“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.
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.)
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.
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.
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.
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.
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.