Why is the labour market doing so well in a recession?
20 June 2012
Today’s labour market statistics were welcome news, but there may be a sting in the tail. Rising employment, falling unemployment and strong private sector job creation should always be welcomed, but it is surprising when the output numbers tell us we were entering a recession at exactly the same time. As we flagged in our main release, a worrying trend is emerging – output is falling while employment increases.
Having now had the time to dig a little deeper, this effect appears to be playing out differently in different parts of the economy. Construction and extraction (mining) have seen huge falls in output, but workers seem to have been sheltered, for now. In the services sector output growth is flat, but employers seem to be recruiting new staff. This effect is most pronounced for distribution, hotels and catering where GDP growth was modest (0.5% in Q1 2012) but employment was growing at 2.3% over the same period.
Graph comparing GDP change between Q4 2011 & Q1 2012 and employment generation by sector
This morning, we offered three explanations:
- First, the good news on jobs may be a temporary blip, and we may see unemployment rise sharply later in the year.
- Second, the GDP figures may be underestimating the performance of the economy, and may eventually be revised upwards.
- Third, and perhaps most worrying, it is possible that we are seeing a transition to a lower wage economy, in which jobs bounce back, but at a lower level of pay and productivity.
All three explanations remain plausible, however the sector breakdown does point towards a fourth option that offers some cause for optimism. It could be that despite the general challenges facing the economy, employers in niche areas are gaining confidence about the recovery and choosing to employ workers to grow their businesses. The fact that this is happening most strongly in the services sector lends credibility to this point. While we believe that manufacturing can be a strong value creator, we anticipate that most jobs in any sustainable recovery will be created within the services sector.
There is no one set route for a recovery from recession. It is often assumed that GDP growth is the best predictor of a recovery, however it is possible that rising employment will be a predictor of economic growth in 2012. The graph below shows changes in GDP and employment since 1992. It highlights just how closely together these two move. We can’t rely on one as a leading indicator or a predictor of the other.
Graph comparing year on year change in GDP and Employment Q1 1992 – Q1 2012
It is definitely too early to get excited. It is not possible to read a recovery into one month’s figures, especially since there appears to be a discrepancy between the two measures of job creation produced by the ONS (the LFS and Workforce Job estimates). Also, this recession has consistently defied prediction – we still don't fully understand why the labour market has operated quite so differently in this recession. The picture could well have changed – since these statistics were collected in March – with the worsening of the Eurozone crisis, and any further instability has the potential to undo any advances. In short, this is not a usual snapshot of a labour market entering a recession, but we can take some cheer from today's numbers.