UK economy: uncharted territory

Bank of England monetary policy committee member, Paul Fisher summed up the state of the UK economy this week: “At the moment, the macroeconomic outlook here is not as bright as in the US, therefore we are some way behind them in terms of return to anything like trend growth.  Output has stayed lower for longer than in any previous recession: in 2013, real national income is still lower than it was in 2007.”

The Institute of Fiscal Studies (IFS) in a special issue of its Fiscal Studies reckons that what is going on in the UK economy is without precedent.  The current UK recession since 2008 is the longest and deepest in over a century.   As the head of the IFS put it: “It is usually dangerous to proclaim “this time is different”. But actually this time really is different. We are in uncharted territory. The long-term consequences of all this are likely to be quite profound. The recovery may look as different from previous recoveries as this period of weak growth and recession does from its predecessors.”

The biggest losers in the last five years since the slump began have been average British households.  Wages have fallen by more in real terms during the current economic downturn than ever previously recorded, according to the IFS.    One-third of workers who stayed in the same post following the recession suffered a cut or freeze in their wages in cash terms up to 2010-11.  Once inflation is taken into account, real-terms pay has fallen by more since the recession began in 2008 than in any comparable five-year period.  Workers have taken the equivalent of a 15% real wage cut over the period 2007 and 2012.

The latest employment figures for the period Jan-April 2013 have been released and they show a marginal improvement over the previous quarter.  The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

I dealt with this apparent conundrum in previous posts (https://thenextrecession.wordpress.com/2013/01/25/britain-deep-down/) and (https://thenextrecession.wordpress.com/2013/01/28/the-rentier-economy/).  In these, I argued that employment has not fallen as much and the unemployment rate did not rise as much as in the US, Spain etc because, while the absolute number of people in full-time employment has fallen by 341,000 and the number of unemployed people is up by 854,000, the number of people in part-time employment increased by 660,000.  In the last year, of those net extra 552,000 jobs, 43.2 % were part-time and much of the rest were in low-paid occupations.   This explains why the UK has avoided a bigger fall in employment.

The IFS study now confirms that analysis. The IFS found that many UK companies, particularly smaller businesses, have cut wages rather than lay off staff.  Workers have been willing to accept pay reductions because of the fierce competition for those jobs which are available.   Competition for jobs has in part been driven by the fact that lone parents and older workers have not withdrawn from the labour market to the extent they did in previous downturns, possibly because welfare reforms make it more difficult for them to do so, the report found.  Fewer workers are unionised than in the past and those who are not protected by collective wage agreements are more likely to have seen their pay cut or frozen.  Smaller firms, which have tended to respond to the tighter economic conditions by cutting wages, have seen productivity fall by an average 7% while firms with more than 250 employees, which were more likely to lay off staff, have seen no change in productivity.

Even so, UK employment as a percentage of those who could work is still well below the peak level achieved before the slump of 2008.

And the overall unemployment rate is still well above pre-slump levels.

Despite the rise in the last quarter, average earnings growth for UK workers remains at very low levels.

The unprecedented decline in real wages seems to be partly associated with long-term changes in welfare benefits policy.   Lone parents and older workers – in part associated with increasing pension age for women and the fall in the value of pensions and annuities for those approaching retirement – have been forced to look for work.  So the ‘reserve army of labour’ has risen and competition for jobs has been intense.  As a result, employers have been able to cut wages, especially in non-union sectors.  As a result, the majority are taking the pain through lower real incomes rather than job losses, as price inflation outstrips pay rises.

Unemployment rates may be higher in Europe and the US than in the UK, but a broader stretch of British workers are taking a significant and lengthening hit to their living standards than those workers in northern Europe or Americans.

Productivity puzzle a result of greater supply of labour, fall in union activity and lower wages, say IFS

         

June 12, 2013, 11:34am

by Chris Harlow

Leading think tank the Institute of Fiscal Studies has released a report showing that the current recession since 2008 is the longest and deepest in over a century.

The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

Source: IFS, ONS data

This has some real consequences for British workers. The IFS shows how real hourly wages across income levels (deflated using the Retail Prices Index) were four per cent lower in April 2011 than they were in April 2008, compared to five per cent higher in the early 1980s and ten per cent higher in the early 1990s.

The IFS finds that wages are positively correlated with productivity, but can’t explain definitely whether there is any causal relationship between the two.

As welfare cuts hit (particularly the elderly and single parents) and the value of household wealth falls, more are pushed back into work. The increasing labour supply has created a greater competition for jobs, and moved workers’ priorities towards stability over than pay. This has pushed wages down and, between 2010 and 2011, 70 per cent of those staying in the same job faced a reduction in real wages.

The decline in trade union membership, meanwhile, has contributed to a more flexible workforce, meaning employers are more able to reduce wages or make job cuts to save on costs. Greater freedom to hire and fire, combined with low pay, the IFS say, may explain the productivity puzzle.

Policymakers are unlikely to be comforted then by the news yesterday that Britain’s manufacturing output fell by 0.2 per cent in April 2013, following encouraging increases of 1.1 per cent in March and 0.7 per cent in February.

However, the wrong thing to do at this point would be to increase welfare spending and employment regulation to take the least productive back out of the workforce and hamper small businesses’ ability to hire through regulation and a higher minimum wage, as the TUC are currently campaigning for. The recovery may be taking longer this time, but the UK could emerge stronger than ever and it’s important we don’t become impatient.

– See more at: http://www.cityam.com/live-blog#sthash.3LRR6IK1.dpuf

Leading think tank the Institute of Fiscal Studies has released a report showing that the current recession since 2008 is the longest and deepest in over a century.

The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

Source: IFS, ONS data

This has some real consequences for British workers. The IFS shows how real hourly wages across income levels (deflated using the Retail Prices Index) were four per cent lower in April 2011 than they were in April 2008, compared to five per cent higher in the early 1980s and ten per cent higher in the early 1990s.

The IFS finds that wages are positively correlated with productivity, but can’t explain definitely whether there is any causal relationship between the two.

As welfare cuts hit (particularly the elderly and single parents) and the value of household wealth falls, more are pushed back into work. The increasing labour supply has created a greater competition for jobs, and moved workers’ priorities towards stability over than pay. This has pushed wages down and, between 2010 and 2011, 70 per cent of those staying in the same job faced a reduction in real wages.

The decline in trade union membership, meanwhile, has contributed to a more flexible workforce, meaning employers are more able to reduce wages or make job cuts to save on costs. Greater freedom to hire and fire, combined with low pay, the IFS say, may explain the productivity puzzle.

Policymakers are unlikely to be comforted then by the news yesterday that Britain’s manufacturing output fell by 0.2 per cent in April 2013, following encouraging increases of 1.1 per cent in March and 0.7 per cent in February.

However, the wrong thing to do at this point would be to increase welfare spending and employment regulation to take the least productive back out of the workforce and hamper small businesses’ ability to hire through regulation and a higher minimum wage, as the TUC are currently campaigning for. The recovery may be taking longer this time, but the UK could emerge stronger than ever and it’s important we don’t become impatient

– See more at: http://www.cityam.com/live-blog#sthash.3LRR6IK1.dpuf

eading think tank the Institute of Fiscal Studies has released a report showing that the current recession since 2008 is the longest and deepest in over a century.

The UK is experiencing what’s known as a productivity puzzle, whereby a relative recovery in employment and working hours has been accompanied by a fall in output, as measured by GDP.

Source: IFS, ONS data

This has some real consequences for British workers. The IFS shows how real hourly wages across income levels (deflated using the Retail Prices Index) were four per cent lower in April 2011 than they were in April 2008, compared to five per cent higher in the early 1980s and ten per cent higher in the early 1990s.

The IFS finds that wages are positively correlated with productivity, but can’t explain definitely whether there is any causal relationship between the two.

As welfare cuts hit (particularly the elderly and single parents) and the value of household wealth falls, more are pushed back into work. The increasing labour supply has created a greater competition for jobs, and moved workers’ priorities towards stability over than pay. This has pushed wages down and, between 2010 and 2011, 70 per cent of those staying in the same job faced a reduction in real wages.

The decline in trade union membership, meanwhile, has contributed to a more flexible workforce, meaning employers are more able to reduce wages or make job cuts to save on costs. Greater freedom to hire and fire, combined with low pay, the IFS say, may explain the productivity puzzle.

Policymakers are unlikely to be comforted then by the news yesterday that Britain’s manufacturing output fell by 0.2 per cent in April 2013, following encouraging increases of 1.1 per cent in March and 0.7 per cent in February.

However, the wrong thing to do at this point would be to increase welfare spending and employment regulation to take the least productive back out of the workforce and hamper small businesses’ ability to hire through regulation and a higher minimum wage, as the TUC are currently campaigning for. The recovery may be taking longer this time, but the UK could emerge stronger than ever and it’s important we don’t become impatient.

– See more at: http://www.cityam.com/live-blog#sthash.Uwpv0ACG.dpuf