracts. Even more striking is the boom in the number of people who would like to work more hours at their current wage rates, but cannot get the extra work. Although the unemployment rate rose from 5.2% at the end of 2007 to 7.8%, estimates of the underemployment rate rose from 6.8% to 10.5%. | What's more, there is evidence of underemployment, as there has been a big rise in the proportion of part-timers, temporary workers and "zero-hours" contracts. Even more striking is the boom in the number of people who would like to work more hours at their current wage rates, but cannot get the extra work. Although the unemployment rate rose from 5.2% at the end of 2007 to 7.8%, estimates of the underemployment rate rose from 6.8% to 10.5%. |
| Despite these caveats, economists expected the labour market to look in much worse shape given how lousy UK growth has been. The main explanation for the puzzle is that real earnings have fallen massively since 2008, as illustrated in chart 9 of the ONS Labour Market Statistics. . | Despite these caveats, economists expected the labour market to look in much worse shape given how lousy UK growth has been. The main explanation for the puzzle is that real earnings have fallen massively since 2008, as illustrated in chart 9 of the ONS Labour Market Statistics. . |
| Regular pay rose by only 0.8% this year – the lowest growth since comparable records began in 2001. Cheaper labour means that employers do not have to lay off so many workers in spite of lower sales. | Regular pay rose by only 0.8% this year – the lowest growth since comparable records began in 2001. Cheaper labour means that employers do not have to lay off so many workers in spite of lower sales. |
| This pattern of falling real wages in a recession is new: real wages did not fall in the early 1980s and early 1990s recessions. It is likely that this increased wage flexibility is due to the decline of union power and welfare-to-work policies over the last three decades. In the early 1980s, jobcentres did not try so hard to find people jobs and claimants were switched onto disability benefits so as to massage down the unemployment numbers. Very few individuals were likely to ever move back into employment once they were on these benefits. | This pattern of falling real wages in a recession is new: real wages did not fall in the early 1980s and early 1990s recessions. It is likely that this increased wage flexibility is due to the decline of union power and welfare-to-work policies over the last three decades. In the early 1980s, jobcentres did not try so hard to find people jobs and claimants were switched onto disability benefits so as to massage down the unemployment numbers. Very few individuals were likely to ever move back into employment once they were on these benefits. |
| Although painful for workers, having low wages is better than having no wages, so this earnings flexibility is useful as it keeps a lid on unemployment. And the scarring effect of recessions comes through long-term unemployment as people lose skills, motivation and job networks. This reduces the potential growth rate of the economy through so-called "hysteresis" effects where severe recessions mean that human capital gets scrapped. | Although painful for workers, having low wages is better than having no wages, so this earnings flexibility is useful as it keeps a lid on unemployment. And the scarring effect of recessions comes through long-term unemployment as people lose skills, motivation and job networks. This reduces the potential growth rate of the economy through so-called "hysteresis" effects where severe recessions mean that human capital gets scrapped. |
| Nor do these low wages seem to have discouraged people from looking for a job, as participation rates have risen, when normally they fall in a recession as people give up looking for jobs altogether (perhaps because of falls in house values or increases in the retirement age). | Nor do these low wages seem to have discouraged people from looking for a job, as participation rates have risen, when normally they fall in a recession as people give up looking for jobs altogether (perhaps because of falls in house values or increases in the retirement age). |
| The fundamental problem facing the UK now is low demand compounded by a dysfunctional financial system. The best way to tackle the demand problem would be for the government to spend at least £20bn on infrastructure over the next two years as analysed in studies by the IFS, NIESR and CEP. | The fundamental problem facing the UK now is low demand compounded by a dysfunctional financial system. The best way to tackle the demand problem would be for the government to spend at least £20bn on infrastructure over the next two years as analysed in studies by the IFS, NIESR and CEP. |
| As the LSE growth commission emphasised, the UK has failed to invest adequately in infrastructure for many decades, and we have pressing needs in transport, housing and energy. Although addressing these problems requires long-term structural reform, we can kickstart things now by reversing some of the 40% cuts in investment, which would create positive multiplier effects in the wider economy. | As the LSE growth commission emphasised, the UK has failed to invest adequately in infrastructure for many decades, and we have pressing needs in transport, housing and energy. Although addressing these problems requires long-term structural reform, we can kickstart things now by reversing some of the 40% cuts in investment, which would create positive multiplier effects in the wider economy. |
| The government itself has identified over £300bn of infrastructure projects needed over the next decade, even though it has no convincing growth plan on how to deliver these and what priorities to take. There are plenty of "shovel-ready" investments to get going with, such as road repair and entry-level housing. The government has no excuses – it's time to get the country moving again. | The government itself has identified over £300bn of infrastructure projects needed over the next decade, even though it has no convincing growth plan on how to deliver these and what priorities to take. There are plenty of "shovel-ready" investments to get going with, such as road repair and entry-level housing. The government has no excuses – it's time to get the country moving again. |
| • This article was originally commissioned by The Conversation UK |