Why have wages stagnated under the last coalition and conservative governments (and why that might continue under labour)

 

The focus of this blog is what happened to real wages under the last coalition and conservative governments and why. I begin in Figure 1 by showing just how dire were economic outcomes for earnings under these governments. In 2023, the year before the election, real average earnings (that is average earnings using 2019 prices) were the same as they were in 2010, the year the coalition of the conservative and liberal democratic parties took office. As the graph in Figure 1 shows his was true for all workers as well as for those working in the private sector. This failure of earnings to rise over the time of these governments is only part of the problem we need to explain. As Figure 1 shows there was a sharp fall for average weekly earnings for both all workers and for private sector workers from their peak in 2008 to 2014. A fall of 10 per cent for all workers and of 11% for the private sector.

Figure 1

Figure 2

 The pattern shown in Figure 1 is quite different from any pattern for real average earning in the period since the Second World War as we can see in Figure 2. In that Figure I mark the recessions that have occurred since the war, defined as falls in total GDP. There were modest falls in real earnings during  the 1979 and 1991 recessions while there was no effect for the 1981 recession. The picture shown in Figure 2 is of a steady rise in real earnings brought to a rather dramatic end at the time of the financial crisis in 2007/2008.

The data shown in Figure 2 is for all workers as I do not have a long run of data for private sector workers. So, what can explain the fall in earnings for all workers in the period after the financial crisis? To answer that question, we need to step back and ask what does determines real earnings. The answer is the productivity of those workers. In the long run the only way real earnings can rise is if labour is more productive in the sense that labour produces more output per hour. In Figure 3 I show how output (measured as gross value-added) per hour worked has grown since 1970, the first year for which this data is available from the ONS. To ensure we can compare productivity, which is per hour worked, with real earnings I show real hourly earnings also in Figure 3. The pattern for real hourly earnings is virtually identical to that for the weekly earnings Figure shown in Figure 1 and 2.

 

Figure 3  Productivity and Real Hourly Earnings

As with real earning the data show a sharp break in the pattern of productivity growth with, not a fall, but a marked slow down in growth after the financial crisis. Now that can happen in various ways of which the skills the labourer has is one. What I want to focus on here is the amount of capital labour has to work with. The reason for such a focus is that the skills of the workforce change slowly and what we see in Figure 3 is a very marked deceleration in the growth of productivity.

So, our question can be reframed as: Can the pattern of the change in productivity and real hourly earnings be linked to changes in the amount of capital services to labour hours? The ONS provide data for the market sector of the total capital services available and the total hour worked where an allowance is made for what the ONS terms the quality of the labour force. In Figure 4 I show both the ratio of capital services to labour hours from 1970 to 2022 and, again, real hourly earnings until 2023.

It is very clear from the data shown in Figure 4 that the financial crisis, starting in 2007, led to a marked fall in the capital labour ratio coinciding with the fall in real hourly earnings. For both real hourly earnings and the capital labour ratio not only did the steady rise which had occurred in both series from 1970 to 2007 abruptly cease but, by 2022, had not just recovered to the level in 2010. If we want to understand the causes of stagnating real hourly earnings then the failure of the economy to provide a rising volume of capital services for labour is clearly one possible part of the explanation. As a first step to understanding what is going on in the decline in the capital labour ratio, I plot in Figure 5 the volume of capital services and labour hour works separately.

What is striking in Figure 5 is that the patterns of the growth in the services of capital and labour hours have changed markedly in the period after the financial crisis. In the period from 1970 until the financial crisis there were fluctuations in the supply of labour but no trend. The fall in employment in the 1970s and early 1980s were caused by the recessions of 1979 and 1981. In the period after that there was a period of recovery brought to an end by the 1991 recession to be followed by a shallow recovery. The financial crisis did lead to a sharp fall but, from 2010, the start of the coalition government, the supply of labour rose sharply.

Figure 4 The Capital Labour Ratio and Real Hourly Earnings

Figure 5 Labour hours and capital services trends

 

In my last blog entitled ‘The UK’s Employment Miracle Post the Financial Crisis’ I noted that the employment growth, which is summarised in the hours worked shown in Figure 5, included employment growth for both men and women and for full and part time work. What Figure 5 shows is that this growth in employment after 2010 exceeded the growth in capital services. While slowing growth in capital services was part of the reason for the fall in the capital to labour ratio another part was the rapid growth in labour supply.

 

The picture painted by the Figures shown above is one where there were major changes in the patterns of both real earnings and productivity following the financial crisis. The falls in both were unprecedented and in 2015 the level of real earnings reached its lowest point after 2010, the same level as a decade earlier. The referendum to leave the EU in 2016 was held against this backdrop of falling real earnings. If the analysis presented above is correct the EU was not the problem but the real problem was the domestic failure to ensure growth in the amount of capital labour had to work with. Unless that changes the period of stagnating real earning under the coalition and conservative governments will continue under the current labour one.

The UK’s Employment Miracle Post the Financial Crisis

 

In an earlier blog I focused on the major puzzle about the UK economy after the financial crisis of 2007 to 2008. Why, after this crisis, did employment grow so rapidly when real hourly earnings were falling. In this blog I want to show what kind of jobs were being created in this period of unprecedented employment growth.

 The UK labour market is a complex one. The growth in employment encompasses many different types of jobs. One important distinction is between part and full-time work, where women are much more likely to be part-time workers. Is this part-time work a matter of choice or are these workers unable to obtain the full-time employment they prefer? A second important distinction is between being a wage employee and being self-employed. A growth in self-employment, rather than wage employment, may indicate very different mechanisms of employment growth. A third distinction we need to consider is between the public and the private sector. There is a view among right-wing commentators that only jobs in the private sector are ‘real’. Finally, there is a view that the ‘gig’ economy has grown in importance and that rather than there being a jobs renaissance in the UK there has been a race to the bottom in the type of jobs being created. I now consider each of these dimensions of employment growth in turn.

 Full and part-time Work

 In terms of job creation, a rise in part-time employment is ambiguous. Are those working part-time because they cannot find a job or is it preference to balance household or child-care responsibilities or simply not wishing to work full-time. I will come to that below. In Figure 1 below I show the growth of full and part-time work for both employees and the self-employed, by gender, over the period after 1985.

 

Figure 1 Full and Part Time work by gender: 1985-2019

 

The growth in total employment was the focus of my last blog. I showed there that not only did employment grow very rapidly after 2010 but the employment rate, the proportion of the population in employment, grew to its highest level ever. In Figure 1 we see the type of job growth that underlay this remarkable growth in employment. The summary fact from the Figure is that both full time and part time jobs, meaning wage jobs and self-employment, for both men and women all grew. Between 2009 and 2019 (2009 being the lowest point reached by employment in the aftermath of the financial crisis) total employment increased by some 10 per cent. The most rapid rise was for full time female employment which increase by 14.3 per cent over this period, the lowest rise was for male part-time employment which only rose by 4.7 per cent.

 

Is part-time work preferred?

 

We are left with the question - how many of those working part time wish to work full time and how has that proportion been changing? The answer is shown in Figure 2.

 

Figure 2 Part Time Workers

 

It is clear from the chart of Figure 2 that at the time of the 2007 to 2008 financial crisis more than 50 per cent of male part time workers did want a full-time job, this was true for only about 20 per cent of female part time workers. If we think of those part-time workers who want full time work as ‘involuntarily’ part-time than in the immediate aftermath of the financial crisis their numbers increased for both men and women. However, this was a short-term effect. After 2014 the numbers of these ‘involuntarily’ part time workers decreased as a proportion of such workers. In fact, by 2019 the proportion of male workers who did NOT want a full-time job was the highest ever recorded since data in this form was collected in the early 1990s. For women there has been a long-term trend by which, again as a proportion of those working part time, they did want a full-time job. By 2019 this was just over 20 per cent. 

 

Private and Public sector jobs

There is a view among right-wing commentators that only jobs in the private sector are ‘real’. This view does not make a lot of sense as many public sector employees work in public services. It is also the case that with the privatisation program begun under the Thatcher government many workers have moved between being classified as public to being private sector, with no change in their jobs. Indeed, these shifts have complicated the task of the ONS in measuring private and public sector jobs. However, using ONS data which seeks to ensure that there is a continuity in the definition Figure 3 shows clearly that all the jobs growth that has occurred since the financial crisis has been in the private sector.

 

Figure 3 Private and Public Sector Employment

 

The ‘Gig’ economy

 A final major concern regarding the pattern of job creation after the financial crisis has been the notion of the gig economy where employment is precarious and hours variable. In a BBC report of February 2017, the gig economy was defined as one where, instead of a regular wage, workers get paid for the "gigs" they do, such as a food delivery or a car journey. It then said that ‘in the UK it's estimated that five million people are employed in this type of capacity.’ It is not clear where that number comes from. Clearly the notion of a ‘gig’ job is not clear cut.

 In using the ONS data to measure the size of the ‘gig’ economy there seem two options. One is to define the ‘gig’ economy as those who work part-time as self-employed.  A second is to identify the ‘gig’ economy with workers the ONS identifies as temporary. These are workers who are on a fixed period contract, agency temping, causal or seasonal work or, for some unstated reason in the survey, do not have a permanent job.  As we have seen by 2017 more than half of those working part-time do not want a full-time job so using the second of these definitions seems to capture better the notion of ‘gig’ work.

 In the left-hand part of Figure 4 I show the number of such temporary workers, classified as whether they are full or part-time.  In the right-hand panel I show temporary workers as a percentage of total employment. 

Figure 4 The ‘Gig’ Economy

If we view these temporary workers as being the gig economy than we obtain a number 0f 1.8 million in 1997 when this data was first reported by the ONS. The numbers then fell until the advent of the financial crisis, after which it rose back to the 1997 level. However, since 2015 the number have fallen back to the pre-crisis level. As the right-hand chart in Figure 4 shows as a percentage of total employment by 2019 the proportion of temporary workers in total employment was the lowest it has ever been. 

 The key fact of the UK economy over the period since 2010 up to 2019 is the rapid growth of all forms of employment, for both men and women, of which the ‘gig’ economy is by far the least important.

We are left with a major puzzle. Why in a period of falling real wages did employment for both men and women, and for full and part time work, expand so rapidly? In future blogs I will seek to answer that question.

 

 

The causes of the collapse of productivity in the UK Economy after the Financial Crisis

 

 

In an earlier blog I showed that after the financial crisis of 2007-08 real wages fell, while the amount of output produced by each hour worked in the economy rose at a far lower pace than earlier. Figure 1 below reproduces the data from that earlier blog.

 

Figure 1  The collapse of productivity growth in the UK economy post the financial crisis

Source ONS data: GDP per hour is obtained from the volume measure of GDP divided by the measure for total weekly hours worked annualised. Real hourly earnings are from data for average weekly earnings divided by weekly hours worked and deflated by the consumer price index.

 In this figure labour productivity is measured as the amount of GDP (that is the output of the economy) produced per hour worked. In the chart I show the periods of recession where GDP per capita fell. These recessions started in 1974, 1980, 1990 and 2007. In 2008, when real hourly earnings were at their pre-Covid peak of £18 per hour (this is in 2019 prices) real GDP per hour was £39.2. By 2019, the year before the pandemic, real hour earnings had fallen by 7 per cent to £16.8 while GDP per hour had risen 3 per cent to £40.5 – all in 2019 prices. What happened after the financial crisis was quite different from what followed earlier recessions where there appears to be no change in the steady grow of GDP per hour.

 

In this blog I want to answer the question as to why that output per hour worked grew so much slower than before the financial crisis. Why was this crisis so very different from earlier recessions?

 

Teresa May, during the 2017 general election campaign, said there was ‘no magic money tree’ when asked by a nurse why her pay had been frozen.  Well, was that true? A ‘magic money tree’ is an informal way of describing what has been happening to now rich countries for the last 200 years in that the amount of output each produces grows faster than does the labour to produce that output. Her more accurate answer, as the above figure shows, should have been that under previous governments there had been a ‘magic money tree’ but that the conservative dominated governments after 2010 had succeeded in killing it off.  This blog is about the mechanisms by which death was affected.

 

If you work hard and do your job, what if each year you produced more with no additional effort on your part. It sounds a bit unlikely but that is exactly what the UK economy did up to the financial crash. Economists call it total factor productivity (TFP). It is, quite literally, a measure of how much more output you get without more inputs into production (or at least any that are measurable).

 In Figure 2 I show how much this magical effect raised output in the UK from 1970 to 2021. Between 1970 and 2007, the advent of the Financial Crisis, TFP increased by some 60 per cent. Then, as the Figure shows, it fell abruptly and by the start of Covid it had barely recovered to its level at the start of the Financial Crisis.

Figure 2 More output but not more inputs

Source ONS data: Release of Productivity Overview, UK: October to December 2021. The figure for TFP in the chart is for the Total Market Sector.

 Now, of course, there are other ways, not magical at all, as to how you can become more productive. You may have more capital to work with or your travel time to work may be reduced. All these are additional inputs increasing output. One way of summarising how these additional inputs may help increase your productivity, that is how much you can produce, is by the capital labour ratio. That is how much capital is available to each worker. How this has changed since 1970 is shown in Figure 3.

 

Figure 3 How much more capital did workers have?

Figure 4 Changes in capital and labour inputs

Source ONS data: Release of Productivity Overview, UK: October to December 2021. Capital services and  labour hours are for the Total Market Sector.   

While we can see from Figure 3 that the amount of capital each worker has to work with fell soon after the Financial Crisis, we need to know how this changed occurred and that we show in Figure 4.

Two changes occurred after the financial crisis which were quite different from earlier recessions. The first was that capital services grew much more slowly than before. The second was that, in dramatic contrast to earlier recessions, labour supply started to grow. The result was the decline in the capital to labour ratio.

 

We can now answer the question we posed in the title to this blog as to why labour productivity growth collapsed after the Financial Crisis. Labour productivity growth depends on two factors. The first is TFP (Total Factor Productivity) which is the magical factor producing more output with no more inputs. While this fell marked immediately following the crisis it then started to rise again. The second factor is the capital to labour ratio which we showed in Figure 3 fell significantly after the financial crisis. It is this fall which is the most important factor explaining the failure of labour productivity to rise by more than very modest amounts.  

 

Labour productivity is not the focus of political debate. Indeed, outside the columns of relatively specialised newspapers it is not mentioned at all. That is regrettable as it is the collapse of that growth in labour productivity that underlies all the UK’s present economic woes. It explains the low wages many workers face, it explains the inability of the government to fund adequately the NHS and social care, it explains why at the end of a decade of ‘austerity’ there was still no budget surplus and the advent of the pandemic ensured that to address it the result has been a public sector deficit far larger than when ‘austerity’ began. It drives real earnings. It is how all of the painful political choices can be avoided. As real incomes rise taxes will rise even if tax rates do not change, there will be more income for workers and more funds for public services.

 

Put simply more people in the UK have been working so output has been rising but the amount of output each produce has not been increasing – the end of the magic money tree. This shows up in Figure 5 below where, following the financial crisis, after a short term fall, output continued to grow while output per person did not. As Figure 5 also shows this had not happened after any earlier recessions.

 

Figure 5 How output grew and productivity did not after the financial Crisis

Sources: As for Figure 1.

While the above analysis shows how the decline in productivity has been affected, the results clearly poses two more fundamental questions. Why did labour supply start rising and investment start falling after the recession caused by the Financial Crisis, while neither had happened in earlier recessions? To that I will return in a future post.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What happened to inequality under conservative and Labour governments since 1979?

 

Many people, I think, would answer that question by saying that it goes up under both. But does it? The answer depends on how we think about inequality. Inequality has been generally falling in the UK since the end of the Thatcher premiership when we measure inequality, as is most commonly done, by the Gini which takes a value of 0 if all incomes are equal and a value of 1 if one person has all the income. This fall in inequality is true if we take market incomes, that is what households get from their wages and self-employed incomes, or if we take equivalised disposable income. The latter allows for cash transfers to households and the taxes they pay and makes an allowance for household size.  I show this in Figure 1 below which tracks the Gini for the period from 1979, the start of the Thatcher premiership to 2019 which is the most recent data I have. Clearly post-Thatcher the Gini for both measures of income has tracked down, albeit with a marked upward spike with the most recent conservative government. This can be seen more clearly if we extract the numbers for the Gini for the periods of Conservative and Labour governments as I do in Figure 2 below. 

Figure 1 The Gini as a Measure of Inequality

Source: ONS data: Average household incomes, taxes and benefits of all households by decile group.

Figure 2 Conservative and Labour Governments Compared

Source: As for Figure 1.

 Two points stand out from the charts. The first is that inequality of equivalised disposable incomes is far lower than that of market incomes, and this is true over the whole period. All governments, both Conservative and Labour have used tax and benefit policies to reduce the level of inequality delivered

 Two points stand out from the charts. The first is that inequality of equivalised disposable incomes is by the market. The second point is that the premiership of Margaret Thatcher increased inequality both in market incomes and in equivalised disposable incomes. While, as I have noted, both measures have trended down they have not returned to the level before Thatcher’s first term.

Now the Gini is hard to interpret. Another way of presenting the information that underlies the Gini is by what is called a Lorenz curve. This shows how much incomes households get in percentage terms. In Figure 3 I show a Lorenz curve for equivalised disposable income for 1979 and 1991, ie the beginning and end of Thatcher’s government. The way to read the chart is to begin with the 45-degree line (in green) which is perfect equality if we think in proportional terms. It says the 20 per cent of households get 20 per cent of incomes, that 30 per cent of households get 30 per cent of incomes etc. So, the further is the line plotting actual percentages from this 45-degree line the more inequality there is in the Gini sense of the term. So, we can see from Figure 3 that this Lorenz curve shifted out quite noticeably over the period of the Thatcher premiership. In Figure 4 we present the same curve for the period afterwards.

Figure 3 The Thatcher Premiership

Source: As for Figure 1.

Figure 4 Lorenz Curves Post Thatcher

Source: As for Figure 1.

 Now what is striking in Figure 4 is that, if anything, there is a move inwards in the Lorenz curve from 2019 compared with 1991. True, very slight, but no evidence here of increasing inequality in the Gini sense of the term.

 However, the Gini, while commonly used, is not how people think about inequality.  The Gini is a relative measure, it is based on the proportions of incomes going to households as we have seen in the Lorenz curves above. If the incomes of everyone doubled the Gini would not change as the proportions would not change. But the gap between the richest and the poorest would have got a lot bigger. It is that gap that most have in mind when they talk about rising inequality. Telling them about the Gini cuts no ice.

What they have in mind is the differences been the top and bottom of the income distribution. There are two ways of looking at these differences. One is to look at the ratios between the top and the bottom (see Figure 5), a second is the gap between the rich and the poor (see Figure 6).

 

Figure 5 Ratios of incomes between the rich and the poor

Source: As for Figure 1.

Figure 6 How much do the rich get relative to the poor

Source: As for Figure 1.

 It is the difference shown in Figure 6 that people partly have in mind when they talk of increasing inequality. Between 1991 the gap in household incomes between the top decile and that of the bottom decile, increased from £57,863 to £88,785 (both numbers in constant 2019 prices), an increase of over 50 per cent. What they also have in mind is the levels of income for the poor and the rich.

In my last blog ‘The assault on the poor by the current conservative government’ I documented what had happened to the levels of income in the poorest decile, see Figure 7 below. What these 

Figure 7 Incomes of the poorest

Source: As for Figure 1.

policies were that had such a catastrophic effect on the incomes of the poor is well documented in an article first published in the Guardian on the 1^st June by John Harris https://www.theguardian.com/politics/2022/jun/01/the-decade-that-broke-britain-the-disastrous-decisions-that-left-millions-in-a-cost-of-living-crisis.

In Figure 7 I show the incomes of the top decile. In the period since 2015 when the incomes of the bottom decile fell by some £3,000 (in 2019 prices) that of the top decile increased by some £10,000 (in 2019 prices).

Figure 7 Incomes of the richest

Source: As for Figure 1.

 An overview

So, what is the answer to the question posed by this blog: What happened to inequality under Conservative and Labour governments? If we focus on the Gini for equivalised disposable income this fell under Labour and rose markedly under the Thatcher and current Conservative government. If we focus on how the top decile have fared relative to the bottom, on this measure inequality remained unchanged for the labour government but nearly doubled for both Conservative governments.

 If rather than focus on gaps, we focus on the level of incomes of the bottom decile this increased by 34 per cent under the Labour government, while under the current Conservative government their incomes fell by a similar percentage – back indeed to nearly their level in 1979. Those, often on the left, who think Labour policies under Blair were Thatcherite, could not be more wrong.   

 A note on the data

 As indicated under the Figures the source of this data is from the ONS which provides data for the incomes across the deciles of the income distribution for each year, the most recent data being for 2019. The ONS data is drawn from household surveys. Many economists think that using such a source is inadequate for capturing the full extent of inequality in an economy. This is because the very rich are so few they will not be captured by surveys. This has led to the use of tax data, where the super-rich will appear, and to combine such tax data with surveys to give a more accurate account of inequality. Thus, the data used in this blog may understate inequality. In a future blog I will review some work which has combined tax with survey data. I will also examine how far the incomes of the super-rich exceed those of the top deciles shown in Figure 7 above. Such work does not affect the picture shown above for the levels of incomes for the vast majority of households.

 

The Current Conservative Party’s Assault on the Poor

 

 

As is well know the period since the election of the coalition/ conservative government in 2010 has seen no rise in average real wages measured either on a weekly or hourly basis as I show in Figure 1. In 2019 real hourly earnings were 6 per cent below their level in 2010, while real weekly earnings were 3 per cent lower. The difference is due to people working more even though their hourly earnings were not rising.

Figure 1 Hourly and Weekly Earnings 1979-2019

Sources: ONS Data. Employee earnings in the UK and LFS: Total actual weekly hours worked.

So, on average over the period from 2010 to 2019 real wages were not rising but what of the poorest, what was happening to their incomes? Neither wages nor average incomes tell us about the incomes of the poorest. The best measure is their disposable income, that is their market income, what they earn from wages, self-employment or non-labour sources, plus the befits they receive less their taxes. In the Figure below I show a measure of disposable income that makes an allowance for household size -, incomes from a two-person household cannot be directly compared with a one-person household or ones with children. This is termed equivalised disposable incomes. For the bottom decile (that is the poorest 10 per cent of the population) equivalised disposable incomes declined by 48 per cent between 2015, the election of the conservative government, and the last full year before the pandemic. Figure 2 below shows that this unprecedented fall took this measure of income back to below the level of 1991 and only marginally above that of 1979. 

Figure 2 Equivalised disposable incomes for the bottom 10%

Source: ONS data: Average household incomes, taxes and benefits of ALL households by decile group

What explains this dramatic fall? First, it is not due to falls in market incomes. As is shown in the Figure below it increased by 17 per cent from 2015 to 2019, helped in particular by the real rise in the minimum wage.

Figure 3 Market Incomes

Source: As for Figure 2.

The answer is in Figure 4 below. On the left we see that the cash benefits to supplement earnings were slashed by nearly 25 per cent, while of the right taxes and national insurance contributions increased more than two and a half times. 

Figure 4 Benefits and Taxes of the Bottom 10%

Source: As for Figure 2.

The poorest were the subject of an assault on their incomes without historical precedent as their cash benefits were cut and their taxes increase, both government decisions. For those inclined to believe this is what Conservative governments always do it needs to be noted that the Thatcher government did nothing similar (see figure 4 above). Why was the period after 2015 so different?

The Guardian reported in July 2015 that  ‘George Osborne has unveiled an unexpected boost for low-paid workers, introducing a compulsory national “living wage” in a budget that also contained an assault on many of the measures introduced by Labour to tackle poverty.

In a final flourish in the first Conservative-only budget in 19 years, the chancellor portrayed the Tories as the party of working people by declaring that the living wage will be introduced from next April at a rate of £7.20 an hour for people over the age of 25.’

This rhetoric continues to this day. What the data shows is that the benefits to the poorest introduced by Labour are essential to prevent falls in disposable comes for the poorest. George Osborne may well have believed his argument that wages could replace benefits, he was imply wrong. 

  

 

 

 

Falling hourly earnings and increasing employment

 

The fundamental puzzle of the UK economy post the financial crisis

 

One of the many ironies of the Brexit debate in the UK was the fact that over a period when the problem of immigrants taking British jobs was the focus of public concern the number of people at work in the UK had risen to previous unknown heights. In this note I document how dramatic have been the changes of the last decade and how different was that job growth compared with the recessions prior to that of 2002-08. I show that the British economy has been good at increasing earnings or increasing the number of jobs, it has not proved good at doing both.

 

Employment

 

Just how different has been the pattern of job growth in the UK since the financial crisis, of 2007 to 2008, as compared with the previous recession in 1991 is shown in the Figure 1 below.

 

Figure 1 Employment in the UK: 1970 - 2020

Not only was the decline in jobs following the financial crisis modest relative to the fall after the 1991 recession but the recovery was far more rapid and the numbers of people in work grew rapidly after 2011 until the advent of the pandemic in 2020. The decline in employment with the lockdowns in 2020 is very modest as the ONS counts furloughed workers as employed on the grounds that they still have jobs and are temporarily absent. That does means that for 2020 that the numbers classified as employed are not the same as the numbers working, a point to which I return below.

 

In fact, the left-hand chart understates the magnitude of the achievement of the UK economy in creating jobs. Employment will grow because the population of those of working age increases. Indeed, over much of this period immigration increased. So, we want to know how many jobs there were relative to the population of working age. This is called the employment rate. It tells you what percentage of those in the population who could work found jobs.

 

In the three decades from 1970 to 2000 the employment rate fluctuated between 73 and 66 per cent. It reached its nadir of 66 per cent in the early 1980s after the first of the Thatcher recessions in 1981. However, this recession simply continued a downwards trend in the employment rate which can be dated from the mid-1970s. The second Thatcher recession of 1991 saw a sharp fall in the employment rate reducing it by some 4 percent points. The 1990s saw some recovery but by 2000 it was still below the level of the mid-1970s. The proportion of those in work since the 1970 had simply fluctuated between 73 and 66 per cent, after 2010 it took off.

 

Contrast the pattern before 2000 with the pattern afterwards. Compared with earlier recessions from 1970 to 2000 the financial crisis had a very modest effect on the employment rate, a decline of only 2 percentage points, while within two years of the crisis the employment rate started to increase and rose continually for the next five years to reach 76 per cent by 2019/2020, far exceeding the highest rates achieved in the three decades from 1970 to 2000. 

 

Hours worked

 

I noted above that for 2020 employment levels did not reflect hours worked. If we want to understand what determines the labour supply to the economy we need to consider not simply the numbers employed but how many hours they work. Indeed, it is hours worked that is the relevant measure of how much labour is supplied to the economy. In Figure 2 below I show how average and total weekly hours have changed from 1970 to 2020. We can now see the effects of the Covid pandemic on labour supply with the collapse in total hours worked in the right-hand chart of the Figure. Between its nadir in 1983 of 795.3 million hours it had reached 1 billion hours in 2019, the year before the pandemic decimated labour input into the economy. As the left-hand chart shows from 1983 to the financial crisis of 2008 average hours fell so over that period the number of jobs was rising faster than the labour supply.

 

Figure 2 Labour supply: Average and Total Hours Worked

What we need to explain

 

We can now clearly state what needs to be explained. Why after the most severe recession in post war UK history in 2008 did labour supply grow in a way it had never done before?

 

Figure 3 GDP and Earnings

There were two other major differences between the post Financial crisis and previous recessions which are shown in the left-hand chart of Figure 3 above. The first was that the growth rate of productivity, measured as GDP per hour worked, fell in a sustained way. The behaviour of real wages was even more dramatic. For the five years after the start of the financial crisis in 2007 the growth rate of real hourly earnings was negative. As the charts show this fall was unprecedented. The contrast with the first of the Thatcher recession is striking. In the early 1980s neither the growth of productivity nor real earnings were ever negative.

 

The cumulative effects of growth rates are hard to see so in the right-hand chart of Figure 3 I show the implication of these growth rates for the level of productivity and for real hourly earnings. The results of these very different patterns of growth rates implied that the level of productivity grew very little while real hourly earnings fell such that by 2019, on the eve of the Covid pandemic, they were back to their level of 2005, two years before the financial crisis.

 

So, what we need to explain is very puzzling? Falls in labour productivity would normally lead to a fall in the demand for labour and a fall in real earnings. While the demand for labour may well have shifted down clearly the supply effect was more than sufficient to offset this as the result was an increase in hours worked. Economists normally assume that to induce more employment you need higher earnings not lower ones. So, what explains this link between falling hourly earnings and more working hours?

 

There are broadly three answers to that question. One is that more workers are joining the labour force in lower wage areas so that it is not true the more hours are forthcoming with lower wages but that the proportion of low wage jobs is increasing. The second is that wages are indeed falling across all occupations and this is the result of falling productivity in those jobs. The third is that sectoral occupational change is occurring and workers are shifting to lower wage sectors.

 

Which of these explain the pattern we observe will be the subject of another blog posting.