October 2013 newsletter – BSA Section F – The labour market after the global financial crisis

The President of Section F for 2013, Prof Steve Machin (UCL), organised a session for the Festival of Science on September 11 at the University of Newcastle at which Prof Paul Gregg (Bath) gave a presentation outlining the unusual behaviour of the labour market since the global financial crisis and the resulting ‘great’ recession. This is David Dickinson’s account of the event.

Some unusual features
Gregg’s analysis started by explaining the profile of jobs, hours and real wages over 2008-13. He highlighted the unusual picture (compared to previous recessions) of relatively small loss in jobs, a fall in hours worked which was similar to previous recessions. He suggested that although there has been an increase in part-time workers (and those on zero hours contracts), the substantial increase in under-employment (workers wanting but unable to get full-time work) was mainly driven by people wanting to work longer hours. The main way that the pain of the recession had been borne this time, and unlike previous recessions, was on falling wages. Gregg observed that the data patterns were consistent with the empirical regularity that a 10 per cent fall in real wages would be associated with saving 5 per cent (or 2mn) jobs. So the economic pain from the current recession was widely borne by falls in living standard across the board rather than being restricted to the group of workers who became unemployed. He also noted that a deep recession combined with a limited loss of jobs meant that productivity growth had stalled and was around 15 per cent lower than would be expected.

Looking for explanations
He then went on to explore in more detail why these patterns were being observed. Firstly in terms of productivity he noted that firms were responding to relatively high cost of capital and relatively low cost of labour. As a consequence real investment had been very weak during the current recession and firms were using more labour instead. The picture for falling wages appears to be driven by two factors. First, Gregg pointed out that there had been a slowdown in wage growth since 2002. This was associated with a breakdown in the long-standing relationship between (median) wages and productivity. Part of this trend was due to increasing pension costs which added to the overall cost of employing a worker and part was the result of rising wage inequality with higher paid workers gaining a rising share of national output. These created a growing wedge between total per worker compensation which still rose in line with productivity and median wages. On top of this was a feature that wages have become more sensitive to unemployment movements with a doubling of unemployment reducing wages by around 12 per cent through this recession compared to around 6 per cent previously. The slower underlying wage growth combined with greater downward pressure from unemployment was driving wage changes into negative territory. He offered tentative explanations based on the decline in Trade Union power and the impact of increased unemployment.

Contrasting fortunes of young and old
Gregg then went on to examine the age profile. He showed that the current recession had seen a large increase in the number of older workers staying in employment and a large rise in unemployment among young people. The problem for the young unemployed is a sharp fall in new vacancies which young people rely on for entry into the labour market, whilst older workers were staying on in work and driving an upturn in overall employment. Gregg argued that it was good news for the economy that older workers were choosing to stay on in employment since it increased the stock of productive workers to cope with the pensions and health costs of an ageing population. He was however concerned about the implications for young people. One response was for them to stay on in Education and Training. This was a positive development given that they would have enhanced skills. However there was still a substantial minority of young people who were unable to gain either training or education and hence had difficulty transitioning into full-time employment. Providing support to young people wishing to enter the labour market was a key policy issue. Gregg also speculated that those in employment will need to adjust to the fact that wages will not continue to grow and there will come a time when children are not wealthier than their parents. The session finished with around 30 minutes of questions from the audience and a lively discussion around Gregg’s analysis.

Support for this event from the British Science Association and the Royal Economic Society is gratefully acknowledged.