Britain’s economy has turned into a giant job-creating machine

 
Allister Heath

BRITAIN’S jobs market is continuing to defy gravity. The latest figures are stunningly good, with employment moving ever-closer to its all-time high as a share of the workforce and the number of jobs in the economy hitting another record. Yet there is a downside to this extraordinary, almost unbelievably positive story – once again, productivity is falling and with it wages. Rarely have such a set of statistics confounded the forecasts of economists more consistently, simultaneously doing better and worse than just about everybody was predicting. So what is going on?

First, the facts. The number of people in work jumped by 1.1 per cent quarter on quarter in February-April – a new record gain, as Citigroup points out, with the previous post-1971 best set only last month. This is an astonishing increase and took the rise over the past 12 months to 2.6 per cent, the strongest surge for 25 years. Other Western economies would do almost anything for this sort of performance.

As befits an increasingly flexible and dynamic economy, self-employment is continuing to rocket – it is up eight per cent year-on-year – but so is traditional full-time employment, up 2.4 per cent, a very strong performance. It gets better: not only are more people working but they are working more hours. The total number of hours worked in the economy, the best measure of the demand for labour, is up an amazing 3.3 per cent year on year, the highest since the height of unsustainable Lawson boom.

Perhaps the best stat of all is that the UK is about to hit a record rate of employment for those aged 16-64 – the previous peak was 73.1 per cent, reached first in 1974 and then again in 2004-05. Yesterday’s figures put employment at 72.9 per cent of the workforce of traditional working age, the second best of the G7 after Germany; Citigroup’s Michael Saunders is predicting that the record will finally be smashed in the next few months. The working age population’s participation rate is now just 0.1 points below the record set in 1990.

So much for the good news – it also actually helps to explain what is going wrong. Hours worked are growing so quickly that they are outpacing economic output, even though GDP itself is expanding at a very strong rate. Productivity – or the amount of output produced per hour worked – is therefore falling again. Not surprisingly, average real, inflation-adjusted wages are falling again; over time, what we earn is closely connected to the value of our output.

The weak pay statistics are partly explained by the fact that they are being compared to wages and bonuses last year. That was the first month when the new, lower 45p income tax rate was in effect, and many firms and self-employed folk had delayed bonuses from the previous year to benefit from the lower taxes. This artificially pushed up pay settlements that month and is therefore pushing down year on year comparators 12 months later. But this effect, while important, doesn’t explain all of the weak pay growth.

A statistical artefact provides another piece of the puzzle. The pool of employed labour is growing very quickly, fuelled in part by younger, less experienced and often less well paid entrants. This is depressing the average wage and productivity figure – even though many people are actually continuing to see real-term pay hikes, especially full-time employees who have been in the same role for a while. The finance sector’s pay is also under particular pressure, and that is dragging down the average. So many people will be getting proper pay hikes – but the mean weekly pay is being diluted by those entering the workforce on far lower wages.

Britain certainly needs to fix its productivity crisis. But if the choice is between a temporarily productivity-less recovery and a jobless recovery, I would choose the former anytime.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath