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Ian Brinkley
Economic Advisor
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Ian Brinkley

Budget 2015: The employment record - too good to be true?

Authors: Ian Brinkley

18 March 2015

The Chancellor was able to announce a lot of positive news about the economy and the labour market, supported by the latest labour market statistics released this morning. With the employment rate up and the unemployment rate down comparing the three months to January 2015 with the same three months a year ago, the overall picture does indeed look encouraging.

The Chancellor rightly said that employment was at the highest rate since 1971, that there were a record number of people in work, and that more women were in work than ever before. The first claim is the most significant, although the difference is not great (73.3 per cent over the three months to February 2015 compared with the 2008 peak of 73 per cent). The second is less significant, as with a growing labour force several post-war governments could (and did) make similar claims. The third claim is not significant at all – almost every post war government could say the same, as the female labour force has grown more or less continuously for decades.

The Chancellor then went on to note the projected fall in unemployment to 5.3 per cent and reaffirmed his aspiration for full employment: “For years governments have talked about full employment – the government is moving towards achieving it”. This is a curious claim to make, as the lowest rate unemployment reached in the decade before the recession was 4.7 per cent. Moreover, the OBR expects the unemployment rate to dip down to 5.2 per cent in 2016 before settling at around the 5.3 per cent rate referred to in the speech. This seems well short of an unemployment rate we would associate with full employment - we think that would require a rate somewhat below 4 per cent.
The Chancellor dismissed critics of the quality of job creation by noting that most of the new jobs since 2010 have been full time and are in more highly skilled occupations. This is broadly correct, in part reflecting structural shifts in favour of more knowledge intensive industries and occupations.

He also claimed that job creation was no longer dominated by London. As ever, it depends what period you use and what measure. Over the past year employment has grown somewhat faster in Northern England than in London or the rest of Southern England, with the North West as the star performer. However this looks more consistent with an economic recovery in its fifth year spreading to less prosperous regions, as we would expect, rather than evidence that government policies had secured a better regional balance. The workforce in employment measure shows that employment growth has been much weaker in the North East, Yorkshire and Humberside, Wales and Northern Ireland no matter what period is used.

There are some welcome announcements (and re-announcements) in the Budget to support economic regeneration outside the South East, but despite the more encouraging indicators for the North West, the creation of a “Northern Powerhouse” remains more of a future policy aspiration than a current reality. Rather less welcome for local economic development were further extensions to Enterprise Zones, a policy likely to prove both wasteful and ineffective.

The Chancellor also referred to changes in living standards and quite reasonably referred to some of the standard measures used, such as real household disposable income per capita, to claim that living standards were higher at the end of this Parliament than at the start. This is correct - albeit it the claim omits the impact of the recession. However and more importantly it also skirts over the fact that this has been by historical standards a very weak recovery in living standards.

The Opposition, not unexpectedly, focused on what has been happening to wages because here the news has been much less helpful to the Chancellor’s case. The latest figures show there is still no sign of a revival on wage growth measured by weekly average earnings despite the continued fall in unemployment. Regular pay grew slightly faster in the three months to January 2015 compared with the three months to January 2014, but this is entirely driven by the rapid recovery in earnings growth in financial services. For the rest of the labour force, wage growth was either similar or weaker than a year ago. It remains the case that while bankers may be doing well, shop and hotel workers, public service workers, and production industry workers are not.

The good news is that without a sniff of wage inflation to worry about the Bank is not going to start raising interest rates anytime soon, and meeting the Chancellor’s aspiration of a return to full employment look feasible. I think the OBR forecast on unemployment may be too pessimistic, provided employment rates for more disadvantaged groups can be significantly improved by better policy interventions over the next five years. The announcement in the small print of the Budget of improvements in support for the unemployed with mental health problems is a good start – more details are in a blog by my colleague Karen Steadman.

The bad news is that any return of the feel good factor is likely to be muted – despite the generally good news on the overall employment position, many people looking at their weekly pay packets will still wonder when the recovery is going to start benefitting them. The OBR does not expect the “real consumption wage” which takes account of inflation as well as earnings growth to return to its 2007 level until 2018 (para 3.79, p67).

The Chancellor made no direct reference to the impact of public sector job cuts, although he did note rightly that predictions of overall falls in employment had proved to be wide of the mark. The labour market has proved able to cope with the large cuts so far, as it did in the recoveries of the 1980s and 1990s. The rate of job loss in the public sector has however tailed off markedly in the run up to the Election: latest figures how that between December 2012 and December 2014 the public sector lost just 48,000 jobs after allowing for classification changes.

The OBR makes a fairly crude projection that on the basis of current spending plans total public sector employment will fall by another 800,000 between now and 2019, pushing total cuts since 2011 to over 1 million, a headcount drop of about 20 per cent. The private sector is expected to create 1.7 million jobs over the same period, giving a significant net growth in employment of just over 1 million. However, the latter includes some public sector jobs reclassified to the private sector in 2012. What exactly the balance between actual job loss and job gain in the public and private sectors respectively will be is anyone’s guess, but historic experience suggests that the national labour market will cope.

The next government and public sector employers are however likely to face challenges on two fronts. One is to keep service delivery in line with public expectations, especially in sensitive areas such as health, education, and social care – not to mention the police and armed services – where there are pressures to employ more or cut less. The other is the persistence of public sector pay policy. If the OBR is right, and average earnings growth in the private sector starts to move back to more “normal” levels, the strains on recruitment and retention will become more intense. In a competitive labour market keeping wage rises artificially low for a sustained period is usually asking for trouble.