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Critically examine the impact of employment relations upon social and economic performance

Employment Relation

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 Introduction

The UK Office of National Statistics (ONS) is responsible for the generation and distribution of statistics that are relevant to the UK population on a monthly basis. The latest statistics for the labour market indicate that there has been an increase of about 419,000 more jobs in 2015 compared to 2014. Additionally, these statistics indicate that there has been an increase in job uptake by about 177,000 people between April-June 2015 and July-September 2015. Overall, there are 31.12 million people who are currently employed in the UK. Out of this number, about 22.8 million are working full-time, which is an increase of about 273,000 people from the previous year; while 8.42 million work part-time, an increase of 146,000 people from the previous year.

The rate of employment is at a high as 73.7% of people aged between 16 and 64 years are currently employed. These statistics are compared to those of 1971 when the UK was experiencing an economic boom. However, there are still 1.75 million people who are unemployed, which is the percentage of people seeking for available work and willing to be employed. This number represents a 210,000 reduction from the previous year and a 103,000 reduction from the period between April and June. Out of the unemployed, 957,000 are men while 793,000 are women. These figures represent a reduction by 130,000 and 80,000 respectively from the previous year.

The rate of unemployment fell to a level commensurate to that of March and May 2008, before the onset of the economic downturn. The rate stands at 5.3%, which is lower than the 5.6% in the period between April and June and 6% the previous year. There are about 8.97 million people in the UK aged between 16 and 64 years who are not actively seeking employment. This represents an inactivity rate of 22% slightly lower than the rate of 22.2% the previous year. However, the rate of inactivity, representative of the number of economically inactive citizens, has not changed in the three months before January 1991.

Pay and bonuses in the UK increased in 2015 compared to the previous year. There was a 3% increase in aggregate pay including bonuses as well as a 2.5% increase excluding bonuses.

Employment by industry and trends in the UK economy

The recession of 2008 hit the UK hard primarily because of its industrial organisation. There is a large concentration of people in business services and the public sector. The bias is especially in finance for business services and health and education for the public sector. There was a period referred to as the Great Moderation that occurred between the 1990s and the 2000s where there was rapid growth in business and financial services. There was an expansion in output and an increase in tax revenues, which consequently led to the expansion of the public sector and in turn employment. This pattern of growth led to substantial divisions in sources of growth for the economy across different regions with London having a larger share of the high value-added sectors with a bias in finance. Conversely, the other parts of the country experienced growth primarily in the public sector.

The changes in the patterns of employment in different industries in the UK led to long-term changes in economic conditions in different ways. The proliferation of technology and global competition has seen the UK follow the trend of other developed countries in focusing on services in place of manufacturing. This in itself has exposed the country to competition from developing countries in regard to lower value products. Falling trade barriers especially in the single European market have led to countries specialising in different industries, determined by their comparative advantages. The loss of lower value manufacturing markets is compensated by a gain in low-cost imports and consequently new markets for higher value products.

Changes in technology have played a major role in employment in the UK. Sectors that have been leading in growth, including information technology, specialist engineering and financial services have been dependent on advances in technology and have consequently attracted skilled labour. There is increased demand for mathematical, engineering, science and technology skills, which are a reserve of the affluent in society. There is a relatively strong supply of skilled labour especially from the youth graduating in UK colleges, which has attracted FDI especially in industries that the UK was previously active in, for example car production. Consequently, there has been inequality in the job market as only the highly skilled individuals get the best jobs and only people with higher levels of education get these jobs. Access to higher education is a reserve of the well-off in the society and is a major contributor to the widening inequality in the UK.

Since the early 2000s, the sectors that have been experiencing the highest growth in the economy included manufacturing and services industries. This growth is primarily measured according to output. However, the greatest growth in jobs was in professional services, including public and business services (Brinkley, 2007). Some of the largest sectors experiencing growth in employment were also leading in size. They included social and residential care, legal and accounting sectors and real estate. Productivity was also relatively high in manufacturing sectors that required increased levels of skill. High-value production, although increasing productivity of individual employees, however, contributed to reduced employment.

On the contrary, the slowest growing sectors in the UK were mainly in primary industries and general manufacturing. These include extraction of minerals, agriculture and processing, which operate in international markets that have a high level of competition. During the recession and its aftermath, there was stagnation in the services and production sectors but there was a sharp decline in manufacturing industries despite increased productivity.

According to Winston et al. (2014), these trends in employment will continue for the foreseeable future. Manufacturing is going to continue its decline while services will experience significant growth. Growth is expected in ICT, business services and legal and commercial services. The UK is well positioned to take advantage of expanding markets in developing countries by offering specialised services due to a combination of effective institutions and skilled labour market.

Winston et al. (2014) further project that there will be an 80% net job growth in private services between 2012 and 2022, which shows that the trend of changing focus of the UK economy towards services is expected to continue. The greatest number of jobs will be generated in the social care and health sectors. However, the need for replacements, for people who are retiring, will mean that there is continued demand for jobs across all sectors in the economy including in those where decline is projected.

The projected trends in the job market indicate that there will be a polarisation in the labour market with higher skilled jobs having the higher hand. Growth in the services sector is expected to increase over 2.3 million jobs for professionals, managers and associate professionals. A decline in the number of middle-ranking jobs especially in terms of blue collar jobs and administration by about 800,000 is expected. The lower skilled end of the labour market will experience and increase of about 600,000 jobs, especially in caring and leisure services. By 2022, it is expected that most of the jobs in the UK will be held by people with degree level skills.

There is a potent threat to enhanced competitiveness of the UK from emerging economies like India and China. These countries have better industrial policies that have led to the growth in their ICT, nano-technology and pharmaceutical sectors, which will be some of the major employers in the decades to come (Griffiths et al., 2006). Thus, there is a need for improved employment policies in the UK to enhance its position in the higher value markets.

Productivity

During the Great Moderation, there was significant progress made by the UK in bridging the gap in labour productivity in comparison to other similar economies in northern Europe and the US. That progress was brought to a halt during the recession and the immediate period after it, while some of the progress was reversed. Productivity in the UK was affected more negatively than in some of the other comparable economies.

The table above shows how the UK compares to other advanced economies in productivity in the period after the recession. The table shows that there is a substantial gap in labour productivity, which makes the higher unemployment levels in the UK an acceptable trade-off. In comparison, countries like the US, Germany and the Netherlands have similar or slightly better levels of unemployment albeit with a 30% or greater advantage in outputs for every man hour worked. Several data sources indicate that there is a strong contrast between the UK levels of employment and productivity in the period before the recession and after the recession compared to other advanced economies. The growth of productivity in the UK before the recession was sustained and strong and even outpaced that of the US. In sharp contrast, many of the countries in Europe only experienced modest growth during this period. During the post-recession period countries like Canada and the US continued to experience high levels of productivity while some like France experienced a decline followed by recovery after the recession had dissipated. The UK, on the other hand, entered a stage of economic stagnation in productivity, which is starting to let off, as indicated by the levels of 2015.

The weak productivity in the UK could be explained as being a consequence of a combination of a resurgence in employment and poor growth in output. The failure of the economy to surpass levels before the recession, coupled with new highs in hours worked have led to a decline in labour productivity. On the contrary, Germany, which experienced a fall in unemployment but did not experience a sharp recession, had a better output. The effect of labour productivity on the economy has led to a bias.

Barnett et al. (2014) argue that productivity in the UK was affected by the fact that UK firms held on to hoarded employees even when their demand had dwindled, which affected measured productivity. A contrary opinion is given by Broadbent (2014), who argues that the lasting nature of weakened productivity is likely a result of changes in composition of employment and output that stem from sustained shocks to trade in the UK. Oulton (2013) cites the weaknesses in the banking sector as being the primary causes of weakened productivity while Goodridge et al. (2013) argue that the focus of the economy on intangible products and services was part of the reason. However, there is hope that the UK will get back to its previous levels of productivity as the emerging economies continue to develop and demand higher value services, in which the UK is a prime exporter, increases. The shift in the economy from primarily a manufacturing-based one to a services-based one may be justified in the future as the UK exports services to all major markets and emerging markets in the world. The recent trends in employment and productivity point to this eventuality.

Hoarding of employees is a benefit for the society since it provides a large part of people, who would otherwise have been jobless, with the means to make a living. Thus, low productivity could have negative consequences on the economy but could be considered as a positive for the society.

The productivity puzzle

The productivity trends in the UK amount to what experts refer to as the ‘productivity puzzle’. The reasons for the existence of the productivity puzzle vary as much as they are speculative. However, some of those that experts have concurrence on include a temporary demand side shock, a temporary supply side shock, and a permanent supply side shock. The analysis of these three reasons gives an insight into whether the productivity levels in the UK can recover to their pre-recession levels or that the damage to the economy occasioning the weakened productivity is permanent.

A temporary demand side shock means that the current weaknesses in productivity in the UK are as a result in variances in demand and will dissipate once economic recovery gains traction. Its premise is that the current gap in output is large. Preliminary evidence from a cursory glance at firm activity does not support this assertion as many firms are working close to their full capacities, which could be a misleading conclusion as firms may be working hard as a means of attracting new business. Since the number of transactions recorded for each hour of work done will be lower than that recorded before the recession, the measured productivity of employees will also commensurate. The cyclical nature of labour productivity and the probability of it being driven by demand points to hoarding of labour by companies. The primary reason for hoarding labour is the fact that shedding of excess labour could be costly for a firm. Thus, firms may decide to hold onto underutilised employees with the expectation of an upturn in the economy. Keeping on skilled staff could also have been made easier by forbearance by banks, low rates of interest, and low wage growth due to the recession (Arrowsmith et al., 2013). However, labour hoarding is only likely to explain a small part of the productivity puzzle since performance in the last year in the labour market has been a result of flows into employment rather than a decline in the flow of unemployment. However, increases in employment levels have been supported by an increase in the number of self-employed individuals and an increase in part-time workers. Self-employment leads to people working below their capacity thus a reduction in average hours worked and consequently a reduction in output. Additionally, part-time employees account for part of the productivity puzzle in that there is fair tracking of GDP in full-time employment hence no indication of a productivity puzzle.

An attempt to remedy productivity by laying-off the hoarded employees may lead to negative consequences for both the firms and the employees in the short and medium term, which is because the firms will have to part with large parts of their capital to compensate these employees whereas the employees will have lost their primary source of employment. In the longer term, however, firms could gain by having leaner workforces that may be easier to manage and consequently ensure efficiency (Athwal et al., 2011). Similarly, this could be beneficial for employees who would not suffer from loss of skills due to underutilization jeopardising their chances for future productivity.

A temporary supply side shock, on the other hand, could contribute to weakened productivity due to the reported levels of supply capacity in the economy being weaker (Benito et al., 2010). An increase in labour could have been a consequence of households increasing their supply of labour as a means of making up for reduced incomes due to the decrease in real wages. Broadbent (2012) argues that an analysis of sectoral data on prices, employment and output points to an increase in capital mismatch in the country. Allocation of labour to more productive sectors of the economy could be as a consequence of low productivity that results from the increased levels of forbearance by banks and low-interest rates shown to firms.

There are comparatively low levels of failures by companies given the many factors that would suggest the contrary, which could be explained by the delay in capital reallocation, which leads to the creation of ‘zombie companies’ that survive at the behest of low-interest rates despite the fact that they may be using their assets in an unproductive manner. These facts suggest that there is scope for catch-up, albeit above-trend, in the future, which could occur at the cost of job losses and insolvencies. These facts point to a period of difficulty in adjustment in the years or months to come for certain areas of the economy.

A third explanation of the productivity puzzle could be a permanent supply side shock. This point suggests that weakened productivity could be as a result of permanent damage to output in the UK. Data collated by the ONS suggests that the UK is currently operating at around 14% below its trend levels before the recession, which is despite the spare capacity of the UK economy being just under 3% of GDP. A permanent shock in productivity could result from; weaknesses in growth of capital stock; loss of some parts of the high value business segments, especially in financial services due to the economic downturn; and loss of skills in employees as a result of high and persistent levels of unemployment, which could also lead to detachment from the labour market.

The productivity puzzle may also be reflective of an error in the measurement of labour market data or output, which is a possibility since producing an accurate picture of the economy, is usually difficult especially in times when there is relative volatility and uncertainty. The average revision for quarter-on-quarter initial estimates in growth in GDP between 1985 and 2010 has stood at +0.25% (Goldman Sachs Global Economics, 2012). This revision is usually done some two or three years after the initial estimates. Thus, three years down the line, there could be significant changes in the effects of the recession on the UK economy especially after labour productivity puzzle has been cracked. Another reason for the productivity puzzle, which is less likely, is the fact that the extents of improvements in employment could have been over-reported by the relevant authorities, which is, however, not a viable explanation for the productivity puzzle. The more likely explanation for the productivity puzzle is a combination of the above factors rather than any one factor playing the sole role.

Conclusion

The UK experienced consequences of the economic downturn of 2008 that have persisted to this day. Its recovery unlike that of other advanced nations has been slow which has led to a mismatch between output and employment in what experts refer to as the productivity puzzle. The fall in output has been far greater than the rate of unemployment which has led industry commentators to project either a complete recovery or permanent damage to the economy. There are many factors that will determine the level of labour productivity in the future including; the level of unemployment, whether the recent increase in temporary workers can change into a permanent arrangement, level and research and development in the economy and demographic changes.

References

Arrowsmith, M., Griffiths, M., Franklin, J., Wohlmann, E., Young, G. & Gregory, D. (2013) “SME forbearance and its implications for monetary and financial stability”, Bank of England Quarterly Bulletin, 53(4), 296–303,

Athwal, B., Brill, L., Chesters, G. & Quiggin, M. (2011) Recession, poverty and sustainable livelihoods in Bradford. York: Joseph Rowntree Foundation

Barnett, A., Chiu, A., Franklin, J. & Sebastia-Barrel, M. (2014) “The productivity puzzle: a firm-level investigation into employment behaviour and resource allocation over the crisis”, Working Paper No.495 (April). Bank of England, London.

Benito, A., Neiss, K., Price, S. & Rachel, L. (2010) “The impact of the financial crisis on supply”, Bank of England Quarterly Bulletin, 50(2), 104–14,

Brinkley, I. (2007) The knowledge economy in Europe. London, The Work Foundation

Broadbent, B. (2012) “Productivity and the allocation of resources”, Speech given at Durham Business School, 12th September. Bank of England, London.

Broadbent, B. (2014) “The balance of growth”, Speech given at London School of Economics, 17th January. Bank of England: London.

Goldman Sachs Global Economics (2012) “Deciphering the UK’s productivity puzzle”, Commodities and Strategy Research, September 28, 2012

Goodridge, P., Haskel, J. & Wallis, G. (2013) “Can intangible investment explain the UK productivity puzzle?”, National Institute Economic Review, 224(1), R48-R58.

Griffiths, R., Huergo, E., Mairesse, J. & Peters, B. (2006) “Innovation and productivity across four European countries”, Oxford Review of Economic Policy, 22(4), 483–98.

Oulton, N. (2013) “Medium and long run prospects for UK growth in the aftermath of the financial crisis”, CEP Occasional Papers 37. Centre for Economic Performance, London School of Economics, London.

Wilson, R.A., Beaven, R., May-Gillings, M., Hay, G. & Stevens, J. (2014) “Working Futures 2012–2022”, Evidence Report 83. UK Commission for Employment and Skills, Wath-upon-Dearne.

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