Why aren’t more people unemployed?

The economy seems to be flatlining, but more people are working. How could that happen?

2 March 2013

9:00 AM

2 March 2013

9:00 AM

An unfamiliar noise floats over the town; an insistent, one-note metallic drone. Tracked to its source, it turns out to come from a sawmill in a hidden wooded valley a quarter of a mile from my house. Abandoned for the past year, the mill has suddenly come back to life. It is emitting great plumes of steam as well as a multi-decibel industrial racket. And men are working there — I can see only two or three, but still they constitute another little piece of the great employment puzzle.

An uptick in demand for sawn timber matches reports of increased levels of activity in the construction and housebuilding sector. Sure enough, quarter of a mile in another direction, a development of stone-built terraced houses that was an abandoned wasteland for three years until last autumn, amid rumours of several changes of ownership, has also come back to life. The houses are up to first-floor level; several trades are busy on site. Yet just the other side of the churchyard stands a boarded-up pub. A little further on are at least four shops that have closed since Christmas. And I’ve rarely seen a customer in the shiny new ‘Curry in a Hurry’ takeaway, though its aromas are warmly enticing.

As I often do in my Any Other Business column, I’m describing my home town of Helmsley in north Yorkshire. But I could be describing any English provincial town or suburb. The state of the national economy is encapsulated in statistics boiled down from tax and benefits data and business surveys, but observation of everyday activity where you live is just as good a guide. Right now, we can all observe a faltering, partial recovery after an extended downturn in which scarcity of credit has left businesses unwilling to invest, below-inflation wage rises have left consumers unwilling to spend, and confidence is traumatised everywhere.

And perhaps only local observation can explain a confusing conjunction of vital statistics. Since 2008, we have had ten quarters of growth and ten of shrinkage; last year, when most of us thought recovery was imminent, we had no net growth at all despite a euphoric post-Olympic blip. And yet there were 580,000 more people in employment by December than a year earlier, taking the total UK workforce to a record 29.7 million. That’s roughly 24 million in the private sector, which added 627,000 jobs in the year to September; the public sector shed 128,000 and has now shrunk all the way back to its 2002 numbers, before Gordon Brown went mad.

So we have an economy that is rebalancing itself favourably between tax generators and tax spenders while creating 2,000 jobs per working day — yet seems incapable of dragging itself out of the mire. Indeed, the only way to reconcile these conflicting data sets is to accept the most depressing interpretation of them: that we have suffered a catastrophic fall in productivity just at a time when the history of past recessions tells us it should have been rising.

Both output per worker and output per hour worked are more than 12 per cent below their pre-recession trend — and we can’t blame the public sector, because its productivity (though harder to measure than that of factories) has if anything slightly improved. No, it’s the private sector that has suffered a bout of what foreigners used to call the English disease: instead of working harder and using our capital more efficiently to battle our way out of the double-turned-triple dip, we seem to have been coasting along. A 12 per cent slump in output is the equivalent of an extra five-minute fag break outside the fire exit for every employee, every hour. With Asian competitors barely allowing workers a five-minute lunch break in a 12-hour day, what on earth are we playing at?

The entire academy of Britain’s eminent economists has failed to answer that question so far. But no one mistakes me for a member of that august body, so let me — with the assistance of a chapter called ‘The Productivity Puzzles’ from the ‘Green Budget’ of the Institute for Fiscal Studies, among other sources — have a go anyway.

First, are the statistics accurate? ‘Measuring GDP is not an exact science and initial estimates are subject to subsequent revisions as more extensive data becomes available,’ says the IFS. Most famously, Norman Lamont was ridiculed in October 1991 for saying ‘the green shoots of economic spring are appearing once again’ at what was then and for some time afterwards thought to be the middle of a recession — but turned out, after several revisions, to have been the very month in which output stopped declining and the climb back to growth began. So it’s possible that the Office for National Statistics’s dismal ‘preliminary estimate’ for the last quarter, a 0.3 per cent drop in GDP, will be revised upwards, as things become clearer.

As for workforce and unemployment stats, they ought to be pretty reliable. But what if a tide of unregistered, cash-paid migrant workers in the boom years made output per worker look better than it really was because the true size of the workforce was understated — thus distorting the apparent impact of the recession? And how many of us keep an accurate record of the actual hours we work, or tell the ONS about them?

Let’s accept that the numbers on both sides of this argument are not gospel, but are still valid indicators of trends and orders of magnitude. The productivity puzzle is not a uniquely British phenomenon, indeed, but has been observed to varying extents in Germany, France and Italy. Our next line of enquiry, then, is why so many existing jobs have not been destroyed as they might have been in previous recessions — and who is creating all the new ones?

To the first part of that question, economists cite three factors: ‘labour hoarding’, the substitution of labour for capital, and the misallocation of capital and bank finance in unproductive, ‘distressed’ or ‘zombie’ companies. All three relate to the flexible, largely non-unionised nature of the UK’s private–sector workforce. Most of us who are not bankers have settled for zero or below–inflation pay rises for the past five years, forfeiting as much as 15 per cent of our spending power. Since the crash in mid-2008, the number of people in part-time work has increased by 572,000 while the number of full-timers fell by 378,000 — although lately there is a distinct shift in the opposite direction. So people are cheaper than they used to be, relatively speaking, and willing to work fewer or more variable hours.

That makes it easier for employers to keep them on the payroll in difficult times — call that hoarding or acting humanely, according to taste. It also means that, if credit or family capital is not available to buy labour-saving robots, it’s possible to employ cheap workers to do the same tasks less efficiently — hence the ‘substitution’ point — and it’s easy to see why both factors suppress productivity.

As for the ‘zombie companies’, some pundits have claimed that as much as 10 per cent of the private–sector workforce — more than two million people — are employed by failing companies that should have gone under by now if the banks had chosen to pull the plug on them. That loose figure isn’t inconsistent with the more precise number of 197,000 ‘financially distressed’ companies identified at the end of last year.

That’s a significant slice of the economy that cannot invest for growth because it can barely meet the interest payments on its debt — not unlike some European governments, you might think. At the same time, the argument goes, more promising companies have been denied access to bank finance, so that they too are unable to invest for growth. Hence a 16 per cent fall in business investment from its pre-recession peak.

So far so good: reasons why businesses that are struggling to survive but reluctant to sack people are less efficient than ruthless, well-financed businesses in better times, and a reason why job numbers fell less sharply than expected in the early phase of this recession. But still it’s not obvious where all the new jobs are coming from now. About 100,000 last year were the result of government schemes. None were the result of hiring in the City of London, where numbers have settled at around 240,000 from a 2007 peak of 354,000. Some are in ever-expanding supermarket chains — but the addition of 7,000 jobs at Tesco last year was swiftly offset by lost jobs in high-street retail failures such as the music chain HMV.

The bigger answer seems to be that we are simply creating new jobs for ourselves, by registering as self-employed or starting new businesses. There are now 367,000 more people self-employed than before the crash, predominantly male and in older age groups, some no doubt because they can no longer otherwise find paid work. ‘It would be naive to think that [they] are all budding entrepreneurs,’ says TUC chief Frances O’Grady in her downbeat way. But many of these carpenters, plumbers, farmers, taxi drivers and freelance journalists have made a positive ‘lifestyle choice’. Indeed I made that choice myself 20 years ago, and have never regretted it for a single day.

So don’t knock self-employment, and likewise salute — as I regularly do — those with the courage to start a business that employs others besides themselves. The most familiar of all supper-table conversations these days is the one about brilliant graduate sons and daughters who can’t find a conventional first step on the career ladder. Many of them are looking at start-ups with friends instead, and that’s one factor behind the startling number of new company registrations in the past two years: around 970,000.

Some of those are reorganisations rather than real start-ups, and among the real ones many will already have failed. But whichever way you cut it, the sheer optimism of entrepreneurship against the odds accounts for hundreds of thousands of jobs and, I suspect, a layer of economic output that is unrecorded because it falls below VAT and other measurement thresholds. There’s reason to be cheerful, and on that note I shall pop out and support one of the brave little pieces of the employment puzzle — by ordering my curry in a hurry.

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