A summary explanation of London’s labour market in the recent recession

& recovery (updated Sept

2011) by Melisa Wickham

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?

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 is GDP/GVA moving?

•How is unemployment and employment moving?

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

Note:

•These slides were last updated in Sept 2011, and 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 and recovery will also be updated. These will all continue to be benchmarked against the performances during and after the 1990s and 1980s recessions.

•It is not presumed that the full impact of the 2008 recession on the labour market has necessarily been experienced yet.

•For a more detailed examination and explanations see the main report: ‘Understanding why the labour market impact of the recent recession has been less pronounced so far than in the 1980s and 1990s recessions’.

UK Background

BACKGROUND

UK GDP fell faster, and further, in the 2008 recession than in the 1990s and 1980s recessions, but GDP recovery is slower:

92

93

94

95

96

97

98

99

100

101

102

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Quarter from UK GDP peak

GD

P in

dex

(100

=GD

P pr

e re

cess

ion

peak

)

1980s

1990s

2008

Source: ONS, GDP chained volume measure, constant 2006 prices, SA

Updated to Q2 2011 (preliminary estimate)

GDP fell by:

•4.6% in the 1980s recession

(at a CAGR of -3.7%)

•2.5% in the 1990s recession

(at a CAGR of -2.0%)

•6.4% in the 2008 recession

(at a CAGR of -4.3%).

After just over three years (13 quarters) from the start of the recession in the 1980s and 1990s GDP had fully recovered to pre-recession peaks.

However, in the recent recovery, GDP remains 3.9% below it pre-recession peak.

But the claimant count rate has not risen as much in the 2008 recession as it did in the 1990s and 1980s recessions:

Percentage point change from UK output peak in UK claimant count rate

99

100

101

102

103

104

105

106

107

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Quarter from UK output peak

100

= cl

aim

ant c

ount

rate

at U

K GDP

peak

20081990s1980s

Note: Claimant count denominator = claimant count + WFJ

Source: ONS

But by the same time had increased by

4.5 percentage points in 1990s

recession

And had increased by

5.9 percentage points in 1980s

recession

The claimant count rate has increased so

far by only 2.3 percentage

points

Updated to Q1 2011

Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession:

Percentage change in UK employee jobs from UK output peak

93

94

95

96

97

98

99

100

101

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Quarter from UK GDP peak

100

= em

ploy

ee jo

bs a

t UK

outp

ut p

eak

20081990s

Source: LFS, ONS

Employee job numbers have fallen

by 3.0% since the start of this recession

But by the same time fell by 5.9% from the start of

the 1990s recession

Updated to Q1 2011

London Background

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.

Note:

Next page

Like the UK, London’s GVA also fell faster in the 2008 recession than in the 1990s recession:

93

94

95

96

97

98

99

100

101

-2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Quarter from UK GDP peak

100

= Lo

ndon

GVA

at t

ime

of U

K GDP

peak

1990s

2008

Source: GVA at basic prices, constant 2005 prices, Experian

Updated to Q1 2011 London’s output fell by:

•6.2% in the 1990s recession (at a CAGR of -2.8%)

•6.5% in the 2008 recession (at a CAGR of -5.3%)

After 11 quarters from the start of the UK’s recession, GVA remains 3.5% below it’s peak

By the same time after the 1990s

recession, output remained 5.7% below its peak

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:

Percentage point change in London claimant count rate

99

100

101

102

103

104

105

106

107

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32

Quarter from UK output peak

100

= Lo

ndon

cla

iman

t co

unt ra

te a

t U

K o

utpu

t pe

ak

2008

1990s

1980s

Note: Claimant count denominator = claimant count + WFJSource: ONS

The claimant count rate in

London has risen by 2.0 percentage

points so far in this recession

Updated to Q2 2011

And by 4.6 percentage points in the

1980s recession

But by the same time in the 1990s it

had risen by 6.5 percentage points

Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession:

Percentage change in London employee jobs from UK output peak

88

90

92

94

96

98

100

102

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Quarter from UK GDP peak

100

= Lo

ndon

em

ploy

ee jo

bs

at U

K ou

tput

pea

k

20081990's recession

Source: Nomis

But by the same time fell by 11.3%

in the 1990s

recession

Has fallen by 2.7% so far in this recession

Updated to Q1 2011

Background summary:

London

UK

Peak-to-trough output decline (%)1

2008 6.5 6.4

1990s 6.2 2.5

1980s - 4.6

Constant annual growth rate (over peak-to-trough period) (%) 1

2008 -5.3 -4.3

1990s -2.8 -2.0

1980s - -3.7

Percentage point change in claimant count rate2

2008 2.0 2.3

1990s 6.5 4.5

1980s 4.6 5.9

Change in employee jobs numbers (%)3

2008 -2.7 -3.0

1990s -11.3 -5.9

1980s - -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 thirteen quarters after.3 For UK output peak to twelve quarters after.

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 thirteen quarters after.3 For UK output peak to twelve quarters after.

Both London and the UK have had a

steeper fall in output over the 2008 recession than the 1990s

and 1980s recessions

At the same time, both

London’s and the UK’s

labour market have held up relatively well

And although London’s

labour market

performed worse than the UK’s in the 1990s recession ………..

……….. London’s labour market has performed better than the UK’s so far in the 2008 recession

Why?

Why?

We examine seven possible reasons

POSSIBLE EXPLANATIONS

Summary of analysis of possible explanations:

Possible explanations

Likely contribution to labour market strength during the

2008 recession so far

     

Reduction in relative wages High

Strong corporate profitability and low rate of business failures High

Growth in the public sector High

Labour market structural change Medium

Reduction in working hours Medium

Less economic structural change Medium

Measurement error Low

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Less labour market

structural change

Less economic structural

change

Measurement error

Reduction in relative

wages

Strong corporate profitabili

ty and low rate

of business

failures

Growth in the public sector

Labour market

structural change

Click on a

potential

reason for

evidence

Reduction in

working hours

For more detailed explanations see the main report: ‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics’.

Have workers accepted larger pay cuts/smaller pay rises to reduce their risks of unemployment?

Reduction in relative wages

Reduction in relative wages

Real unit wage costs show how real wages (wages adjusted for inflation)

have moved compared to firms’ productivity (output per worker).

Source: ONS (ROYJ, MGRN, MGRZ, ABML), GLA Economics calculation

Updated to Q1 2011

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 labour costs

94

96

98

100

102

104

106

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

100 = real unit labour costs at GDP peak

Qua

rter

from

UK

GDP

peak

1980s 1990s2008

Wages per £ of output have actually risen since the recent recession

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.

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

Return to list

-25

-20

-15

-10

-5

0

5

10

Perc

enta

ge c

hang

e in

rela

tive

unit

labo

ur c

osts

(200

7 Q

1 to

20

09 Q

3)

Ireland Spain Germany United States United Kingdom

Source: IMF

Reduction in relative wages

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.

The early 1990s also experienced a large drop in Sterling value, but that did not occur until afterGDP returned to growth. The peak to trough fall inrelative unit labour costs in the 1990s recession

was only around half of that in this recession.

In an increasingly globalised world, relative unitlabour costs are more important to firm hiring

and firing decisions.

Strong corporate profitability and low rate of business failures

8

9

10

11

12

13

14

15

16

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Net

rate

of r

etur

n (%

)

1990s

peak

2008

peak

Source: PSNFC net rate of return (%, SA), ONS

Higher than historical average, and rising, profits are likely to have minimised unemployment rises in the 2008 recession by:

(a) Affording firms time to rely on natural wastage to reduce headcount (i.e. freezing recruitment whilst staff leave voluntarily/retire), and

(b) Limiting the number of firms going bankrupt

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.

Updated to Q4 2010

Profits have shown signs of recovery much earlier than in the previous recession and remain much higher than during the 1990s recession

Return to list

Strong corporate profitability and low rate of business failures

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

Actual business failures

1980s

1990s 2008

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%

In the 1990s recession,business failures rose

by 105%

In the 2008 recession, business failures rose

only by 57%

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

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

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.

Percentage change in UK workforce jobs excluding public administration & defence, education, and health & social work

90

92

94

96

98

100

102

-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Quater from cyclical peak in employment

100

= em

ploy

men

t at

cyc

lical

pea

k

1978Q3-1983Q41989Q1-1994Q22007Q1-2010Q1

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 played a significant role in mitigating employment falls during the 2008 recession in the UK

Growth in public sector

Source: Workforce Jobs, ONS

………then, until more recently, the movement of workforce jobs during the 2008 recession was not too different from the movements seen in the 1990s and 1980s recessions

Employment during the 2008 recession in some sectors has fallen in line with output. Others, however, have played an important role in protecting the labour market.

Updated to Q1 2011

UK public and private sector employment (08 Q1 to 10 Q2)

95

97

99

101

103

105

107

0 1 2 3 4 5 6 7 8 9 10 11 12

Quarter from UK output peak

100

= em

ploy

men

t at

UK

outp

ut p

eak

Public sector employment (excluding publicly owned financialcorporation)Private Sector Employment

Total public sector employment

Growth in public sector

Return to list

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

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, in March 2011 the OBR estimated that public sector employment will

fall by around 400,000 by 2015/16. Looking specifically at

public sector employment :

Updated to Q1 2011 There was a large rise

since the recession

Public sector employment (excl. publically owned

financial corporations) has fallen and is now

below its pre-recession peak

However, much of this was due to the

take over of financial institutions (e.g.

Lloyds) by the public sector

Reduction in working hours

Approximate average weekly hours worked

96

96.5

97

97.5

98

98.5

99

99.5

100

100.5

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Quarter from UK GDP peak

100

= to

tal a

ctua

l wee

kly

hour

s w

orke

d/in

em

ploy

men

t at

GD

P pe

ak

20081990's 1980's

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

And in the 1980s

average weekly

hours fell by 3.8%

So although average weekly hours have fallen quite a bit in the recent recession, much of this was only experienced in

the last quarter.

Thus far in the 2008 recession average weekly

hours have fallen by 3.3%

Updated to Q1 2011

By the same time in the

1990s recession average

weekly hours fell 2.3%

Have firms just adjustedthe hours that their staff

work rather than the total number of staff?

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

London UK

2007-20082008-20092009-2010

Reduction in working hours

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

Between 2007-2008 average weekly hours worked in London fell

by 0.6%

Compared to a fall of 0.3%

in the UK between

2007-2008

Average weekly hours worked in London:

Between 2008-2009 average weekly hours

worked in London fell a further 1.4%

And by a further 1.3% in

the UK between 2008-

2009

Overall, between 2007-2009 average

weekly hours worked in London

fell by 2.0%

But only fell by 1.3% between

2007-2009 in the UK

However, between 2009 and 2010 average weekly hours worked in London rose by

0.8%

Compared to a 0.2% increase in

the UK

Looking forward, as GDP recovers

average weekly hours of work should continue to rise. As

this occurs employment growth is likely to be slow.

If the economic recovery is slow firmsmay eventually have to layoff these workers.

At the least, it will be some time beforethey hire additional workers, so growth in

employment may be slow.

Labour market structural change

Return to list

Since the 1990s there hasbeen an increase in theproportion of skilled jobs

in the UK Specialist jobs often

involve higher costs

(e.g. in the recruitment

process)

This is likely to havecreated some reluctance for firms to cut their workforce

during this recession

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.

Less economic structural change

Return to list

Labour retention would have arguably been less rational for firms in the 1980s and

1990s recessions than in the 2008 recession

So firm’s long-term economic outlook is likely to have been more pessimistic(and for many more businesses) during

the 1980s and 1990s recessionsEconomic structural transition (such as manufacturing to services) is alengthy process so it is likely that

employment will pick up fasterduring this recovery than the

1980s or 1990s recoveries.

Measurement error

Return to list

Two possible sources of error in official national statistics:

Overestimation of the fall in GDP

Underestimation of the fall in employment

But the fall in UK GDP is not too different from

the fall in GDP of comparable countries affected by the global

downturn

Have they all miscalculated GDP?

But the workforce jobs series shows a similar pattern to that of the labour force survey

Have they both been underestimated?

Not very likelyCould the official statistics be wrong?

Factors that are likely to support the labour market further as the economy grows:

•Reduced relative wages•Strong corporate profitabilityand low business failures•Lower economic structural change

Looking forward summary

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

END

Return to start

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.