Britain is a jobs factory of insecure work

Economic insecurity is sustaining Britain's low road economy - which is bad for wages, bad for productivity and bad for living standards. The Chancellor recently lauded Britain as a "jobs factory." But our so-called employment miracle appears to be a symptom of a deep economic malaise that is making all of us less secure.

Earlier this week the Chancellor delivered a budget that was more of the same. There’s still no indication of an appetite to address structural economic challenges; still no let-up on austerity that will push many families into poverty; and still no reversal of the Treasury’s use of housing market stimuli to create easy growth (at the expense of the millions of people for whom a home is no longer affordable).

Though the budget made the headlines, it was Mr Hammond’s comments last weekend that I found most revealing.

Much of the focus was on the gaffe that there are no unemployed people in Britain. This is obviously untrue - 1.4 million are ‘officially’ unemployed, but the true figure may be closer to 2.3 million if you count the ‘hidden’ unemployed, including 760,000 people currently on incapacity-related benefits who would be expected to be in work in a genuinely fully employed economy. These people aren’t fraudulent claimants too lazy to work. They’re communities, often concentrated in older industrial areas, that have been badly let down by decades of under-investment.

But it was Hammond’s comment that the UK had become a “jobs factory” that really caught my eye. Spun as a positive by the Chancellor, for me it conjured up images of an assembly line churning out dull, repetitive, insecure jobs en masse. Unfortunately, that’s a closer reflection of what Britain has become: an assembly line of insecurity. 

Jobs miracle or a living standards crisis?

The problem for the Chancellor is that the “jobs factory” or the “employment miracle” isn’t a sign that the British economy is working well, but rather is a symptom of a deep economic malaise. As the graph below shows, the UK is truly exceptional - but not in a good way. We’re the only advanced economy that is creating economic growth whilst making our workers poorer.

(Source: FT analysis of OECD data)

There’s also something else that’s puzzling economists. We’re getting high employment growth, but negative wage growth in comparison to pre-recession levels. The conventional wisdom is that when employment goes up and labour markets ‘tighten,’ the bargaining position of workers improves and wages rise. This hasn’t happened - employment growth and pay growth are uncoupling. The assembly line of insecurity is a big part of the explanation. As Bank of England member Michael Saunders noted in a fantastic speech in January (and my colleague Anthony Painter addressed in a recent blog), labour market insecurity - and the hidden ‘slack’ or spare labour that comes with it - is likely placing a significant downward pressure on pay growth. This is tied to the dramatic growth in self-employment, the rise of zero hour contracts, agency work, the gig economy, under-employment and other types of non-standard work that mean workers have much more spare capacity. It means full-time employment as a proportion of all work has fallen by several percentage points in recent years.

There’s another reason why workers’ bargaining power has weakened so considerably. Building on the theme of job insecurity, Saunders relates it to  the “scarring” effect of unemployment and the increasingly punitive nature of our welfare system (though his framing is more diplomatic). The insecurity caused by a combination of an increased risk of unemployment and a harsh benefits system may be pushing people into risk averseness - meaning they would rather stick to jobs on the same levels of pay than seek out better pay and risk losing employment and facing an unsympathetic welfare state. The latter should not be under-estimated: the government has been highly efficient at restricting and stigmatising unemployed people’s access to benefits. Remarkably, while 80 percent of unemployed people received jobless benefits 20 years ago, today only half of them do. When unemployed people do get benefits and labour market support from the state, it is designed to get them into work and off benefits as quickly as possible, rather than supporting them to get into decent work that develops and makes best use of their human capital. This keeps the assembly line of insecurity ticking. Our problems therefore are not simply rooted in a run away free market capitalism, but rather the state and the market combining to drive economic insecurity (this makes the case for a universal basic income even more urgent).

These factors have tilted the balance of power in the economy even more firmly away from workers and people - especially those with the highest levels of employment insecurity.

There are also broader and longer run factors at play. In particular the UK’s highly flexible labour market (without a correspondingly generous welfare state as a counterweight, as is the case in countries with “flexicurity”), the weakening of unions and collective bargaining, and the low cost of labour.

Britain’s productivity crisis: the cost of a low road economy

Britain’s living standards crisis is fuelled by a productivity crisis. You’d have to go back over two centuries to find a decade of productivity growth as bad the last ten years.

When the spare labour from the assembly line of insecurity combines with high labour market flexibility, a punitive welfare state, low cost of labour and the short-termism of quarterly capitalism - it spells bad news for productivity. It means that rather than investing in new equipment, technology and processes, companies prefer to turn a quick profit and keep costs to a minimum so that they meet quarterly targets. Why invest for the long term when cheap, highly flexible labour will do the job for now? Why invest in training to maximise skills utilisation when your business model is premised on getting the job done with the minimum required skill?

It is therefore little wonder that the UK has a long tail of under-performing businesses as pointed out by Sir Charlie Mayfield. Two-thirds of workers are employed in firms with below industry average levels of productivity. The unintended consequence of Britain’s self-image as a flexible economy is that it has become a Mecca for low-cost, low road capitalism.

Much of the productivity gap with other countries lies in the low wage sectors (see the Inclusive Growth Commission report) - those high employment parts of the economy that don’t get the attention of fancy industrial strategies and policy interventions. The assembly line of insecurity is churning out job after job in these sectors. It is these jobs - often low paying, poor quality and insecure - that are the driving force behind our much lauded “jobs miracle.”

(Source: Michael Saunders' analysis of ONS data)

So yes, Mr Hammond is right. We are indeed a jobs factory - but not the kind  that we, or indeed probably the Chancellor himself, really wants.