From the TUC

A thoughtful look at jobs by the head of the CBI

11 May 2010, by in Economics, Labour market

One of the more interesting discussions about employment in the recession has come from Richard Lambert, the Director General of the employers’ organisation, the Confederation of British Industry. It is an important contribution to the discussion about why unemployment has not risen as much as might have been expected in this recession.

Each year the Industrial Relations Research Unit at Warwick University invites a distinguished commentator to give lecture on industrial relations in memory of Pat Lowry; this year Richard Lambert spoke about “The Labour Market and Employment Relations Beyond the Recession”.

He begins by pointing out that, at the start of the current recession, the outlook for employment seemed even worse than it had been in the 80s and 90s recessions. With plummeting business and consumer confidence and disappearing investment, “it seemed a fair bet that the labour market was also going to take a savage blow.”

That was certainly my view. At the end of 2008 and start of 2009, when journalists asked me what level of unemployment we could expect, my answer was usually that 2.5 million was unavoidable, 3 million was probable and 3.5 million possible – and some forecasters predicted even higher levels than that. Mr Lambert admits that the CBI’s forecast “was for unemployment to peak this year at above three million and then to decline only slowly.”

We’ve all been pleasantly surprised that unemployment is only just over the bottom end of this range, and there are grounds for hoping that it won’t peak at a much higher level. As Nicola has pointed out, “the labour market picture is far better than we would have seen had the recession followed the trends of the 80s and the 90s downturns.”

This is a remarkable performance: GDP is six percent lower than it was before the recession, about ten percent below the level it would be at now if the economy had continued growing at pre-recession levels, so unemployment ‘ought’ to be a lot higher.

Why hasn’t it happened? Part of the story, as we have been reporting in our Recession Reports and Labour Market Reports, has been the growth in involuntary temporary and part-time work.

The proportion of temporary workers that say they are only doing these jobs because they couldn’t get permanent ones has risen steadily, from 25.0 per cent in January 2008 to 34.7 per cent in the latest figures. There has been a similar story in relation to part-time jobs, with an increase in the proportion of part-time workers who are involuntary, from 9.9 to 13.9 percent.

Mr Lambert recognises the importance of this trend, and acknowledges the positive impact of the Labour government’s investment in public sector jobs and employment programmes, points that we have also emphasised.

He is particularly interesting on some of the other factors that have come into play. Generously, he recognises that the labour market regulations introduced by the Labour government – including those the CBI did not like – have not harmed employment prospects (contrary to the predictions of some economists.)

But none of these factors are sufficient to explain the whole picture.

In a recession, businesses have to cut their costs to survive, and in the 1980s and 1990s this meant substantial lay-offs. In this recession, by contrast, firms have, as I have mentioned before, been ‘labour hoarding’ – holding on to as many staff as they can. But giving the phenomenon a name doesn’t explain why it’s happening. What is different this time round?

Mr Lambert suggests a couple of possible explanations. One is that the workforce is more highly qualified now than in the 1990s. Highly qualified workers are more expensive to make redundant – their pay is higher, so their redundancy pay is higher. Even more importantly, replacing them when the recession is over is expensive.

The other part of the story, according to Mr Lambert, has been ‘wage flexibility’. In previous recessions real wages rose, in this one they have not. Incomes Data Services have reported on this phenomenon – and noted that unions have played an important role in negotiating lower pay rises in return for promises on protecting jobs.

But, of course, ‘wage flexibility’ itself needs explaining. Why have employees accepted lower pay increases?

Mr Lambert suggests a couple of possibilities; one of which is the speed at which the recession developed; this meant that, instead of “a long, slow attrition in which it took people a long time to realise that their world had changed … [it] was clear in a matter of weeks that labour costs would have to be curtailed, either by shorter hours or wage sacrifice, or by job losses”

Another (and, I’d say, more important) explanation is that inflation and inflation expectations (the two are linked, of course) are much lower than in the last two recessions, so workers felt less need to demand pay increases big enough to maintain their living standards.

What interested me most in Mr Lambert’s lecture (and it’s the reason I decided to write this post) was his suggestion that the relationship between GDP growth, average hours and real wages seems to have become less direct since the 1990s. These days, Mr Lambert argues, when the economy grows, businesses are more likely to increase hours and wages than to increase numbers. Mr Lambert notes that:

“ … hiring and firing costs have increased relative to the costs of adjusting hours and pay. This has provided incentives for employers to seek flexibility through other routes than changing headcount.”

Mr Lambert notes that this rather contradicts “the notion that the UK’s flexibility is built on the low cost of firing people”, and that the CBI has argued that:

“labour market flexibility is a much wider concept. It describes how well the labour market overall responds to changing economic conditions. It means having a workforce with skills that are relevant and transferable from job to job, and flexibility within employment through flexible working patterns.”

It’s really significant that the head of the CBI is taking this line because the people who have argued most vociferously that “the UK’s flexibility is built on the low cost of firing people” haven’t been union critics of the UK model, but those employer voices that have been raised in defence of that model.

Any number of business and political commentators have told a story about how Mrs Thatcher’s government tamed the unions and achieved the labour market flexibility that has helped us to weather the storm, so that workers are more willing to sacrifice net pay to hold on to their jobs. But the CBI model of labour market flexibility that he describes sounds very much closer to the approach that we have been taking in recent years. 

Flexibility is not only inadequately described by freedom to hire and fire, that freedom can itself be an obstacle to flexibility – and more so, the more advanced a company is.

I suppose a key point on which we would differ is that Mr Lambert argues that this is the model of flexibility that British businesses are already adopting, and that unions don’t have to be part of the story – though he does recognise that we have played a ‘constructive’ role. I suppose that’s a subject for another posting; in any case, it’s a pleasant change to read an employer contribution to the debate that challenges your own ideas without insisting that any interference with the sacred right to hire and fire is the work of Satan.

2 Responses to A thoughtful look at jobs by the head of the CBI

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  2. Tim Worstall
    May 12th 2010, 12:08 pm

    There does seem to be a very simple answer here:

    “The proportion of temporary workers that say they are only doing these jobs because they couldn’t get permanent ones has risen steadily, from 25.0 per cent in January 2008 to 34.7 per cent in the latest figures. There has been a similar story in relation to part-time jobs, with an increase in the proportion of part-time workers who are involuntary, from 9.9 to 13.9 percent.”

    We have a more flexible labour market than we did in the 70s and early 80s for example….no, not the freedom to fire, but in the number of temp and part time jobs that are created….because they don’t come with all of the baggage that full time/long term ones do. Like, say, redundancy etc.

    So full marks to the TUC for campaigning to have full emplopyment rights assigned to those with temp and part time jobs….trying to get rid of exactly what has kept unemployment down in this recession.

    Yes, full marks there.