Summary slides: London's labour market in the recessions

A summary explanation of London’s labour market in the

recent recession by Melisa Wickham

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?

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

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?

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.

UK Background

BACKGROUND

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

90

92

94

96

98

100

102

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

GDP i

ndex

(100

=GDP

pre

reces

sion p

eak)

1980's recession1990's recession2008 recession

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

And in the 1990s it fell

by 2.5% over 5

quarters

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



In 2008, GDP fell by 6.4% over 6

quarters

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

99100101102103104105106107

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

Quarter from UK output peak

100 -

claim

ant c

ount

rate

at UK

GDP

pe

ak

20081990s1980s

Note: Claimant count denominator = claimant count + WFJ

Source: ONS

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

But by the same time had increased by

4.1 percentage points in 1990s

recession

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

93949596979899

100101


100 =

emplo

yee j

obs a

t UK

outp

ut pe

ak

20081990's

Source: LFS, ONS

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

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:

93949596979899

100101

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

Quarter from UK GDP peak

100 =

Lond

on G

VA at

time o

f UK G

DP

peak

1990s2008

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

This is equal to a steady rate of

decline of 4.2% a year

This is equal to a steady rate of decline

of 2.8% a year

And has fallen by 5.3% over 5

quarters in the recent recession

London’s output fell by 6.2% over 9 quarters in the

1990s recession

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

99100101102103104105106107

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

Quarter from UK output peak

100 =

Lond

on cl

aiman

t cou

nt rat

e at

UK ou

tput p

eak

20081990s1980s

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

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

But by the same time in

the 1990s it had risen by 5.7 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

889092949698

100102

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

100 =

Lond

on em

ploye

e job

s at

UK ou

tput p

eak

2008 recession1990's recession

Source: Nomis

But by the same time fell by 8.1% in the 1990s

recession

Has fallen by 2.6% so far

in this recession

Background summary:London

UK

Peak-to-trough output decline (%)1

2008 5.3 6.41990s 6.2 2.51980s - 4.7

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

2008 -4.2 -4.31990s -2.8 -2.01980s - -3.7

Percentage point change in claimant count rate2

2008 1.7 2.21990s 5.7 4.11980s 3.7 4.9

Change in employee jobs numbers (%)3

2008 -2.6 -3.91990s -8.1 -4.31980s - -

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.

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


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).

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

-25-20-15-10-505

10

Perce

ntag

e cha

nge i

n rela

tive

unit l

abou

r cos

ts (2

007 Q

1 to

2009

Q3)

Ireland Spain Germany United States United Kingdom

Source: IMF


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

89

10111213141516

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Net r

ate of

retu

rn (%

)

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.

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

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 =

emplo

ymen

t at c

yclic

al pe

ak

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

Growth in public sector

Source: Workforce Jobs, ONS

………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.

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 9Quarter from UK output peak

100 =

emplo

ymen

t at U

K outp

ut pe

ak

Public sector employment (excluding'Other public sector')Private Sector Employment

Total public sector employment (including'Other public sector')

Growth in public sector

Return to list

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

However, a lot of this increase is due to the

incorporation of financial institutions (e.g. Lloyds) into the

public sector

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 specifically at public sector

employment in the 2008 recession:

There has been a large rise since the recessionLooking 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.

Reduction in working hours

Approximate average weekly hours worked

9696.5

9797.5

9898.5

9999.5100

100.5


100 =

total

actua

l wee

kly ho

urs

worke

d/in

emplo

ymen

t at G

DP

peak

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

Thus far in the 2008 recession average weekly

hours have fallen by 1.7%

By the same time in the

1990s recession average

weekly hours fell 2.1%

And in the 1980s

average weekly

hours fell by 3.5%

So average weekly hours have not fallen by as much as may have been

expected so far in this recession given the GDP decline.

Have firms just adjustedthe hours that their staff

work rather than the total number of staff?

-2.5-2

-1.5-1

-0.50

0.51

1.5

London UK

2007-20082008-20092007-2009

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 0.8%

Compared to a fall of 1.6%

in the UK between

2007-2008Looking 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:

Between 2008-2009 average weekly hours

worked in London fell a further 1.4%

But in the UK as a whole,

average weekly hours rose by 1.3%

between 2008-2009

Overall, between 2007-2009 average

weekly hours worked in London

fell by 2.2%

But have only fallen by 0.3% between

2007-2009 in the UK

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 recruitmentprocess)

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 movingfrom 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

downturnHave 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.

Summary slides: London's labour market in the recessions

Economy & Finance

Transcript of Summary slides: London's labour market in the recessions