Ten Important Facts about the UK Labour Market Today

In an article for the National Institute Economic Review published today I reviewed the main trends in the UK labour market over the last 50 years. Ten important facts emerge:

1. Unemployment although oscillating between 12% and 4% has fallen dramatically to its level of around 4% now – it’s lowest in 50 years. An examination of figure 1 shows that unemployment in the UK which went from a steady state full employment rate of 2–4 per cent in the 1960s and early 1970s to a huge high of around 13 per cent by 1984.

Figure 1. Unemployment rate aged 16 and over (seasonally adjusted)

There is no doubt that the biggest economic issue of the 1980s in the UK (and other advanced countries) was the high level of unemployment. Now working hours are more flexible and less certain in a world of zero hours contracts and the ‘gig economy’

2. Wages are not rising in real terms for most people in the UK economy.  Prices have been rising faster than wages for most of the last 10 years. Most of us are becoming poorer – some at a faster rate than others.

3. Public sector pay, since the recession of 2008 has fallen in real terms by around 10-15%. Public sector jobs tend to have: longer holidays, shorter working hours, less chance of redundancy and better pensions. Until recently most public-sector pension schemes have been based on a final salary (defined benefit, DB) scheme. Typically, private sector workers are paid more, earlier in their career, but have less generous pensions. Valid comparisons need to look at ‘Total Reward’ – i.e. the value of pay and pensions and conditions of employment over the whole life cycle.

Figure 2. Average weekly earnings growth (incl. bonuses and arrears)

Figure 2 shows, since the crash of 2008 annual public sector wage rises in the UK have basically been pegged at 0 or 1 per cent in order to keep a tight control over public spending. During this time private sector wages have been rising – mainly in line with inflation. This has now created a sizeable gap between public and private sector wages. Most recently NHS staff have been given a three-year pay deal which will give them around a 6 per cent pay hike. This will inevitably lead to knock-on effects throughout the other public sector. How will these pay rises be afforded; secondly, will they give rise to inevitable tax rises to pay for them; and finally what will be the knock-on consequences for future wage settlements and price inflation?

4. Net Immigration into the UK hit an all-time high of over 300,000 per year in 2016 – roughly equivalent to a city the size of Birmingham ever 3 years. It is possible that this had an important knock effect on the Brexit referendum. Figure 3 charts this rise, which culminated in a net inflow, at its height in 2016 of nearly 350,000 people a year. It is fanciful to believe the resolution to the country’s is to curtail low skilled immigration.

Figure 3. Net immigration numbers to the UK 1975-2018

5. Occupational pensions are getting less valuable. Most public sector workers in occupational pension’s schemes are now in Career Average Schemes which will be worth significantly less than the Defined Benefit (DB) Schemes they replaced. Indeed, young people will find that their pensions will be worth much less in real terms in 30 years’ time. This major change was necessary to balance the public sector fiscal position. What has gone largely uncommented on is that this will cause a seismic shift in personal income and wealth of individuals. For most public-sector workers, it will leave them between 10–40 per cent worse off in terms of the real value of their pension when they retire relative to the generation who retired on a full DB pension from an equivalent

6. Trade Union membership has been dramatically falling from the mid-1980s onwards. Figure 4 graphs this, both in terms of the absolute number of trade union members (right hand scale), and also the fraction of those who are employed who are in a union (left hand scale). This trend was in large part a result of the Thatcher reforms of industrial relations which also saw a dramatic fall in strike activity. Trade Unions have lost over 3 million union members in the last 40 years.  Less than one in four workers are now union members. It is unclear the role that this has played in the rise of the ‘gig economy’ and zero hours contracts.

Figure 4. Trade union membership

7. The National Living Wage (NLW) is now worth much more in real terms than the National Minimum Wage was when it was introduced in 1999. Those who are becoming worse off in relative terms are NOT those on the NLW but those on low pay – but paid just above the NLW.

8. State Pensioners have never had it so good.  The value of the state pension – indexed to inflation – is now higher in real terms than it has ever been. However, the incontrovertible truth is that individuals are not saving enough for their retirement and to meet the cost of their own health and social care into old age. The state is largely withdrawing from its responsibilities in this area and, as yet, individuals have not understood that these reforms will leave them much poorer into their old age

9. Intergenerational inequality – literally how well off the next generation will be compared to this generation – is getting much worse for young people.  The young are being ‘ripped off’ by the old due to a combination of student loans, high house prices, and lower real wages and pensions for young people relative to their parents and grand-parents.

10. Over-education – in the sense of having qualification higher than those necessary in the job is very prevalent. The fraction of graduates who are not getting graduate jobs remains stubbornly high at around a third of all graduates. Widely touted estimates of the rate of return to a degree of up to 15% extra earnings per year of extra education have now been shown to be false. It is now 6% or lower.  This has major implication for the viability of young people taking out large loans to fund their studies.

You can read Peter’s article in full here and listen to his podcast here