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Professor Geraint Johnes
Professor of Economics at Lancaster University
T 020 7976 3516
Professor Geraint Johnes

May Director's report

Authors: Professor Geraint Johnes

14 May 2014

There has been a lot of good news about the economy recently. Output is growing rapidly and has now (finally) almost climbed back to pre-recession levels. Likewise there is much encouraging news in the labour market, with a rapid fall in unemployment over recent months. Meanwhile vacancies have been rising steadily over the last two years.

In the first quarter of this year, notified vacancies stood at 611000 - over 100000 more than a year earlier. There has been a particularly sharp rise in vacancies in industries employing highly skilled workers - including health, education, business services and (significantly) in science and technology. This increased demand for skills has been reflected also in work by the UK Commission for Employment and Skills, who argue that skills shortages are emerging in some sectors. We might expect such shortages to be reflected in rising wages - and indeed the year on year change in weekly earnings has now started to rise more quickly, and is on the point of overtaking the rate of price inflation. In some industries - particularly in manufacturing - the rate at which wages are rising does seem to indicate that employers are indeed starting to run up against skill shortatges.

Yet some observers argue that a sustained increase in real wages is unlikely. They point out that productivity has flatlined over an extended period, and that gains in productivity are needed to drive real wage increases. They argue further that, in any event, the link between productivity and real wages may be weaker than in the past - though economic theory suggests that such weakening would be anomalous. And they suggest that, with the rise in unemployment during the recession being rather modest, unemployment is unlikely to fall enough with recovery to bring about serious wage pressures.

This may be the case. Or it may not. One thing that is clear from the recovery so far is that the world we now inhabit is very different from the one we lived in before the recession. I have written in earlier director's reports on the appearance and stubborn persistence of underemployment and about the rise of self-employment. These are indicative of continued labour market slack - yet other evidence is pointing to a market that, at least in some dimensions, is getting increasingly tight.

Much discussion about the current state of the labour market emphasises the effect that changes in technology are having on the qualitative nature of the demand for skills. These changes are those that appear to be hollowing out the labour market - reducing the demand for intermediate skills while raising the demand for workers at the extremes of the skills distribution. In times of such rapid change, underemployment for some may well be accompanied by skills shortages. If this is the world we are now in, then it calls for rapid adaptation - an education and training landscape that is characterised by fleetness of foot. For all involved - workers, employers, and those responsible for the education system - that represents a considerable challenge.