The London Labour Market in Recession

1. A summary explanation of London’s labour market in the recent recession by Melisa Wickham

2. What the summary covers: • Background: • How does the economy in the recent recession, in the UK and London, compare to that in the 1990s and 1980s recessions? • How has GDP/GVA moved? • How has unemployment and employment moved? • Looking forward: • How might the factors that have supported the labour market thus far change going forward? • How might this make the recovery from the recent recession different from the recovery in the 1990s and 1980s recessions? Possible explanations: Why has the labour market in the UK and London been more resilient during the recent recession so far? We examine seven possible explanations

3. Note: • It is not presumed that the full impact of the 2008 recession on the labour market has necessarily been experienced yet. • These slides will be updated quarterly to track the performance of both the UK and London’s economy. Where possible, data on the underlying factors supporting the labour market in this recession will also be updated. These will all continue to be benchmarked against the performances during and after the 1990s and 1980s recessions. • For a more detailed examination and explanations see the main report: ‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics.

4. UK Background BACKGROUND

5. UK GDP fell faster, and further, in the 2008 recession than in the 1990s and 1980s recessions: This is equal to a steady rate of decline of 2.0% a year This is equal to a steady rate of decline of 3.7% a year In the 1980s GDP fell by 4.7% over 5 quarters And in the 1990s it fell by 2.5% over 5 quarters In 2008, GDP fell by 6.4% over 6 quarters This is equal to a steady rate of decline of 4.3% a year Source: ONS, GDP chained volume measure, constant 2006 prices, SA

6. But the claimant count rate has not risen as much in the 2008 recession as it did in the 1990s and 1980s recessions: But by the same time had increased by 4.1 percentage points in 1990s recession And had increased by 4.9 percentage points in 1980s recession The claimant count rate has increased so far by only 2.2 percentage points Note: Claimant count denominator = claimant count + WFJ Source: ONS

7. Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession: Employee job numbers have fallen by 3.9% so far during this recession But by the same time fell by 4.3% in the 1990s recession Source: LFS, ONS

8. London Background

9. Note: CAUTION:The GVA estimates used here for London are not national statistics, and there are causality issues between the labour market performance and output. Specifically, the past relationship between the labour market and GVA along with the latest ONS labour market statistics (as well as other variables) are used to estimate GVA. What this means is that if London’s labour market has performed relatively better during this recession then it is almost a pre-built condition that the output estimates will also be stronger. These estimates are also often subject to significant revisions. Therefore, the London’s GVA estimates shown next should be taken as indicative (and not necessarily definitive) of how output may have performed in London over the recessions. Next page

10. Like the UK, London’s GVA also fell faster in the 2008 recession than in the 1990s recession: This is equal to a steady rate of decline of 2.8% a year This is equal to a steady rate of decline of 4.2% a year London’s output fell by 6.2% over 9 quarters in the 1990s recession And has fallen by 5.3% over 5 quarters in the recent recession Source: GVA at basic prices, constant 2005 prices, Experian

11. And like the UK, the claimant count has not risen as much in the 2008 recession as it did in the 1990s and 1980s recessions: But by the same time in the 1990s it had risen by 5.7 percentage points The claimant count rate in London has risen by 1.7 percentage points so far in this recession And by 3.7 percentage points in the 1980s recession Note: Claimant count denominator = claimant count + WFJ Source: ONS

12. Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession: But by the same time fell by 8.1% in the 1990s recession Has fallen by 2.6% so far in this recession Source: Nomis

13. Background summary: Both London and the UK have had a steeper fall in output over the 2008 recession than the 1990s and 1980s recessions ……….. London’s labour market has performed better than the UK’s so far in the 2008 recession And although London’s labour market performed worse than the UK’s in the 1990s recession ……….. At the same time, both London’s and the UK’s labour market have held up relatively well 1 London figures are derived from Experian’s regional GVA estimates. UK figures are derived from ONS GDP estimates. 2 From UK output peak to nine quarters after. 3 For the UK this is over the period from UK output peak to eight quarters after. For London this is over the period from UK output peak to seven quarters after.

14. Why? Why?

15. We examine seven possible reasons POSSIBLE EXPLANATIONS

16. Summary of analysis of possible explanations: Next page

17. Strong corporate profitability and low rate of business failures Growth in the public sector Reduction in relative wages Labour market structural change Click on a potential reason for evidence Less labour market structural change Reduction in working hours Less economic structural change Measurement error For more detailed explanations see the main report:‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics’. Jump to conclusion

18. Reduction in relative wages Have workers accepted larger pay cuts/smaller pay rises to reduce their risks of unemployment?

19. Reduction in relative wages Compared to the 1980s and 1990s recessions it does not seem that wages in the UK have fallen sufficiently to compensate for lower firm output. We can therefore look at real unit wage costs to see if wages have fallen enough to ease financial pressures on employers, thereby reducing the need for job cuts. Real unit wage costs show how real wages (wages adjusted for inflation) have moved compared to firms’ productivity (output per worker).

20. Reduction in relative wages However………. ………… at the same time the drop in the value of Sterling has meant that the UK’s relative unit labour costs have fallen significantly so far in this recession The early 1990s also experienced a large drop in Sterling value, but that did not occur until after GDP returned to growth. The peak to trough fall in relative unit labour costs in the 1990s recession was only around half of that in this recession. In an increasingly globalised world, relative unit labour costs are more important to firm hiring and firing decisions. Looking forward, slow employment growth during the recovery should minimise pressure on wage rises in the UK. However, Sterling is unlikely to fall much further, so further falls in the relative unit labour costs in the UK seem unlikely. Return to list Source: IMF

21. Strong corporate profitability and low rate of business failures • Higher than historical average, and rising, profits are likely to have minimised unemployment rises in the 2008 recession by: • Affording firms time to rely on natural wastage to reduce headcount (i.e. freezing recruitment whilst staff leave voluntarily/retire), and • Limiting the number of firms going bankrupt 2008 peak 1990s peak Private sector profits were higher (and rising) prior to the 2008 GDP peak than prior to the 1990s GDP peak. Private sector profits were already being squeezed ahead of the 1990s recession. Source: PSNFC net rate of return (%, SA), ONS

22. Strong corporate profitability and low rate of business failures Actual business failures In the 1990s recession, business failures rose by 105% In the 2008 recession, business failures rose only by 57% Compared to the rise in the 1980s and 1990s recessions and given the fall in GDP, the rise in company liquidations has been modest during the 2008 recession. In the 1980s recession, business failures rose by 97% Looking forward, special Government support measures are gradually being withdrawn and this could make future liquidations a risk. Particularly if private finance is still tight and economic activity places demand for working capital. However, the forecast low real interest rates in the near term should continue to support business survival. Especially as firms remain relatively highly leveraged/indebted by historical standards. • Two potential reasons for the strength and survival of business in this recession (compared to those previously) are: • The speed and magnitude of the change in the Bank of England’s monetary policy, and • Government policy measures such as ‘time to pay’ business support 1990s 2008 1980s Return to list Note: Historic business failures are based on data for compulsory liquidations, creditors’ voluntary liquidations, administrative receiverships, administrative orders and company voluntary arrangements from The Insolvency Service

23. Growth in public sector If we exclude jobs in public administration, defence, education, health and social work from the total number of jobs in the economy…….. If we take these sectors (public administration, education, and health) as a proxy for the public sector then this suggests that the public sector has played a significant role in mitigating employment falls during the 2008 recession in the UK ………then the movement of workforce jobs so far in this recession is not too different from the movements seen in the 1990s and 1980s recessions Employment during the 2008 recession in some sectors has moved as would be expected given the fall in output. Others, however, have played an important role in protecting the labour market. Source: Workforce Jobs, ONS

24. However, a lot of this increase is due to the incorporation of financial institutions (e.g. Lloyds) into the public sector Around 25% of the public sector employment increase between 2008 and 2010 was in London. Around 40% of this is due to the reclassification of financial institutions into the public sector Growth in public sector There has been a large rise since the recession London has benefited from the recent growth in public sector jobs. However, a lot of this is due to the reclassification of some financial institutions. These jobs are unlikely to be lost. Further, public sector employment in London is a relatively small percentage of total employment. The public sector job cuts should, therefore, be less costly for London compared to other parts of the country. Looking forward, the OBR estimates that public sector employment will fall by around 400,000 by 2015/16. This means that public sector employment will contract at a similar compound rate over the next 5 years as the private sector experienced between 2008 and 2010. Looking specifically at public sector employment in the 2008 recession: Note: ‘Other public sector’ includes financial corporations. In the timeframe above, RBoS and Lloyds were included in the 3rd quarter from UK output peak (2008 Q4). Northern Rock was included prior to the GDP peak. Source: ONS Return to list

25. Reduction in working hours Have firms just adjusted the hours that their staff work rather than the total number of staff? So average weekly hours have not fallen by as much as may have been expected so far in this recession given the GDP decline. Thus far in the 2008 recession average weekly hours have fallen by 1.7% And in the 1980s average weekly hours fell by 3.5% By the same time in the 1990s recession average weekly hours fell 2.1% Note: Average weekly hours worked is taken as total actual weekly hours worked divided by numbers in employment. In employment does not include second jobs. Source: LFS, ONS

26. Reduction in working hours But in the UK as a whole, average weekly hours rose by 1.3% between 2008-2009 Compared to a fall of 1.6% in the UK between 2007-2008 Looking forward, as GDP recovers average weekly hours of work should rise. During this period employment growth is likely to be slow. Average weekly hours worked in London: But have only fallen by 0.3% between 2007-2009 in the UK Between 2007-2008 average weekly hours worked in London fell by 0.8% Between 2008-2009 average weekly hours worked in London fell a further 1.4% Overall, between 2007-2009 average weekly hours worked in London fell by 2.2% Note: Average weekly hours worked is taken as total actual weekly hours worked divided by numbers in employment. In employment does not include second jobs. Source: LFS, ONS Return to list

27. Labour market structural change Since the 1990s there has been an increase in the proportion of skilled jobs in the UK If the economic recovery is slow firms may eventually have to layoff these workers. At the least, it will be some time before they hire additional workers, so growth in employment may be slow. Specialist jobs often involve higher costs (e.g. in the recruitment process) This is likely to have created some reluctance for firms to cut their workforce during this recession Return to list

28. Less economic structural change During the 1980s (and to some extent the 1990s) recession there was a structural transition in the UK economy; businesses were moving from the manufacturing industries to service industries. So firm’s long-term economic outlook is likely to have been more pessimistic (and for many more businesses) during the 1980s and 1990s recessions Economic structural transition (such as manufacturing to services) is a lengthy process so it is likely that employment will pick up faster during this recovery than the 1980s or 1990s recoveries. Labour retention would have arguably been less rational for firms in the 1980s and 1990s recessions than in the 2008 recession Return to list

29. Measurement error Two possible sources of error in official national statistics: Could the official statistics be wrong? Underestimation of the fall in employment Overestimation of the fall in GDP Not very likely But the fall in UK GDP is not too different from the fall in GDP of comparable countries affected by the global downturn But the workforce jobs series shows a similar pattern to that of the labour force survey Have they all miscalculated GDP? Have they both been underestimated? Return to list

30. Factors that are likely to support the labour market further as the economy grows: Looking forward summary • Reduced relative wages • Strong corporate profitability • and low business failures • Lower economic structural • change

31. Factors that may slow any improvement in the labour market as the economy grows: • Reduced working hours • Labour market structural • change • Reductions in public sector • employment

32. END For a more detailed examination and explanations see the main report: ‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics. Return to start