THERE is something strange going on in the UK economy – or at least with the official statistics that we all have to rely on. The economy is shrinking – and yet employment and total hours worked are rising. Such a combination is possible, of course, but it implies a slump in productivity.
The total number of hours worked per week reached 937.8m in the three months to May 2012, up 26.8m on a year earlier. This is partly explained by the timing of bank holidays. But a 2.9 per cent rise in working hours, combined with roughly zero growth in output during that time, simply doesn’t sound plausible. One possibility is that the economy did a bit better than the figures suggest – or that the labour market is weaker.
There are, of course, other possible explanations for the unusual data which assume that it is in fact correct. In a truly flexible economy, wages can adjust to supply and demand easily, which means that one could have full employment even at the height of a major depression. In practice, of course, we don’t have this in the UK. But real wages are falling, helping price some people back into work. Nominal wages (including bonuses) are up 1.5 per cent over the past year; with the retail price index measure of inflation still going up by 2.8 per cent a year, that implies a real wage cut of 1.3 per cent. This is clearly having a terrible effect on the demand for goods and services, as people’s purchasing power is slumping – but it does mean that workers are cheaper and therefore more likely to find work. A related way of looking at this is that workers’ share of the economy’s total output is falling, while that of owners of capital is going up.
But how could productivity be collapsing so much? People produce more per hour worked when the technology and tools they use improve – and less when they get worse. So plummeting productivity may be caused by the fact that the stock of capital may be falling, either because a lot of it has become either too old or has turned out to be obsolete – a case of malinvestment caused by faulty decisions taken during the bubble years – or because new investment has collapsed.
While this may be part of the story, it cannot explain everything. Usually, employment figures are less wrong than GDP figures, which tend to be revised endlessly over the years – and sometimes even over the decades. The current set of jobs figures are fascinating, though they hide many other trends, such as the surge in self-employment, the still extremely high unemployment (much of it camouflaged) and the fact that many are working fewer hours than they wish.
Private sector employment peaked at 23.515m in the first quarter of 2008, before tumbling to 22.490m in the final quarter of 2009. Since then, the private sector has bounced back, hitting 23.382m jobs in the first quarter of 2012, a rise of 892,000. By contrast, the official measure of the public sector (other measures give a bigger reading) peaked at 6.353m in the third quarter of 2009, beginning its descent in the fourth quarter of that year under Labour and reaching 5.899m in the first quarter of this year, a level previously seen in 2003.
Total employment hit a record 29.528m in the first quarter of 2008, a trough of 28.831m in the second quarter of 2009 and 29.35m in May 2012, up 181,000 on the quarter. So what is really going on? We know that the economy isn’t doing well, real incomes are falling and that there is also some job creation. But as to the exact details, whether the economy is growing slightly or shrinking slightly, the depressing reality is that nobody really has a clue.