15 Aug 2012

Why recession plus labour hoarding means more jobs

As latest government figures show a drop in the number of people without work – despite the recession – Channel 4 News speaks to one of the economists who are scratching their heads to explain why.

Commuters in London (Reuters)

“The only other example I can think of where this has happened is when there has been large-scale government intervention,” Ian Brinkley, centre director of the Work Foundation, told Channel 4 News.

“In Germany during the current downturn, there was large scale government intervention in the form of salary subsidies and there was a change relations between firms and employees.”

But other than this, he is baffled as to what may be driving the two factors in counter-intuitive directions.

“I can’t think of an example where the labour market has behaved in such a way for such a long time. If we’d seen these employment figures following the last couple of recessions, we’d say we were in a recovery. But the other data such as GDP figures and high street spending, point to us being in recession.”

Labour hoarding

One explanation for why employment figures are rising as productivity falls is the phenomenon called “labour hoarding“, where employers do not adjust the amount of employees they pay, despite fluctuations in economic conditions.

Four years ago if you had asked me what would be the level of unemployment under the current economic conditions, I’d have said I’d expect it to be be at least 3 million people. Jonathan Portes

Ian Brinkley says such a practice is not a long-term explanation for the recent official figures: “Logically, this phenomenon of “labour hoarding” can only go on for a short time but this has gone on from about 2008 and it’s now 2012. So the idea of four years of blaming this on labour hoarding is starting to lose credibility.”

“The one thing I can think of which could explain this is that we may be underestimating GDP, but it would have to be a significant revision to show that the UK economy has been growing rather than contracting in the first half of this year”.

Jonathan Portes, director of the National Institute of Economic and Social Research, agrees. He told Channel 4 News there are also other factors: “The pace of the fiscal squeeze has slowed somewhat, and it might be that GDP is revised upwards.

“Also we’ve seen employees prepared to accept shorter hours, there’ve been pay cuts and many people have moved into self-employment. These changes might not be terribly pleasant for individuals but it’s better than having an extra half-million people on the dole.”

“Jobs growth in London has been strong, due perhaps to the Olympics but also London’s general economic resilience. But there’s no doubt that it is still a puzzle”.

He says the pattern has come as a surprise to economists who might have expected significantly higher unemployment figures based on the other data: “Four years ago if you had asked me what would be the level of unemployment under the current economic conditions, I’d have said I’d expect unemployment be at least 3 million people.”

But while the collective brains of the economics community try and figure out why this is happening, Mr Portes says the figures do give him some cause for optimism.

“If there is no international deterioriation – for example a disorderly collapse of the eurozone, or Israel bombs Iran for example, I think there is the potential for a decent increase in productivity and growth.”