Monday, 20 August 2012

Output’s down, employment’s up – puzzle for UK policy makers


Charlie Bean, Deputy Governor of the Bank of England did not have an explanation to hand. If the Bank can’t tell us, you wonder who else can?

As the chart shows, UK output has been declining for three consecutive quarters, beginning in the final quarter of last year, yet employment has been picking up over exactly the same period. GDP has fallen by 1.4 percent since the third quarter of last year but employment aged 16 and over has risen by 1.3 percent. The UK has relapsed into recession and, despite this, some 374,000 full and part-time jobs have been created.     

In contrast to the US, the eurozone and Japan, where productivity levels now exceed their respective previous cycle peaks, productivity for the UK remains well below its cyclical peak. It may be hard times for the economy, but the labour market is in better shape than might be expected. So as to offer some perspective on what has been happening, a few of the features behind the developments in the UK labour market are summarised below: 

1. If you look at all those working full-time, whether employed or self-employed – this category accounts for 73 percent of the all those aged 16 and over – the rise from the end of the third quarter of 2011 is 0.5 percent, which amounts to a rise in the full-time job count of 111,000.

2. If you look at the corresponding rise for all employees working full-time, as opposed to self-employed and as opposed to part-time – a category that accounts for about 62 percent of all those 16 and over – that rise is 0.5 percent, making for a rise of 96,000.  

3. If you look at the corresponding rise for employees that are part-time, a category accounting for 23 percent of all employment aged 16 and over, the rise is 2.3 percent making for an increase of some 151,000.

4. If you look at the corresponding rises for all self-employed (full-time and part-time), a category comprising 14 percent of total employment, the rise in the self-employed from the end of the third quarter of 2011 is 1.8 percent, making for a gain of 76,000. The rise for the part-time self-employed, a category accounting for 4 percent of all those employed aged 16 and over, is 5.4 percent, thus making for an increase of 61,000. That for the full-time self employed, which accounts for 10 percent of all those employed aged 16 and over, is 0.5 percent, making for a gain in jobs of 15,000.

5. Finally, if you combine the self-employed (whether they work full-time and part-time) and the employees who work part-time, a category that accounts for 37 percent of employment aged 16 and over, this rise is 2.1, thus making for a rise of 227,000 jobs.

This 37 percent – a mix of all self-employed and part-time employees – accounts for 60 percent of the total rise in employment, aged 16 and over, since the third quarter of last year. The rise in full-time employees accounts for about 30 percent. In terms of job numbers then, the former accounts for twice the latter. The balance of 10 percent is accounted for by other employment (e.g., unpaid family workers, government support training and employment programmes, all of which is included in the overall level of employment aged 16 and over).  

There are plenty of numbers here but the conclusion is that the rise in the overall level of employment aged 16 and over has come in large measure from the self-employed and part-time employees – and especially the latter. What makes the rise anomalous, or a puzzle, is that it comes as output in the UK economy has been declining and thus lowering productivity.   

The following chart sets out the dynamics of UK employment. From around the middle of last year, the level of full-time employees dropped sharply and then steadied before picking up in March of this year. However, the current level is still down on the peak level of last year. On the other hand, the combined level of part-time employees and full-time and part-time self-employed has continued rising since last summer and more than offsets the loss of full-time employees.


It is understandable that, when economic activity is weak, output is falling and there is great uncertainty about business prospects, companies should wish to substitute part-time employment for full-time employment and/or make redundancies, which encourage self-employment. However, it is not clear why the overall level of employment for all those aged 16 and over should still go on rising in such an environment.     

To sum up, the shift to part-time employment as well as to self-employment (both part-time and full-time) has resulted in the overall level of employment (aged 16 years and over) growing when output has been falling. It may well be that in measuring and tallying up the value added, output is being under-recorded as many think.

We may not know for a while – a long time, as David Smith pointed out in his column in the Sunday Times this past weekend. The example he cites is that of Norman (green shoots of recovery) Lamont, the Chancellor from 1990 to 1993 in John Major’s government. Lamont’s green shoots following the recession of the early 1990s were ‘snuffed out by a drop in GDP in early 1992’. Several decades and several revisions later, the drop in output is gone. The green shoots were there. They could be about to make a comeback. The Olympics have made a difference to the job numbers but growth may be about to rebound anyway as decelerating inflation and the upward trend in employment boost real income growth and spending. Maybe output is about to catch up with a lagging indicator.  

Mike Lenhoff
Chief Strategist

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