How can you have growing employment and a shrinking economy?

Underemployment: the UK’s response to economic weakness

Despite the UK economy being in recession in the first quarter of 2012, unemployment fell by 45,000 (and youth unemployment was down by 18,000). This is very welcome news. Throughout the last four years of recession, hesitant recovery and return to recession the UK’s labour market has performed remarkably well. The fact that 2.63 million people are unemployed is terrible news, but, if the pattern of previous recessions had held, that number could have been closer to 3.5 million. It’s bad, but it could have been a lot worse.

Companies and workers have found two alternatives to mass redundancies: cuts in real pay and increased part-time working.

Pay has failed to keep pace with prices for much of the last four years and the latest figures show regular earnings (excluding bonuses) increased by just 1.6 per cent over the last year, compared to consumer price inflation of 3.5 per cent.

Meanwhile, the 105,000 increase in employment in the latest quarter was more than fully accounted for by part-time workers, while the number in full-time employment fell by 13,000. Looking at the numbers differently, 90,000 of the 105,000 increase in employment in the last quarter was due to an increase in self-employment.

These are not new trends; they have been evident throughout the recession and recovery. The following table shows the change in employment over the last four years (i.e. comparing the first quarter of 2008, just before the recession, with the first quarter of 2012):

 

Change in employment (000s)

Total employment

-277

 

 

Employees

-544

Self-employed

307

Unpaid and on government programmes

-40

 

 

Employment – full-time

-744

Employment – part-time

467

 

 

Employees – full-time

-792

Employees – part-time

248

 

 

Self-employed – full-time

44

Self-employed – part-time

263

In round numbers, over this period total employment in the UK has fallen by close to 300,000. But the number of full-time employees is down by 800,000, while the number of part-time employees and the number of part-time self-employed people are both up by about 250,000.

We know there are many reluctant part-time workers because the Office for National Statistics asks those who are working part-time if they would prefer to be working full-time and 1,418,000 are currently saying yes – the highest number since comparable records began in 1992 and an increase of 700,000 over the last four years. Unfortunately, the ONS does not ask the self-employed if they would rather be working as an employee – but it is a fair bet that some of the recent increase in self-employment reflects people who would rather not be self-employed but have set up their own businesses because they cannot find a company to employ them.

The headline unemployment figures do not tell the full story of the UK labour market during the recession and recovery. As well as a large increase in unemployment, there has been a large increase in underemployment – people working fewer hours than they would like.

This represents lost potential output to the UK economy, as well as lost income and lower living standards for those who find themselves underemployed, but it is far better for the economy in the long-run for people remain in work than for them to lose their jobs. Once people are out of work, there is a risk they lose touch with the labour market and find it impossible ever to get back into employment (as happened to thousands in the 1980s).

It is not clear, however, why underemployment is replacing unemployment as the response to economic weakness. There is no evidence of a renaissance in industrial relations at the whole economy level, but it seems that in many companies employers and workers are getting together to agree that more part-time working and cuts in real pay are preferable to lay-offs. You could say that some workers have decided that they are better off "all in it together" than seeing some of their number lose their jobs.

There is, however, one sense in which the increase in involuntary working is bad news, and that is for the outlook for employment once the economy does start to grow at a healthy pace. When this happens, before they start to recruit new workers, companies will want to bring back into use the underutilised resources represented by underemployment. Meanwhile, workers who are working part-time involuntarily will want to return to full-time employment before they see new colleagues alongside them. There is a limit to the "all in it together" sentiment, which means it is not likely to extend to those unfortunate enough to be unemployed.

At a macro level, the result is likely to be something of a "jobless" recovery. Stronger output growth, when it eventually arrives, accompanied by modest increases in employment – and stubbornly high unemployment – while part-time working falls and full-time working increases.

A worker is underemployed in the HK stock exchange. Photograph: Getty Images

Tony Dolphin is chief economist at IPPR

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What type of Brexit did we vote for? 150,000 Conservative members will decide

As Michael Gove launches his leadership bid, what Leave looks like will be decided by Conservative activists.

Why did 17 million people vote to the leave the European Union, and what did they want? That’s the question that will shape the direction of British politics and economics for the next half-century, perhaps longer.

Vote Leave triumphed in part because they fought a campaign that combined ruthless precision about what the European Union would do – the illusory £350m a week that could be clawed back with a Brexit vote, the imagined 75 million Turks who would rock up to Britain in the days after a Remain vote – with calculated ambiguity about what exit would look like.

Now that ambiguity will be clarified – by just 150,000 people.

 That’s part of why the initial Brexit losses on the stock market have been clawed back – there is still some expectation that we may end up with a more diluted version of a Leave vote than the version offered by Vote Leave. Within the Treasury, the expectation is that the initial “Brexit shock” has been pushed back until the last quarter of the year, when the election of a new Conservative leader will give markets an idea of what to expect.  

Michael Gove, who kicked off his surprise bid today, is running as the “full-fat” version offered by Vote Leave: exit from not just the European Union but from the single market, a cash bounty for Britain’s public services, more investment in science and education. Make Britain great again!

Although my reading of the Conservative parliamentary party is that Gove’s chances of getting to the top two are receding, with Andrea Leadsom the likely beneficiary. She, too, will offer something close to the unadulterated version of exit that Gove is running on. That is the version that is making officials in Whitehall and the Bank of England most nervous, as they expect it means exit on World Trade Organisation terms, followed by lengthy and severe recession.

Elsewhere, both Stephen Crabb and Theresa May, who supported a Remain vote, have kicked off their campaigns with a promise that “Brexit means Brexit” in the words of May, while Crabb has conceded that, in his view, the Leave vote means that Britain will have to take more control of its borders as part of any exit deal. May has made retaining Britain’s single market access a priority, Crabb has not.

On the Labour side, John McDonnell has set out his red lines in a Brexit negotiation, and again remaining in the single market is a red line, alongside access to the European Investment Bank, and the maintenance of “social Europe”. But he, too, has stated that Brexit means the “end of free movement”.

My reading – and indeed the reading within McDonnell’s circle – is that it is the loyalists who are likely to emerge victorious in Labour’s power struggle, although it could yet be under a different leader. (Serious figures in that camp are thinking about whether Clive Lewis might be the solution to the party’s woes.) Even if they don’t, the rebels’ alternate is likely either to be drawn from the party’s Brownite tendency or to have that faction acting as its guarantors, making an end to free movement a near-certainty on the Labour side.

Why does that matter? Well, the emerging consensus on Whitehall is that, provided you were willing to sacrifice the bulk of Britain’s financial services to Frankfurt and Paris, there is a deal to be struck in which Britain remains subject to only three of the four freedoms – free movement of goods, services, capital and people – but retains access to the single market. 

That means that what Brexit actually looks like remains a matter of conjecture, a subject of considerable consternation for British officials. For staff at the Bank of England,  who have to make a judgement call in their August inflation report as to what the impact of an out vote will be. The Office of Budget Responsibility expects that it will be heavily led by the Bank. Britain's short-term economic future will be driven not by elected politicians but by polls of the Conservative membership. A tense few months await. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.