Something funny is going on in Britain’s jobs market. And it’s not a joke.
Unemployment has dropped to 4.5%, the lowest since 1975. The employment rate is the highest on record at 74.9%. On paper, it’s the tightest labour market in almost half a century, and yet workers are no better off. In fact, they are worse off after adjusting for inflation.
The problem is that, while employers bemoan skills shortages and have a near-record number of vacancies to fill, average wages are barely growing. Inflation, meanwhile, has picked up as the pound’s weakness since the Brexit vote raises the cost of imports.
On the latest figures, for the three months to May, pay adjusted to account for inflation fell by 0.5% year-on-year.
Taking a longer view, pay has yet to recover to its pre-crisis peak in inflation-adjusted, or real, terms. Compared with the spring of 2008, employees are earning £15 less a week before tax and other deductions from pay, according to the Office for National Statistics.
The Bank of England says the squeeze on living standards will continue for the rest of this year. It expects inflation to peak around 3% in the autumn. Wage growth is expected to average 2% in 2017. The Bank does not see much improvement next year. But it has often been wrong about wage growth, typically making overoptimistic forecasts.
So what is going on? Mark Carney, the Bank’s governor, had a chance to give his take last week as he unveiled Threadneedle Street’s outlook for the economy.
Carney said the UK’s lacklustre productivity growth bore much of the blame. There were also signs that companies were reticent to increase pay amid Brexit uncertainties. As the governor spoke, striking Bank staff protested outside over a below-inflation pay offer.
His comments exposed a split on the Bank’s monetary policy committee. Carney and the deputy governor Ben Broadbent both rebuffed the idea that wages have failed to clamber back to their pre-crisis level in part because the nature of work has changed.
By contrast, Andy Haldane, the Bank’s chief economist, has highlighted several trends that suggest anaemic wage growth is at least partly driven by the balance of power shifting towards employers. Haldane used a recent speech to argue the clock had been turned back to the days before the Industrial Revolution when there were no trade unions and self-employment was rife. He is right. Workers’ influence over their hours, conditions and pay has been eroded as a culture of insecurity takes hold.
Consider the following four factors.
First is the rise of short-hours contracts and of zero-hours contracts, whereby employees are not guaranteed a minimum number of hours in any given week.
The number of people on zero-hours contracts in their main job rose from 168,000, or 0.6% of those in employment, in 2010 to a record 905,000, or 2.8% of those in employment, at the end of 2016.
Of course, some of that rise may be the result of greater awareness of such contracts and people accurately reporting their circumstances to statisticians.
In the latest figures, there was a drop in the number of companies using such contracts. But as the TUC points out, some of that is down to bad publicity around zero-hours arrangements and companies are finding other ways to employ people on insecure terms. It cites evidence that businesses are employing staff on short-hours contracts, guaranteeing as little as one hour a week.
What these contracts mean in practice is people are turning up to work at shops, care homes and warehouses and, if their employer so chooses, they are being sent home before their shift has even begun.
A second factor is higher self-employment, up from less than 8% of the workforce in 1980 to almost 15% in 2016, as Haldane noted. Some people are happily setting up their own business, enjoying being their own boss. But some is what MPs investigating the gig economy have described as “bogus self-employment”. People were being forced into self-employment as couriers, taxi drivers and other roles, as companies declined to take them on as employees, said parliament’s work and pensions committee. Some were on contracts paying less than £2.50 an hour, said the committee’s former chair Frank Field.
Those self-employed earnings are not in the ONS official wages data, but this reliance on lower-paid contractors naturally depresses nationwide earnings growth.
A third factor is underemployment, or part-time workers who say they would like more hours. This has declined over the past three years, but is still higher than a decade ago: 12.1% of part-timers, compared with 9.4% in 2007.
There is also evidence that more people are stuck in work for which they are overqualified and so are unlikely to be earning to their full potential . The Institute for Public Policy Research reckons 5.1 million people are “over-educated” for their role compared with 3.9 million in 2006.
Finally, there is the dimming of workers’ voices. Union membership has fallen dramatically and the idea of driving it back up in an increasingly fragmented workforce is challenging. Theresa May once pledged to give workers a stronger say by putting them on boards but has since watered down her proposals.
Put all that together and weak wage growth is not so puzzling after all. Nor is it so surprising that work is no longer as sure a route out of poverty as it once was. In 1996-97, there were 2.3m working households in poverty, today there are 3.7m, according to the Joseph Rowntree Foundation.
To gauge how far we truly are from full employment, JRF has combined various labour market measures. Its “more jobs gap” captures the proportion of the workforce not in work, including those classed as economically inactive, but who would like to work and those who are underemployed. The total is 5.4 million people, or 18% of the labour force (taking a broader view than official statistics by also including those who are inactive but who would like to work).
No wonder the old relationship between pay and headline unemployment is dead.
The Bank of England can keep being overoptimistic on pay and the government can keep saying that work is the best way out of poverty, but they will both be proved wrong if the balance of power continues to slide further towards employers.
