Why if the UK employment situation is so good is the Bank of England panicking?

One of the conundrums in UK economic life has been the apparent divergence between UK economic growth and the UK labour market. The former has had a little growth and then flat-lined whereas the latter has signalled hopes of a better performance. I am immediately reminded of Rudyard Kipling’s famous statement as I look at the clear divergence.

Oh, East is East and West is West, and never the twain shall meet

The case for employment

Whilst there were many apparent issues with the UK economy in 2012 its ability to increase employment was not one of them. If we take the period from September to November 2012 we see this.

Compared with a year earlier:

 the number of men in full-time employment increased by 237,000, the number of men in part-time employment increased by 95,000,

 the number of women in full-time employment increased by 77,000, the number of women in part-time employment increased by 144,000,

the total number of people in employment increased by 552,000, the largest annual increase since 1989

So we see that one past criticism of these numbers -the switch to part-time work as opposed to full-time – had faded and there is now genuine growth in the latter too, on the way to the best annual performance for over 20 years. Indeed the January report told us this.

the number of people in full-time employment increased by 113,000 (over the three month period it covered)

All is rosy then? Well not quite as if we look for some perspective we see that better is still a fair bit below the peak. This is with the data released today.

The employment rate for those aged from 16 to 64 was 71.5%, up 0.3 percentage points on July to September 2012 and up 1.1 on a year earlier but it was lower than the pre-recession peak of 73.0% recorded for March to May 2008

So on this basis and using what has elsewhere been a prescient measure we would be expecting some improvement in the UK economy in 2013.

Don’t forget the price of employment

Perhaps an unusual way of putting it but we have seen substantial falls in the real price of employment as in real wages. Over the credit crunch period the Office for National Statistics recently reported that they had fallen by 7%. So if we continue with the good theme we can argue that the fall in the price of labour is likely to be a major influence in the increase in employment. Something that many economists have argued and indeed hoped for is what is a flexible labour market or what appears to be happening.

However in this ying and yang era things are unfortunately not that simple! For example the falling level of real wages has contracted UK domestic demand- or more specifically restricted possible rises- and so we have seen the quantity of employment boost to the economy be drained away up to now. We see today this has continued and in fact increased as pay rises drift lower.

Total pay (including bonuses) rose by 1.4% compared with October to December 2011

This compares to the official measure of consumer inflation at 2.7% and the Retail Price Index at 3.3%. Also we see that the concept of a squeeze on public-sector wages may be for some but certainly not for all.

Total pay in the public sector rose by 2.0%, while regular pay rose by 1.8%.

But whatever the breakdown and split overall we are left with this.

Average earnings in real terms are now at similar levels to those of 2002-03.

Lost decade anyone?

Self employment

This has been an issue as we wonder what its rise has added to our knowledge and indeed our economy. It now represents some 14% of the workforce. But the analysis made of the state of play here throws up something that is troubling.

Between 2007/08 and 2010/11 median real income from self-employment (in 2010/11 constant prices) fell by 16% for the UK as a whole and by one-third (from a higher starting point) for people living in London.

Ouch! We are not only discussing real falls but actual ones and they are substantial. The ONS also identifies a possible and indeed probable cause.

This may reflect underlying changes following the recession, such as increases in the numbers of self-employed people which have not been matched by increases in the amount of work available, resulting in rising underemployment rates among the self-employed.

So there are clear problems here for a section of our labour force and we have another possible reason for the reported employment improvement not feeding into the wider UK economy.

As ever care is needed with any report like this as when I looked at the survey and asked about its reliability it was given a thumbs-up by Jonathan Portes of the NIESR who has followed it. I however am concerned that surveying 24,000 a year leaves room for a fair bit of doubt.

At least some at the Bank of England are unsure too

If it was true that the UK economy was doing better than reported in other numbers we have the issue of why at least some of the Monetary Policy Committee are keen on the value of the pound falling. For example this weekend Martin Weale gave a speech with this in the conclusion.

The likely outcome of this would be a lower real exchange rate which, while unwelcome in terms of its effect on inflation, would go some way to redress what is probably, at present, a substantial external imbalance

There is an unwritten instruction for central bankers which goes as follows “Do not discuss your own currency falling”! As we observe Martin Weale breaking this we also note that it is something he is wishing for. However if we move on from his fevered economic fantasies to reality we see this in the same paragraph.

To sum up, it is possible that the full benefits of the 2007/8 depreciation are yet to be realised

Good isn’t it? It did not work last time so let us do some more! Also there is a deeper clowning going on here as if we take him at face value a depreciation now will not help until 2018 or so when we may not want or need it.

A case of do not call us we will call you I think  (and of course we will not)…..

Today’s Monetary Policy Committee Vote

Regular readers will be aware that I have been arguing for several months that there is a split on the MPC about further Quantitative Easing. Also that I expect them in the end to do more as such an economically and intellectually limited group seem incapable of raising their game. So I had a wry smile at today’s minutes.

Three members of the Committee (the Governor, Paul Fisher and David Miles) voted against the proposition, preferring to increase the size of the asset purchase programme by a further £25 billion to a total of £400 billion.

Apparently this does not seem to bother them at all.

Inflation was still above the target, and was likely to rise further in the first half of the year,and to remain above the target for the next two years. There was a risk that the prospect of continued above-target inflation could result in a rise in inflation expectations which could affect wage and price-setting behaviour.

Actually we know that wages are depressed and if anything falling so that leaves only prices to rise and for real wages to fall yet again. Yes the same mechanism which has done the most to prevent the UK economy recovering! And even worse the starting gun for it is being fired by the body most responsible for putting the conditions for an economic recovery in place. Truly has their role been perverted in this era.

Is the Funding for Lending Scheme about to be relegated?

There is a strong element of “The lady doth protest too much,methinks” (Hamlet) about this below.

In this context, for example, the Committee continued to monitor the effects of the FLS, which was so far operating broadly as it had anticipated,

So three members of the MPC (at least) never expected it to work? Otherwise why did they vote as they did last month?

It was only on Monday that I pointed out that FLS was looking like yet another backdoor bank bail out.

Comment

So as I review today’s data and MPC minutes I note that we seem doomed in the UK to repeat the same mistakes and policy errors. It would be like the episode in Star Trek The Next Generation where the USS Enterprise is trapped in a repeating loop except Captain  Jean-Luc Picard figured it out and made a change. Whereas the MPC seem determined to erode any advances we may make in higher inflation and  lower real wages. So whilst they think this.

So as the pound £ plummets to US $1.532 the UK FTSE 100 soars to 6400. Mervyn King must be happy right now!

I am reminded of the biggest hit of the glam rock group the Sweet, Blockbuster.

Does anyone know the way, did we hear someone say ?

We just haven’t got a clue what to do

This entry was posted in Banks, GDP, General Economics, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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