Lost decade? We used to dream of a lost decade!

Last week’s employment statistics showed that the UK has finally closed its jobs gap. There are now as many people in work, as a percentage of 16-64 year olds, as there were before the recession. As Laura Gardiner said, though, the headline obscures some regional differences. The recovery is still weak in the West Midlands, Wales and Northern Ireland and even the South East outside London still hasn’t recovered its pre-recession employment rate.

There are other differences between now and before the recession. Two thirds of the job increase has come from self-employment and there are still fewer full-time employees than there were in mid-2008.

Extra-jobs-since-May-2008-2

Chart via Thomas Brooks and Kayley Hignell at CAB.

Pay remains in the doldrums. E&Y predicted a lost decade last week, with real-terms wages failing to get back to pre-recession levels before 2017. Even this depends on how you measure it, as Gavin Kelly and Matthew Whittaker said earlier this year. Measure the mean wage against the Consumer Price Index and we get a recovery by 2018. If we look at the median wage, which is not pulled up by the high earners at the top, the recovery looks a lot weaker. Measure it against versions of the Retail Price Index, which includes housing costs, and it doesn’t recover at all.

Wages

Lost decade? We used to dream of a lost decade!

In the Observer at the weekend, Tony Dolphin wrote of the relentless slide towards a low-pay Britain.

Clearly something very unusual is happening in the labour market and it is not just a post-recession phenomenon. The recession has merely exacerbated a trend that has been in place for the past three decades: a polarisation of the labour market.

Employment growth has been strongest in the high-skilled and low-skilled occupations, but the number of jobs requiring mid-skilled workers – skilled tradespeople, machine operatives and administrative and secretarial workers – is shrinking.

The Economist ran a series of articles a couple of weeks ago on the polarisation of the labour market. Ten years ago, they weren’t at all convinced about it. Now, they reckon it’s been happening, to varying degrees, across the developed economies.

Screen Shot 2014-10-21 at 18.11.04Until now, it’s the jobs of mid-skill manual workers that have been hardest hit but, as technology advances, it is starting to replace middle-class jobs too.

[T]he rise of machine intelligence means more workers will see their jobs threatened. The effects will be felt further up the skill ladder, as auditors, radiologists and researchers of all sorts begin competing with machines. Technology will enable some doctors or professors to be much more productive, leaving others redundant.

And so far, new technology does not seem to be replacing old jobs with that many new ones.

[W]ealth creation in the digital era has so far generated little employment. Entrepreneurs can turn their ideas into firms with huge valuations and hardly any staff. Oculus VR, a maker of virtual-reality headsets with 75 employees, was bought by Facebook earlier this year for $2 billion. With fewer than 50,000 workers each, the giants of the modern tech economy such as Google and Facebook are a small fraction of the size of the 20th century’s industrial behemoths.

It is possible to build a global behemoth now with a workforce not much larger than that of a county council, as Shane Granger shows on this chart.

1-wealthwithoutworkers_141004

Shane spotted something else too.

The extraordinary data-point that I found from looking at the data is that the combined market capitalisation of the Wealth without Workers companies is $1.541-trillion but only employs 558-thousand people (a VtER of $2.76-million). Again to give those figures some context if this were a country they would be invited to the G20, have a GDP just $20-million under Australia (the 12th largest global economy in 2013 figures) yet the population would only equate to the Gold Coast (in Australia), less than Bristol (in the UK) or Albuquerque (in the USA).

That’s half-a-million people sharing a hell of a lot of money. Not equally, of course, but even the relatively junior ones are getting a big wedge compared to most of the rest of the world.

Between now and 2022, the UK Commission for education and Skills (UKCES) forecasts an increase in the number of high skilled jobs and in those service areas such as caring which, so far, have been relatively immune to automation.

The hourglass labour market: occupational projections, 2012-2022

Screen Shot 2014-10-14 at 11.02.53

 

What will happen to the displaced mid-skill workers? Will they re-skill and move in to the higher skill jobs?

So far, not much of that seems to be happening. Here’s Tony Dolphin again.

Mid-skilled workers who lose their jobs initially try to find a comparable job that makes full use of their talents. Some succeed but, because of the shrinking number of mid-skilled jobs, many do not. They do not have the qualifications to move up the skills ladder, so eventually they are forced to move down it and compete for low-skilled jobs. Employers faced with many applicants for every low-skilled vacancy are therefore under no pressure to increase wages. At the same time, increasing numbers of people who cannot find the type of work they want are opting for self-employment, even though it means earning less than they formerly did.

So as the machines move up the skills ladder, most of the workers move down it.

As UKCES says, it’s fine if you get a good start but it’s becoming much more difficult to move up the ladder later in life.

The projected changes are likely to result in significant differences in the labour market profile, occupational structures and career routes available, as while some intermediate roles would emerge, their overall volume would be reduced. This could result in a labour market with great prospects for those able to demonstrate talent early, but with fewer pathways for those who need to progress to higher skilled occupations through career development in work.

You don’t need much imagination to see the implications for social mobility (or lack of it), the accumulation of advantage over the next generation and increased inequality. It also doesn’t bode well for the public finances. Wealth without workers has a habit of leaving the country for offshore tax havens.

It may be that some of these forecasts are unduly pessimistic. After all, the fear of machines putting people out of work is nothing new. Looking at the recent trends, though, there is a shift taking place in the demand for labour which, added to the effects of an almighty recession and government spending cuts, is hitting employment and wages for all but the most highly skilled. So far, economic growth hasn’t done much for wages, steady full-time employment or tax revenues. There’s not a lot to suggest this will change much over the next five years.

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Public finances: From La La Land to Dipsy Land

I managed to be out of the country for most of the party conferences so much of what I would probably have said has already been covered elsewhere. But just for the record….

The Conservatives’ statements on public finances were all over the place. Not only did Dave and George forget to mention an extra £13bn of public spending cuts, they also said they were going to offer tax cuts as well. Whether or not this will happen before the deficit is eliminated is unclear. The Prime Minister seems to have changed his mind on that since last Christmas. The IFS calculated that these tax promises would cost an extra £7.2bn. This would leave a 2015 Conservative government with £45bn a year (at least) to find from extra spending cuts, tax increases or borrowing.

Jonathan Portes asked me if I was going to update my 2015 dilemma chart again but I’m not altogether sure how to show it on a diagram.

Public Spending Venn 2015-2

I suppose tax cuts could be a subset of the No Tax Increases circle and the bit overlapping in the middle would then be a subset of La La Land; something like Dipsy Land perhaps.

It is very unlikely that the next government, whoever is running it, will eliminate the deficit and run an absolute surplus by 2019. Not unless we get a quantum leap in economic growth, which delivers a bounty of unforeseen tax revenue, or the government increases tax rates by quite a lot. The scope for welfare cuts is very small so all the deficit reduction, plus any new spending commitments, has to come by cutting public services, as the Office for Budget Responsibility showed in it’s report last month.

As the Resolution Foundation commented (my emphasis):

[S]uch DEL cuts would produce reductions to some departments that to many will sound highly implausible. By 2018-19, budgets would need to be cut relative to 2010-11 by two-fifths in Defence and BIS, by half in the Home Office and by two-thirds in the FCO. Correcting for population growth would make the impact on public services appear starker still. It seems very unlikely that any of the parties will rely exclusively on DEL cuts to achieve their version of balance.

That’s about as close as you can get in polite, measured think-tank speak to saying Big Chinny Reckon.

You only have to look at the OBR’s projections to see how unlikely this is. Based on the government’s plans, the OBR expects public service spending to have fallen from 21.2 percent of GDP in 2013-14 to 16.3 percent of GDP by 2018-19. (There’s more discussion of the reasons why public services will bear the brunt of the spending cuts here and here.)

Now look at the OBR’s projections for health, long-term care and education for the same year.

Screen Shot 2014-10-17 at 11.17.35

That’s a total of 11.9 percent. Now add 0.7 percent pledged for foreign aid and 2 percent on defence to keep within NATO guidelines. That makes 14.6 percent, which leaves only 1.7 percent of GDP for everything else.

Now add in over £7 billion worth of tax-cuts.

It’s just not going to happen. Much of the rest of the state would have to be shut down.

There are one or two state-shrinking fanatics who think that the state could still run effectively with large parts of it hacked away but they are in a minority even in the Conservative Party.When public services start disappearing, Conservative voters are just as likely as anyone else to start kicking up a fuss and government ministers know it.

This is one area where the Conservatives are not being outflanked on the right either. Despite what some commentators have said, UKIP isn’t Britain’s Tea Party. Many of its voters are relatively left-wing on a lot of economic issues. In some respects, they are to the left of the Labour leadership. Much of what they want, including tougher immigration controls, implies higher public spending. If anything, UKIP supporters want more state, not less. These voters will not be won back by a slash and burn attack on public services.

There is very little appetite among voters for a major reduction in the size of the state. The British Social Attitudes Survey shows that public opinion on taxation and spending has shifted over-time from favouring more spending to keeping things the same. Keeping things the same is a long way from what the Conservatives are proposing though. Those in favour of the sort of reduction in public service spending implied by the government’s plans have never registered above 10 percent. There is no support for public service cuts on this scale.

key_findings_figure_0.3_499x317.jpgGiven recent developments, it might be that the cuts would have to be even deeper than the OBR estimates, as Frances said last week:

[T]he fiscal consolidation of 2010-12 is widely believed to have delayed the UK’s recovery. The UK is now growing, but the recovery is by no means established: inflation is below target, wage growth is even lower and households are still highly indebted. The UK faces headwinds from slowing global growth, the chronic Eurozone crisis and the prospect of Gulf War Three. It is distinctly possible that another sharp fiscal consolidation would squash this recovery too. Repeating what has been done before may not be wise.

She concludes:

The fact is that the Conservatives’ fiscal plans have a hole the size of a small planet. Mind you, Labour’s aren’t much better: Miliband’s promises were clearly driven by worries about losing Scottish Labour voters to the SNP, while Balls was equally clearly driven by worries about losing votes to the Conservatives. Two scared parties, abandoning common sense and good economic management for the sake of winning an election. Fiscal rectitude has been sacrificed on the altar of realpolitik.

She’s spot on, apart from the ‘real’ bit. There’s nothing real about this at all. It’s Dipsy Land Politik – even further into fairyland than before.

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The taxless recovery

This is no ordinary recovery. Not only has it taken a hell of a long time to do not very much, it’s seen collapsing productivity and very little wage growth, even for those who appear to be highly skilled. As a result of all this, even though the economy grew at over 3 percent, the tax revenues didn’t increase at the same rate.

As Sarah O’Connor reported in the FT:

[T]ax receipts have grown just 2 per cent so far this year, compared with the 5 per cent growth the Office for Budget Responsibility forecast in March.

As Ben Chu’s chart shows, most of the rise in tax revenue since the recession is due to VAT.

ByNkhCfCYAAZgJg

Record numbers of people in employment, it seems, hasn’t led to record levels of income tax.

When you break out the figures for income tax, as Michael O’Connor did earlier this week, there is a marked difference between receipts from those on PAYE and those on self-assessment.

ByTN88ZCMAAqt1l

Falling self-assessment receipts are, for the most part, a symptom of falling self-employment incomes. Around three-quarters of the employment growth since the recession has come from self employment yet between them, the self-employed are still delivering a lot less tax. We won’t see the final 2013 HMRC figures for self-employment incomes until January but these charts suggest that the spectacular fall in self-employment earnings between 2008 and 2012 hasn’t improved by much. Probably the closest estimate we have for self-employed pay since 2012 is by Laura Gardiner at the Resolution Foundation. The low tax receipts indicate that self-employed earnings may have continued to fall or are, at best, stagnating.

Screen Shot 2014-07-10 at 16.43.58

Things might be about to get worse for some of the self-employed. As Ben Dellot explains, the new Universal Credit system could leave many of them worse off. According to the RSA’s calculations, 37 percent of the self-employed earn less than the minimum income floor, which is set at around the full-time minimum wage. (That sounds about right. A study by the IFS found that 40 percent of the self-employed earn less than the minimum wage.) Not all the self-employed currently claim tax credits but those who do, and who fall below the income floor under the new system, will find their benefits cut. The self-employed now account for almost a fifth of tax credit claimants so this is likely to affect a lot of people.

It is yet another symptom of the uncertain situation in which many people find themselves. The low tax take and stubbornly high social security costs are two sides of the same story. The number of people in employment might have increased but a lot of that employment is insecure and doesn’t pay very well.

Income tax, VAT and National Insurance are three of the state’s biggest sources of revenue. If any one of them fails to deliver as promised, the government is in a financial hole. People whose employment status and earnings are precarious don’t deliver much in tax. This isn’t a normal recovery. Along with the other epithets being used to describe it – low-wage, slowest-for-a-century, low-productivity and so on – we can now add another; taxless!

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A high-skill, low-wage recovery

“Labour economics used to be easy,” lamented David Blanchflower in Monday’s Independent. He continued:

All you had to do was watch the unemployment rate and that told you most of everything. As it went up things were bad and pay weakened. When the unemployment rate fell that meant the economy was getting better and that meant pay rises. Low unemployment meant big pay rises. High unemployment meant smaller rises. Simple.

But, over the past few years, falling unemployment hasn’t led to higher wages in the UK or the US. If anything, wages have continued to fall as employment has picked up.

The picture is even stranger when you look at skills. Employers have been talking about skills shortages for some time now. Earlier this week, the UK Commission for Education and Skills (UKCES) published a paper saying that Britain is already facing a skills challenge and that the country will need 2 million more highly skilled workers by 2022.

UKCES expects the skills profile of the workforce to polarise over the course of this decade, as there is an increased demand for jobs at the high and low skill end while demand falls in the middle.

Screen Shot 2014-09-23 at 18.40.51

That’s not what seems to have happened since the recession though. The ONS data on skills indicate that the employment recovery has been largely a highly skilled one. This chart in the Bank of England’s inflation report shows that, while a lot of the very recent job growth has been in lower skilled occupations, most of it since 2010 has been among the higher skilled. (Definitions are based on the Labour Force Survey categories.)

Screen Shot 2014-09-18 at 18.18.57

I wondered how much of that might be due to the self-employed bigging themselves up in the Labour Force Survey. As the ONS said:

The nature of self-employment is such that many people manage their business and are therefore likely to state they are in a managerial role despite the level of responsibility they may have.

Using at the ONS data and applying the definitions the Bank used, I broke the same period down between employed and self-employed.

Skills1 2010-14

Among the employees, even more of the increase is accounted for by those in the highest skill groups, so bang goes that theory.

Take the figures over a longer period, since the start of the recession, though, and things look even more skewed.

Skills1 2008-14

Almost all the increase in employment since the recession has been among the more highly skilled groups. There are still fewer medium and low skill employee jobs than there were six years ago.

There’s something else funny going on here, though. We’ve just had the longest decline in wages for half a century. It looks even worse if you include the self-employed.

Screen Shot 2014-07-10 at 16.43.58

Since the recession, pay has fallen by about 12 percent yet, over the same period, almost all the net gain in employment has been among the most highly skilled occupational groups. So we have a more highly skilled workforce earning a lot less.

Some of this may be due to the hours people are working, or not working. All the net increase in employment since the recession has come from self-employment or part-time jobs. Last week’s figures showed a slight fall in the number of employed full-time jobs for the second month running. There are still fewer people in full-time employment than there were in 2008.

That said, hourly pay rates have fallen too. The reduction in earnings isn’t just because people have gone part-time and not done as much work. The amount they are paid per hour has also fallen. In recent years, the drop has been particularly steep at the top end.

Screen Shot 2014-09-23 at 18.12.43

This suggests that, while Britain’s workforce may be more highly skilled, employers either don’t have enough work or are not paying a premium for those skills.

Of course, some of this might be due to the zeitgeist. It may be that people are becoming more inclined to talk themselves up when they answer the Labour Force Survey. A decade of programmes like the Apprentice may have convinced us that we are all managers and professionals now. Somehow I doubt it though. The increase in jobs is skewed so far towards the high skilled that an increased tendency to talk up our jobs couldn’t explain all of it.

Could it be that the distribution of skills is wrong? Perhaps people are skilled but not in the things that employers are prepared to pay a high premium for. There has been a lot in the media about skills shortages but a UKCES paper earlier this year found that only 4 percent of employers said they couldn’t fill vacancies because they couldn’t find people with the right skills. More common was the problem of insufficient skills within the existing workforce. 15 percent of employers reported having staff in jobs whose skills did not fully meet the job requirement. 13 percent said that the skills of their employees were either not relevant to their jobs or there was little opportunity to use them. This suggests that some highly skilled people may have been taking lower-skilled jobs.

Whatever the explanation, none seems entirely satisfactory. If the UK has skill shortage it is a very strange one if it is not bidding up wages. It is very odd that pay has fallen so spectacularly at the same time as highly skilled employment has risen. We hear a lot about the UK becoming a low wage, low-skill economy but, if these figures are a true reflection of what’s going on, it looks more like a low-wage high-skill recovery.

It reminds me of a question one of my lecturers tossed out to the class many years ago: Is a skill still a skill if nobody is prepared to pay for it?

I don’t think we ever came up with an answer to that one.

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The 2015 Dilemma (Revised Edition)

Two reports on the public finances were published at the weekend. These things usually come out during the week but both the Institute for Fiscal Studies and the Resolution Foundation had to squeeze their press releases into the couple of days after the Scottish referendum result (which would have thrown everything up in the air) and before the party conferences.

Both papers look at the spending plans of the three main parties as they have been outlined so far. All parties say they will eliminate the deficit by the end of the next parliament. The only differences are how quickly they will do so and which definition of the deficit they use.

Broadly speaking, the main difference is that the Conservatives say they will eliminate the entire deficit by 2018-19 whereas Labour and the Liberal Democrats aim to eliminate the deficit on day-to-day spending but continue to borrow for capital investment.

Screen Shot 2014-09-22 at 07.56.43

As the Resolution Foundation says, working out what that means in practice is quite difficult:

Assessing precisely what is implied by these differing plans depends on a number of unknown policy details (as well as inevitable economic uncertainty). It is not possible based on current information to say anything definitive about the differences between these plans. But by way of adding to the debate, we can establish a number of indicative scenarios based on what we think are plausible interpretations of these different approaches. As more information is provided these scenarios will obviously change. Taking this speculative approach, the main options and trade-offs are set out in the chart below.

Spending-review-chart-20141

In other words, the longer you take to reduce the deficit, the fewer public service and welfare cuts you have to make by 2018-19 but the more you have to borrow or raise taxes.

These different scenarios – all highly speculative – clearly have differing implications for the size and shape of the state in 2018-19. They also involve different trade-offs. One the one hand, more gradual trajectories clearly have the advantage of reducing the immediate burden on public services and on households. But that choice comes at a price. Other things being equal, faster approaches will bring the stock of debt down more quickly therefore reducing the share of government funds allocated to debt interest payments as well as leaving the economy better placed to absorb future shocks and pressures.

Based on the OBR numbers, both the IFS and the Resolution Foundation came up with a similar figure for the shortfall. To avoid any more cuts to social security or public service spending, or any additional borrowing, the next government will need an extra £37 billion a year. Unless that is raised in tax, the government will have to borrow more or cut more during the next parliament.

So far, all three parties have been fairly quiet about tax, apart from the odd promise that won’t actually raise much money. The difference between the main parties, therefore, is not cuts or no cuts but how deep the cuts should be and over what period. It all means more austerity, it’s just that the blend is different.

Beyond that, there isn’t much detail. As the IFS says:

For all the main UK parties, based on the latest official forecasts for the economy and public finances, achieving their fiscal targets will require further tax increases, or cuts to welfare spending or public services in the next parliament. None of the parties have yet provided the electorate with full details of these tough choices.

Even what little detail there isn’t very plausible. For example, George Osborne’s £12 billion of welfare cuts, highlighted on the Resolution Foundation’s graph, looks to me like a big Chinny Reckon.

It’s unlikely that the next government, whoever is running it, will be able to eliminate the deficit without tax increases. Welfare cuts wouldn’t save much and so the cuts to public services would just be too big unless a major reduction in state provision is planned. It’s also nigh on impossible to rise these extra taxes just from the rich, which is perhaps why politicians are so reluctant to talk about it.

So far, then, the parties stated plans give us a flavour of what might happen but not much detail. The projections from the IFS and Resolution Foundation tell us that there will certainly me more cuts and there will probably be extra borrowing. Most probably, there will also be extra tax increases.

The 2015 dilemma remains, as ever, the about the trade-off between them.

The 2015 Dilemma (Revised)

Public Spending Venn 2015-2

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Pirate Day joke

One night, far out at sea, a young pirate is talking to the pirate captain.

“Cap’n,” he says, “‘Ow comes is it you’s got an ‘ook for an ‘and?”

“Ha ha harrr. ‘Twas like this. We was just leavin’ Port Royal when we was attacked by a Navy frigate. I fought a desperate battle with their cap’n. I ran ‘im though but not before he’d chopped my ‘and off and taken it with ‘im to his watery grave. Ha Ha Harrr!”

“So Cap’n, ‘ow comes is it you’s only got one leg?”

“Ha ha harrr. We was comin’ back from a raid in the Bahamas when we was shipwrecked in a storm. I ended up in a fight with a shark. I stabbed ‘im in the eye with my dagger but not before he’d bitten my leg off and taken it with ‘im to Davey Jones’s Locker. Ha Ha Harrr!”

So Cap’n, ‘ow comes is it you’s got a patch on your eye?”

“Ha ha harrr. We was about to set sail from Plymouth. I was looking’ up to the heavens to see if there be a storm brewin’ when a seagull flew over and crapped in my eye.”

“But Cap’n, you doesn’t lose an eye just cos a seagull craps in it.”

“Ha Ha Harrr! You does when you forgets you’s got an ‘ook for an ‘and.”

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Nine thoughts on the referendum result

A few thoughts on the referendum result.

1. I’m pleased about the result. We’ve saved ourselves a lot of pain.

2. When people think there is a likelihood of real change, they will come out and vote, even if only to prevent it.

3. Some people are making too much of 2. As any manager knows, it’s easy to motivate people when there is a clear and immediate goal. Much of government and party politics is about the tedious day-to-day and the ambiguous long-term. It’s much more difficult to get people excited about that. It is unlikely that general elections will get 86 percent turnouts, no matter how honest and authentic the politicians are.

4. We’ve got all this to come again if there is a referendum on the EU. Most of the arguments about uncertainty and instability apply as much to a UK exit from the EU as they do to a break up of the UK. Some of the people who deployed these arguments against the Yes campaign will be saying the opposite when it comes to leaving the EU.

5. At some point someone (most likely the IFS) will make a stab at working out the cost of ‘the Vow‘ and its implications for the rest of the UK. It won’t be cost neutral. It will probably have to be added to that growing list of unfunded spending commitments in the next parliament.

6. This result raises a whole series of new questions, especially about England. If some powers are to be devolved to Scotland, Wales and Northern Ireland, they are devolved to England by default, yet England has no representative body. Devolution to England, though, is barely devolution at all. The referendum has led to calls for decentralisation from all corners. From Northumberland to Cornwall, devolution is where it’s at. How this is all going to work is anybody’s guess.

7. Expect more ugliness. I have stayed out of most of the debate because I haven’t had time to do much more than stick out a couple of blog posts. From what I hear, though, both the online and street level arguments got quite nasty. I saw a couple of Twitter attacks on Frances Coppola and Jonathan Portes. When you are losing an argument, make stuff up, claim that people are in the pay of bankers (or whoever is today’s bête noire) and insult their families. We’ll probably see a lot more of this. An English backlash is already being stoked up. The nastiness on all sides will get worse as the election gets closer.

8. Despite everything I’ve said so far, some of this might lead to changes that will make our country better. I’m a devolution sceptic, which is an unfashionable position at the moment, but I’m keeping an open mind. The jolt Westminster has received from the world outside London is no bad thing. Perhaps we could do something radical like relocate the government.

9. I’ve picked a great time to go on holiday. I can go and buy my Euros now.

 

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