Labour market update; why ‘more of the same’ is cause for concern

10 Feb 2017, by Anjum Klair in Labour market

The next set of labour market data is out next Wednesday. This blog looks at recent trends in the figures to give some pointers as to what we should be looking out for.

In summary, our view of the labour market hasn’t changed much; the headline employment figures are strong, but we’re seeing a growth in insecure work, underemployment and the continuation of feeble pay growth.

What is surprising is how familiar this story now is. We’re set to see the longest pay squeeze since Victorian times, and the labour market recovery hasn’t delivered the gains in pay and security that we’d expect. We may have a new normal, but it’s not one we should be happy with.

Employment

The employment rate remains at record levels at 74.5 %, and the unemployment rate has fallen to 4.8 %. This has not been lower since July to September 2005. The number of people in work remained broadly unchanged at 31.8 million and employment growth is now showing signs of slowing after five consecutive quarters of growth.

Quarterly change in employment 2008-2016

Behind the headline figures

We haven’t recovered from the decline in the share of full time employee jobs after the financial crisis

Full time employee employment is the first choice for many in work. But compared to pre-recession levels, the smallest net increase in employment has been among full time employee jobs. And despite the growth in full time employee jobs from 2014, the share of full time employees as a proportion of all in employment still remains below pre-recession levels. The share in Jan-March 2008 was 64.4 per cent, it is currently 62.2 per cent (Sep – Nov 2016). Achieving the equivalent share today would require an additional 686,000 full time employee jobs.

Change in composition of the labour market since 2008

Share of full-time employee jobs 2008-16

Self-employment is still the big labour market story…

The graph below gives us a further look in to the change in the composition of the labour market since 2008.

This shows us that in the early part of the recession, self- employment and part time work cushioned overall employment falls, and from early – mid 2014 we saw the return of net growth in full time employee jobs; however self-employment still continued to rise. Self-employment now makes up 15 per cent of the work force, up two percentage points from 2008. Since then, part-time self-employment has increased by almost 50 per cent compared to a 15 per cent increase in full time.

Net employment growth in 2008

Our concern is that while some people may have moved in to self-employment out of choice, others may have been forced in to self-employment as they were unable to find alternative employment, and the growth of self-employment has come at the expense of more secure employee jobs and the loss of key employment rights. Official data also shows that self-employed people earn on an average 60 per cent of the median annual rate of an employee per year. Other analysis shows that 45 per cent of the self-employed aged 25 or over (1.7 million individuals) are paid below the National Living Wage (£7.20 an hour). For employees the risk of low pay is around 20 per cent.

There is also concern about ‘bogus self-employment’; employers are increasingly labelling their workers as self-employed contractors to avoid providing employment rights and national insurance contributions. The recent high profile court case against Uber highlighted the issue of bogus self-employment.

Estimates of bogus self-employment vary, Citizens Advice suggest that around 500,000 people could be classified as falsely self-employed, this is based on survey work. An alternative estimate comes from data from the Department of Business Energy and Industrial Strategy (then BIS) which suggests that there are at least 100,000 people who were encouraged into self- employment by their previous employer, and now work principally for them. We think that this is a minimum level for the number of people who are falsely self-employed.

.. but other indicators that the labour market isn’t delivering the jobs people want are also high

Others in the workforce may end up in a form of involuntary employment as they are unable to find their preferred choice of full time or permanent work. While many choose to work part-time, or in temporary roles to work around other commitments, others have no alternative. The latest data shows that 14 per cent of those working part time are doing so as they could not find a full time job, and just under a third of temporary workers are doing so as they could not find permanent work.

Increase in involuntary part time work and temporary work since 2008

While there have been some falls in involuntary part time work recently, the levels are still well above pre–recession levels.

We have developed our own TUC definition of underemployment which looks at how many workers across the economy want more hours in their existing jobs as well as the regularly published measure of the number of workers in part-time jobs who want to work full-time. This shows there were 2.3 million people underemployed in 2007 (Q3), this now stands at 3.1 million, again while there have been small improvements this is over three quarters of a million higher than pre-recession levels.

The graph below shows us that while unemployment has fallen rapidly since 2013, underemployment remains high compared to pre-recession levels and there is considerable slack in the labour market.

Unemployment and Underemployment 2008-2016

Initially the argument in response to the growth in zero hour contracts, temporary work, underemployment and precarious self-employment was that they would decline rapidly as the labour market improved.

The labour market recovery became established by mid-2012, the employment rate is now at record levels, unemployment has returned to pre- recession levels; but insecurity hasn’t gone away.

Recent TUC analysis, estimates that there are over 3 million workers (1 in 10) in precarious work, this is formed of temporary workers (excluding the fixed term), zero hours contracts, and the low paid self-employed.

Pay

November pay data shows that nominal regular pay increased over the year to 2.7 from 2.6 per cent in October. This may seem like a small improvement; however when looking at real pay growth, this has been stuck at 1.7 per cent for the last five months, and remains well below its pre-crisis peak.

The OBR projections at the time of the Autumn Statement showed that real wages are not expected to return to their pre-crisis peak until 2020/21 – this is 13 years of lost pay growth.

The Chart below compares all episodes of real earnings decline from 1854. 2017 corresponds to the tenth year of decline, with the pre-crisis peak not expected to be restored until 2021.

Chart: Real earnings, pre-crisis peak =100

Other forecasts are in line with these gloomy expectations, with the latest HM Treasury round up of economic forecasts predicting wage growth of 2.5 per cent in 2017, but CPI growth of 2.8 per cent meaning falls in real wages over the year.

Real pay growth in the last years has only been as a result of ultra-low inflation, with inflation forecast to rise this will pose a real threat to living standards.

The outlook for public sector pay is even worse; it is set to decline in real terms as a result of a 1 per cent pay cap till the end of this parliament.

And recent TUC analysis on pay also shows there is a significant pay penalty for insecure work, with rising numbers in these forms of work more and more people are struggling to make ends meet.

Self-employed people now earn on an average 60 per cent of the median annual rate of an employee per year, down from around 70 per cent a decade ago.

Median hourly pay for those on zero hour contracts in 2016 was worth just 66 per cent of the median for all employees.

Rising levels of insecure work, and the overall wage squeeze may be familiar stories, but that doesn’t mean they should be seen as acceptable.