From the TUC

Where next for the UK labour market?

14 Nov 2013, by in Economics

The Bank of England’s confirmation that a strengthening recovery is finally with us has rightly received an accross the board welcome. But the Governor’s assessment that real wages are still failing to increase, and that the recovery will not be secured until real pay growth is positive, is as important. It also points to the vital question of  when earnings will pick up, and what more can meaningfully be done to secure more equitable labour market outcomes.  Has the economic crisis done such permanent damage to the UK’s productive potential that wage rises can never again be afforded? Or will an increase in demand resolve most of the labour market problems we still face?

Today’s Resolution Foundation paper makes an important contribution to the ongoing debate on our labour market future. The study starts by confirming that the UK labour market is becoming more polarised, with the share of middle-skilled jobs declining while the proportions at the top and bottom increase. As previous evidence has shown the analysis finds that since 2008 these trends have been accentuated, with low-skilled occupations outperforming those across the rest of of the specturm.

In line with previous TUC research, the study also shows strong growth in some low paying industries, along with considerable falls in middle paying areas such as manufacturing and construction. But noting that there is significant variation within different sectors, the research goes on to try to explain this trend, concluding that while ‘routine’ jobs have suffered a bigger hit non-routine jobs have seen stronger employment growth. Real wages show the opposite trend, with the pay of non-routine workers facing a bigger squeeze than that of routine staff. The message seems to be that over the 2008 to 2012 period pay cuts faciliated the retention of ‘non-routine workers’ (if you want the definition turn to page 20 of the paper!), while their counterparts in routine employment were more likely to lose their jobs, contributing to an exacerbation of labour market polarisation (as middle skilled workers are more likely to be in routine occupations).

This is important new analysis – but the jury (along with the report’s authors!) is still out on exactly what its implications are for our future labour market prospects. While the analysis could suggest that the crisis has accentuacted trend rates of labour market polarisation, with low and high skilled areas of work continue to increase their labour market share at the expense of middle skilled roles, it could also be the case that when demand picks up trends will return to where they were before. As ever in recent times, the next few years are anyone’s guess.

My own assessment includes a comparable amount of fence sitting – with some tentative notes of optimism. While we know that the UK still faces significant ongoing labour market challenges, there seems no reason to assume that strengthening growth won’t allow any of them to be addressed.  Stronger GDP performance is already leading to job gains, with full-time employee positions now showing stronger growth than part-time and temporary roles.  And productivity is also rising, suggesting that those arguing that the recession caused such structural damage to our productive potential that rising demand would soon run up against capacity constraints (and that pleasant ‘supply side’ measures such as reduced employment rights would be a necessary requirement for any future labour market gains to be achieved) are likely to be wrong. It follows that if growth is maintained, jobs improvements will continue (albeit with unemployment falls slightly slower than would have been the case had productivity not taken such a hit during the downturn) with some wage growth following strengthening other labour market gains.

But of course disagreeing with those who claim that a low pay, low productivity jobs market is the inevitable new normal is not the same as agreeing that everything is rosy. There are signs that worring pre-crisis trends (such as the rise of zero hours contracts in certain industries) may have been exacerbated by poor recent economic performance, and if the crisis has increased rates of labour market polarisation it’s very bad news, particularly for those with low skills who have seen a sharp deterioration in their jobs prospects during the downturn. It is widely accepted that for workers in the middle real wages were not growing before the crash – a result of multiple factors including an increasing share of lower paid jobs and reduced bargaining power in some industries. So the need for reforms which shift our economy to a higher investment, higher skilled model, with laser sharp industrial policies targeted on securing higher shares of better paid employment, remains even more imperative than before the crash, not least because of the damage caused by the first three years of this government’s economic stewardship. And of course we need to make sure that our pay and conditions are set both to incentivise investment and productivity improvements while also ensuring profits are fairly shared with those who produce them, alongside effective redistribution. 

So there are ongoing and significant labour market challenges still to overcome – and with government policy (both fiscal and social) making things worse for growth, labour standards and household incomes, it will take longer than it should do to put things right. What’s even worse is that the problems we faced before the crash still remain unaddressed, and prolonged economic stagnation may have made some of them worse. But all that said, growth hasn’t lost the ability to deliver any gains at all; current trends suggest that while 2014 will be far from perfect there are further labour market improvements to come.