Flexibility of UK Work force
Published on 16th May 2012 by Fiona Lim
Today’s article in The Guardian newspaper highlights the increasing flexibility of the UK workforce in these challenging times with British workers proving far more flexible than previous recessions.
Overall, today's employment statistics are good news. They confirm the resilience of the UK labour market in the face of a very weak economy. If, three years ago, you had told me – or almost any other labour market economist – that output would still be more than 4% below its peak level, we'd have predicted unemployment of well over 3 million. Thankfully, we were wrong. So what's going on?
At a headline level, the most important factor is that British workers have proved to be far more flexible than in previous recessions. Wage growth has fallen sharply; earnings, excluding bonuses, have only increased 1.6% in the last year, well behind inflation. Meanwhile, there are far more people working part-time, with the number of involuntary part-timers at a record level. And the net increase in the number of people in employment is primarily the result of fewer people leaving or losing jobs, rather than more people being hired; this suggests that workers are prepared to accept lower pay or fewer hours as an alternative to being laid off. Self-employment is at record levels as well, and – although we don't know – it may be the case that many of them are "involuntary" as well, that is people who have lost jobs and are trying to make ends meet on a freelance basis.
This may sound like an unattractive picture; lower pay and more insecurity. But it is vastly preferable to the alternative, of higher wages for some but mass unemployment, with people dropping out of the labour force entirely and in many cases never returning, as in previous recessions. Shared pain will do less long-run social and economic damage.
These figures also suggests that those who argue that employment deregulation would lead to rapid job creation are wrong. The OECD already rates our labour market as being very flexible, and this analysis supports that. There is no evidence to suggest the gains from further deregulation would be large. Spain and Italy need radical labour market reform; we don't. There is much more to gain from supply-side reforms in other areas, like education and planning.
The government does however need to worry about welfare-to-work programmes. Successful reforms, like the introduction of Jobcentre Plus, improved labour market flexibility. But there has been a recent very sharp rise in the number of people on jobseekers' allowance for more than a year; for those under 25, it has more than tripled in the last year. Since this is the very group the government's flagship work programme is supposed to help, they need urgently to address what's going wrong.
Do these figures presage a sustained recovery? They certainly suggest that things aren't getting worse. But they don't suggest a rapid fall in unemployment is in prospect in the short term, even leaving aside the wider economic risks from developments in the eurozone. Since firms have internal spare capacity – those involuntary part-time workers – they can't be expected to hire aggressively, and indeed vacancies remain flat at historically low levels.
And it is important to remember that unemployment remains unacceptably and unnecessarily high. This causes not just short-term suffering, but does long-term social and economic damage to individuals and communities. The Office for Budget Responsibility estimates that the "natural", or structural, rate of unemployment remains about 5.25% – the rate of unemployment we'd have if the economy were roughly on track – is about a million lower than the actual level. That is the measure of the challenge we still face. As I set out here, at today's low interest rates, the government could finance a £30bn investment programme with the revenues from the pasty tax. That would create jobs at the same time as beginning to address Britain's creaking infrastructure and lack of housing supply.