Quote of the day

“I find economics increasingly satisfactory, and I think I am rather good at it.”– John Maynard Keynes

Wednesday, 11 May 2022

Good look at UK labour market conditions

Jeremy Warner in the Daily Telegraph 


Everyone knows the old saying about lies, damned lies and statistics, but when citing data for political purposes, you might at least expect the said statistics to be quoted accurately, even if they end up misleading everyone. This Boris Johnson has repeatedly failed to do when talking about Britain's apparently booming jobs market.

The claim he makes is that there are more people in work today than before the pandemic.

The first time the Prime Minister made this mistake it might have seemed forgivable, for there are indeed more people in payroll jobs than before the pandemic - and quite a lot more at that.

There are also record job vacancies. That's a reasonable thing to boast about.

Yet it is just plain wrong to say there are more people in work; reduced numbers of self employed and migrant workers from Europe, in combination with lower labour force participation, mean that there are in fact around 600,000 fewer people in work in the UK than before the pandemic.

This has been repeatedly pointed out to the Prime Minister, eventually prompting a full throated rebuke from Sir David Norgrove, the head of the UK Statistics Authority, but it doesn't seem to have made any difference.

According to the Full Fact website, which doggedly crusades against political misinformation, Boris has now made this claim on nine occasions, including after the Statistics Authority reprimand in at least one case. A number of Conservative MPs have similarly repeated the claim.

Now admittedly, this is a somewhat trivial and easy mistake to make; I doubt it was entirely deliberate, even if casual disregard for the facts seems to be one of the Prime Minister's more unfortunate characteristics.

Yet it also highlights an interesting truth about the UK labour market, which is that it is not quite as tight as it seems. What's essentially going on is that repeated falls in the unemployment rate - now at its lowest level since 1974 - are masking a now quite pronounced decline in the size of the labour force.

According to the latest labour market statistics, there are 590,000 fewer people in work than before the pandemic and 490,000 more people economically inactive. The amount of work hasn't changed, but the size of the workforce just got a whole lot smaller.

There are a number of explanations. One is that the pandemic caused more younger people to choose full time education over employment. In combination with Brexit, the pandemic also caused a substantial net outflow of European migrant labour.

But most important of all, there are fewer older people in work and more people out of work due to long-term ill health. When furlough ended, many people in their 50s and 60s simply didn't come back. There is also evidence of substantial numbers of relatively highly paid professionals using the pandemic to reevaluate lifestyles and choosing to quit work altogether.

The bottom line is that labour participation has fallen quite significantly, reversing the pre-pandemic trend.

According to Tony Wilson, director of the Institute for Employment Studies, it means that "there are now 1.17 million fewer people in the labour force than we estimate would have been the case had the pre-pandemic trend [of rising participation] continued".

None of this is to argue that a shrinking workforce is necessarily a bad thing.

The consequent scramble for labour has been driving up wages across the board, and is particularly acute in hospitality, finance, information technology and other professional services.

In some high skilled jobs, it has been possible to name your price. Even on average, growth in regular pay was 4pc higher in the December to February quarter than a year earlier, and 5.4pc including bonuses. That still trails inflation, but is also the highest rate of increase in nominal pay since the financial crisis.

Stagnant pay has been one of the big complaints since then; finally things seem to be moving again.

Those who argued that Brexit would amount to a positive supply side shock as far as wages are concerned - as indeed did the Prime Minister - have been proved partially correct.

In any case, demand for labour is outstripping supply. There's an outright war between rival firms when it comes to talent, and we shouldn't be unhappy about that.

Unfortunately, there are simply not enough workers around with the desired skills, or at least if there are, they tend to be in the wrong places.

The solution to this problem is more training, yet only the better companies tend to provide it to any meaningful degree.

In many firms, rarely does the idea of training stretch much beyond basic induction and health & safety instruction. Government support for training remains almost non-existent. (As a policy initiative, the apprentice levy has been a hopeless and costly failure).

As it is, the Treasury remains resistant to anything meaningful in the way of tax breaks for training, this on the not unreasonable grounds that for the Government they would be merely a revenue loss.

Companies inclined to train staff in new skills will do it anyway, while those that don't train are unlikely to be incentivised into it; rightly or wrongly they believe there is no benefit to them.

Spending on training is a waste of money if once trained, the employee only takes their skills elsewhere.

There is therefore still an unfortunate tendency to recruit where necessary from abroad, rather than reskill the local workforce.

This attitude needs to change. Incentives for training, even if they introduce an element of compulsion, must be a major priority for the Government.

In the meantime, let's just please stop playing silly, political games with the statistics.

Yes, it's good to have a tight labour market, but the productivity gain the economy so desperately needs is not going to happen unless the Government seeks to address the underlying causes of these shortages.

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