Monday 1 June 2015

The UK Employment Miracle

Unemployment in the UK has been steadily falling, with 1.4 million new jobs created since the depths of 2010. This is rightly seen as a success for the government; I would say that nothing eats away at a country's morale like high unemployment.

This fall in unemployment has led Noah Smith, for example, to suggest that there is no shortfall in demand in the UK. Brad DeLong disagrees and I am firmly on Profesor DeLong's side here.

This reduction in unemployment has come with a very puzzling lack of increase in productivity per worker. The graph below shows how productivity per worker, after fifty years of extremely steady increase, is actually lower in 2014 than it was in 2007.

How to interpret this? Did technology suddenly stop improving productivity in 2008? Was there some structural change that meant that growth in the UK suddenly should stop?

As I have been arguing in just about  every other post I have written; what has happened is that the economy since 2008 has been suffering from a lack of demand. This is structural, due to too much of the income from GDP being saved; I believe this is because interest, rental and dividend payments as a proportion of GDP are too high and worker compensation is too low. 

In previous years, private sector debt would increase, increasing spending and filling the demand gap. After 2008 this has not been possible as, even at the zero lower bound, the poor economic prospects and already extremely high levels of private sector debt have reduced the appetite to increase private sector debt. The government has stepped in to a certain extent but the chronic lack of demand is still there and if and when the government reduces spending further this should become apparent. The solution to this is new central bank money given to the government, allowing the government to run bigger deficits without increasing debt.

But how should one interpret the stellar employment figures over the last 5 years? It becomes clearer when the type of employment is factored in. 

The government has reduced unemployment benefit and increased sanctions on people not working. At the same time, it has increased the level below which no income tax is paid, so that minimum wage work is now more rewarded relative to welfare. This combination of carrot and stick appears to have increased the numbers in work. 2% of the workforce is now employed on zero hours contracts; contracts without a set number of hours giving no secure income to the worker. 

The clearest indication of what has happened can be gleaned from looking at the percentage of the workforce working below the living wage (set in 2014 at £7.85 nationally). I have gone back to 2005 using an RPI adjusted 2014 figure. In a growing economy, one would expect more and more workers to rise above this inflation adjusted level. This has not happened.

Between 2005 and 2009, the average percentage of the 21+ year old workforce working below living wage was 13.8%. In 2014, this percentage was 21.7%.

A graph of jobs created is shown below. Up until 2009, consistently more jobs were created above the living wage relative to those below. Under the Conservative government the opposite has happened. This is shown in the graph below

There have been 1.45m new jobs for 21+ year olds between 2010 and 2014. This is obviously a good thing. But there are 2.13m more jobs  below living wage in 2014 for 21+ year olds than there were in 2010.

The total number of jobs below the living wage are shown below:

Employment has increased, but employment above the living wage has actually gone down by around 700,000 people. So in fact, one way of looking at it is that since 2010, 700,000 jobs above the living wage have been lost. 

The employment miracle can be more reasonably described as a good achievement at getting people into the workforce, but not in a particularly economically productive manner. By increasing competition for low paid work it has reduced wages at the bottom end. The whole picture is consistent with a lack of demand in the economy combined with a sense of necessity to take lower paid and insecure work.

And the productivity puzzle, can be explained by the fact that production is roughly equal to demand. Here we have the same amount of demand just divided between more workers. Oversupply of labour has pushed wages down so that more people can be employed, but there is no corresponding increase in demand. If production stays the same but more people are employed then we get lower productivity per hour. 

This is quite simple, and seems to have been ignored by most people looking for a supply side answer to the fall in productivity.

In my view, this solution to the unemployment problem has not been economic progress.


  1. If you create a low level non-productive job, you can top it up with state tax credits. This is an alternative to creating a proper Job Guarantee where the state provides a job and a living wage.

    The difference is that a Job Guarantee takes the labour output away from the private sector into a non-competitive arena - forcing the private sector to bid that labour output back with higher wages or replace the labour with improved productive techniques and equipment.

    If you leave the labour output with the private sector then you get a Gresham effect where productive machinery is out-competed by subsidised labour. Hence the replacement of the car wash machine with the bucket and sponge on old garage forecourts.

    There are two ways to full employment in a productive economy that is simply too productive to rationally provide everyone with a job and an income. One is a Job Guarantee that expands to maintain demand as it forces more robotisation and automation onto the private economy. The other is to reduce the productivity of the economy down until everybody has a job and an income.

    Currently we're doing the latter.

    1. I am not in favour of a job guarantee either. It involves too much micromanaging of the economy.

      I am just in favour of making sure that there is enough money in circulation that productivity is maximised. How it is done can be left to the private sector to organise.

      But I don't agree that our economy is in any way too productive. I don't believe that we have hit any limit other than that caused by a deficit in demand. So what the government has done is make the most of a low demand situation.

      I believe that what it should do is to increase the demand enough so that zero hours contracts are not a necessity and university graduates can find productive jobs.

    2. Well then you condemn millions of people to unemployment and poverty. There is no way that a government can 'demand manage' the economy to full employment other than by guaranteeing jobs at the bottom end that are outside the normal production system. If you do it any other way you hit supply side limits and inflation before you hit full employment.

    3. I think that the first step is to hit the limits of supply. We are nowhere near there now.

      If that doesn't work, then I agree we may need to think again.

  2. It's also important to note that the UK population is 5% larger than it was in Nov 2008 (we've gained 2.6 million people), yet the number of people wanting work is the same now as it was then (4.1 million).

    Percentages hide a multitude of sins.

  3. Perhaps veering off-topic, but I wonder what your (or Neil's) views are on a basic guaranteed income, which seems to be a fashionable idea in some progressive circles these days. And how you think the economics of that compare to a job creation program -- if you had to pick.

    1. Money needs to get to people who will spend it. At the moment too much is being saved and the clear best solution, in my opinion, is to print more to replace the lost demand.

      How to get the money to people who will spend it is a different question. My instinct is to try to interfere as little as possible with the supply side; to allow the market to decide how best to invest and provide for the demands of the market.

      For this reason, I quite like the idea of a central bank cash funded small basic guaranteed income. Somewhere around the £1,500 to £2,000 per year level should be around the right level to replace the lost demand and keep the economy running. At the same time it is low enough to not distort the job market.

  4. i think it is obvious we are becoming a low skilled low wage economy. our entrepreneurs. are responding to a lack of investment by going low tech low skilled. hence as you said car wash with 80K machine is being replaced by I man with a bucket and sponge literally. The reason is that he has to work and the only way he can undercut the machine is to do it for less. Which mean I can get a car washed for less than £5 now. When I was a child washing a car would have netted me a £1 some 40 years ago.

    Unless we start generating better ideas in the UK and indeed taking those idea to fruition then we will be in be forever in the low productivity conundrum.
    Asking a central bank to give people money is an interesting idea but I am not sure that all it does is allow those than can spend it using it for paying of debt. part of our problem is we are actually deeply indebted and hence the lack of spending. In order to change that you need to change the housing market which essentially would mean that the electorate would be turkeys voting for christmas

    1. I do see your point, and I think that this is the way it looks at the moment. When labour is relatively cheap then it is used in this way.

      But I don't see there being anything fundamentally wrong with the UK. I think that there is great entrepreneurial spirit and world class research. I do think that we have had an unfortunate diversion of resources into finance. But mostly, we have suffered, as you say, from the debt levels becoming so high, fueling house price rises, and masking an economy that has not had enough demand.

      If people spent more money then there would be more demand for employment in higher value jobs. And the machines could take over washing cars again.

      Building more houses, as you appear to suggest, would be an excellent idea too.

    2. So how will change from how it looks at the moment?
      You are seeing an increasing number of people on very low incomes. The newly employed low paid are in low/non skilled jobs as that is the jobs we are creating. if we had more demand it would tend to go on imports if we bought consumer durables for example. We don't make the things we need anymore hence the need for a very low waged workforce. We doubly have the most deregulated, non unionised workforce in Europe so there is nothing to counteract capitals strength and mobility. I think the problem is that we are now in a spiral that says even though interest rates are low there is no investment and no appetite for any level of risk. The only way you can make a profit is essentially low tech/low finance, hence a huge profusion of software companies where by whom leverage free software to generate something of added value, surviving on very little. At the same time our bigger hig tech industries are closing. In bristol for example both STM and Nvidia have closed with a loss of 300 engineers. The companies that are surviving are small/very low cap as we seen a massive profusion of gardeners and cleaners dogwalkers, thing we used to leave to our kids as wages have become low and the safety net being reduced.

      No my argument is not political, but I can only see a spiral downwards, For example house building would affect house price inflation and no government will allow that price correction to happen it would be electoral suicide. In the same way half of the welfare budget is due to go up by a minimum of 2.5% you see are creating a disconnect which essential is going to be generational.

      What we are asking people to do is to pivot from speculating in housing to speculating in generation of skilled jobs which create export lead growth. That is a big ask, your figures suggest there are not many takers, Not the government, not the entrepreneurs or high net worth investors nor the man in the street,

      Simply put any increase in my salary goes on my debt ( getting a bigger share of the house I live in) since at the moment is worth more than my pension and most engineers I know made more on their house purchases than their time working at start ups and share cash ins. Simply put we need to find a way of let people get capital/assets beyond houses

      Sorry for the rambling , I am still at work and my code doesn't work at the moment at it's friday afternoon I need a pint ;-)

      I understand where you are coming from I wish you the PM and had the chace to try it since no one else would. I think when the GFC hit if we gave the money to those with mortgages we coyuld have had a correction in the house prices since people would have paid off the debt and then we could have had house price reduction but we bailed out the lenders,

  5. David, I think you are largely right about the direction we are headed in and it will take a lot more vision from our policy makers, both on the supply and the demand side to arrest this situation.

    As you say, house price rises are not enough to keep an economy going, but by cutting public deficits and relying on private debt, we are creating a distorted economy which only runs because people are borrowing more for housing. Until the next crash that is.

    Steve Keen said he was pleased the conservatives won, because now austerity will finally be proved to not work and no-one else can be blamed this time. My real hope is that next time we have a crash, people see it for what it is, rather than blaming Gordon Brown for spending a little bit too much money on the health service and poor people.

    Probably they won't though. The fact that after being proved disastrous so many times throughout history, people still voted for austerity at the last election shows how little we learn.

  6. Hi Ari, I believe we're still asking the public to move from narrow self interest to a broader understanding. We have now a set of narratives such deserving and undeserving poor, which has allowed the ability to nibbled away at the working poor, for example housing benefit, 80% if it goes to working people. Secondly if you take the effects of austerity from studies by the IFS amongst other it has effectively reduced the income of the poorest 10% by some 5%, the next decile by 3% and the only other decile to be negatively effected is the highest 10% of earners which are 3% worse off. We're not all in it together and it shows. we can get a minority to vote for austerity for the poor which is why. The narrative basically says they are spending my money and I have none to give.. The issue is that despite growth people do not feel wealthy except in terms of house price inflation and the ability to borrow. it is not felt in their wages as your figures have shown and so it reinforces the believe of hitting those that are demonised. Indeed most benefit claimants approve of these policies as long as it on others. I agree the economics is sound but the politics is the problem here. Why do we fail it is because our narrative is more complex than theirs. It take engagement and that is something that does not happen.

    Interesting blog at least it got me out of my hole ;-)


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