25 May 2021

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.

12 March 2021

Why is the labour party so ashamed of its last government?

 

In a YouGov poll conducted of labour party members in early 2020 Tony Blair was by far the most unpopular of those who have led the labour party since 1964. Only 37 per cent of labour party members had a favourable view of him as compared with 71 per cent for Jeremy Corbyn and 70 per cent for Ed Miliband.


At the time of the most recent labour leadership election none of the candidates was willing to praise the record of his government when compared with the Tories. A similar silence emanated under Jeremy Corbyn at the last election. Surely the first time in democratic politics in this country where a party has tried to get elected on the basis that it was very bad last time but would do much better this time. It did not work, which might well not be thought a surprise.

 

Now the issue that probably dominates in the minds of labour party members is the Iraq war. A deeply divisive and, even at the time, a very unpopular policy. But the critique is wider than that. The argument is often heard that New Labour was simply a continuation of the neo-liberal free market individualist policies instigated by the Thatcher premiership. Indeed, it appears many members of the labour party draw no distinction between the outcomes for the two periods in the area of economic policy. There are those who argue for a more positive view of new labour, for example:

www.theguardian.com/commentisfree/2018/nov/20/new-labour-neoliberal-left-tony-blair

but even those willing to defend the Blair and Brown governments seem unaware that its economic policy effectively reversed the pattern of income growth under the Thatcher government.

 

To demonstrate this I present the data for rises in average household incomes across the distribution for the periods of the Thatcher and New Labour governments, the latter including Gordon Brown’s premiership and thus the years of the financial crisis. In Figure 1 I show the total increase based on the trend growth of income in the period. While this captures what happens on average over the period it may mislead as to the differences between the beginning and end points of the premierships. So, in Figure 2 I compare the average incomes for the top and bottom decile at the beginning and end points of the two premierships. In Figure 2 I also show how the median household fared and the size of the gap in incomes between the top and bottom deciles.

 

It would be little exaggeration to say that the New Labour years were the exact opposite of those of the Thatcher premiership. The grey line shows increases in market incomes, while the red lines show increases in equivalised disposable income, both are total percentage changes over the period of the respective premierships. For both you can see how those increases differed across the distribution from the bottom decile (that is the bottom 10 per cent) and the top decile (the top ten per cent).

 

Figure 1  Thatcher and New Labour Compared

Market incomes are the wages of employees and the self-employed that the market delivers. Disposable incomes are those available to households after transfers and income taxes and national insurance. Clearly how well off is a household depends on how many adults and children there are in the households. What equivalised means is that an adjustment has been made for such differences. Thus, equivalised disposable incomes are our best means of comparing how households across the income distribution have fared.

 

As Figure 1 shows for the Thatcher years increases in disposable household incomes for the bottom 30 per cent of the households were derisory, averaging about 6 per cent - that is a total increase over eleven years. From the fourth to the top decile there is a steady march up with the higher the household income the higher the percentage growth rates.

 

The contrast with New Labour is stark. The bottom 30 per cent of the household had increases that compare favourably with those of the top 30 per cent for both market and equivalised disposable incomes. Indeed, while the bottom 30 per cent of households under Thatcher saw falls in their market incomes under New Labour they had massively larger increases than those at the top of the distribution.

 

Percentage changes are a bit abstract so what do these percentages means for actual incomes across the distribution. Further what do they mean for the gap between the rich and the poor across these years of Thatcher and New Labour economic policy. Those questions are answered by the data in Figure 2 which shows the second way of presenting the data.  

 

Figure 2 Household Incomes across the Distribution


The top and bottom left charts in Figure 2 show increases in average annual household incomes (all at constant 2019 prices) for the top and bottom deciles respectively. The years shown cover the start and end of the Thatcher premiership and the start and end of the New Labour ones. The message is the same as from Figure1 but now we can put numbers on those income differences between Thatcher and New Labour.

 

Considering equivalised disposable incomes under Thatcher incomes in the top decile increased from £ 36,150 to £64,976, a rise of 80 per cent. In contrast incomes for the bottom decile increased from £6,748 to £7,113, a rise of just over 5 per cent.

 

The comparable numbers for New Labour are an increase from £68,452 to £89,596 for the top decile, a rise of 31 per cent. For the bottom decile the increase is from £7,681 to £10,256, a rise 33.5 per cent. This is less than that shown in Figure 1 as there was some slowing of the growth rate for the bottom decile during the later New Labour years. However, both approaches point to the reversal of the pattern shown during the Thatcher years for the New Labour ones.

 

Clearly the bottom and top deciles are the extremes of the distribution. In the top right I show the pattern for the median households. For these the two period saw virtually identical increases if we look at changes between the beginning and end points from Figure 2. If we look at trends, as used in Figure 1, New Labour does slightly better. 

 

In the bottom right of Figure 2 we show the gap between the top and bottom deciles. It is indeed this gap which people often mean when they talk of increasing inequality. As the chart shows it is true that the gap between the top and bottom deciles has been growing both under both Thatcher and New Labour. But that reflects, not the failure of New Labour, but the assault by the Conservative government on the poor such that by1997 the level relative to the rich was so low that even the much  better performance for the poor under New Labour was insufficient to close the gap.

 

New labour represented a revolution in the success of economic policy toward the poorest parts of society. It is unsurprising that the Tories remain silent on this success. That they are joined in this silence by members of the labour party is a tragedy for the people that New Labour was so successful at helping.

 

Notes on the data used in the charts:

The data is provided by the ONS. The most recent data can be found at:

www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/theeffectsoftaxesandbenefitsonhouseholdincome/financialyearending2019

The data in the Figures is drawn from past publications of this data which seeks to provide estimates of the redistributive role of taxes and benefits on household income and inequality. The data are from our Living Costs and Food Survey (LCF), a voluntary sample survey of around 5,000 private households in the UK.

 

These statistics are produced at the individual level meaning, for example, that income quintiles are derived by ordering people, rather than households, on an equivalised household disposable income basis. This method is consistent with the statistics reported in Average household income, UK: financial year ending 2019 and Household income inequality, UK: financial year ending 2019, and it ensures the variance in household size across the income distribution is better accounted for.

 

My book – The Poor and the Plutocrats (to be published by Oxford University Press on March 24 2021) - uses this data source, presenting quintiles rather than deciles, to show how the US compares with the UK in terms of how levels of income across the distribution have changed. The book also provides more details on the data used.

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 fa...