The economy in Wales: position and implications

Jonathan PriceChief Economist Welsh Government

Latest position and prospects

Employment after recession (Last quarter before recession = 100)

99

9595

100

92

94

96

98

100

102

1 4 7 10 13 16 19

1970s 1980s

1990s Current

Source: ONS

Number of quarters after output peak

GDP after recession (Last quarter before recession = 100)

103

104

102

108

97

90

94

98

102

106

110

1 4 7 10 13 16 19

Great Depression

1970s

1980s

1990s

Current

Source: ONS

Number of quarters after output peak

Recessions compared:

Latest labour market position (changes):

Labour Market - Annual ChangeJul 2012 to Sep 2012

Claimant count - Oct 2012

Wales UKEmployment Rate 1.3 1.0(change in levels) 34,000 513,000

Unemployment Rate -1.1 -0.4(change in levels) -14,000 -110,000

Inactivity Rate -0.6 -0.7(change in levels) -12,000 -285,000

Claimant Count Rate 0.2 0.0(change in levels) 2,200 -10,900

Latest labour market position (levels):

Labour Market - LatestJul 2012 to Sep 2012

Claimant count - Oct 2012

Wales UKEmployment Rate 69.0 71.2

(levels) 1,358,000 29,576,000Unemployment Rate 8.2 7.8

(levels) 121,000 2,514,000Inactivity Rate 24.7 22.6

(levels) 467,000 9,073,000Claimant Count Rate 5.6 4.8

(levels) 80,700 1,582,200

Longer-run labour market position:

Employment rate

64.0

66.0

68.0

70.0

72.0

74.0

76.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

WalesNorthern EnglandScotlandUK

The historic gap in employment rates between Wales and the UK has narrowed since 2002.

Labour market trends (1)

– Wales is maintaining an employment rate well above its historical average, with the level up just under 150,000 since the start of the Assembly (146,000 in latest data);

– Perhaps up to one-third of this is accounted for by net in-migration;

– Employment in Wales has increased by around 12% since devolution, compared to around 9% increase for the UK;

– Since devolution the economic inactivity rate in Wales has fallen by 3.4 percentage points, compared to a fall of 0.9 percentage points for the UK as a whole over the same period.

Labour market trends (2)

– Since 1999 employment in the private sector in Wales has increased by 96,000, whilst the public sector has increased 12,000 (last full year)

– Between 2001 and the year to June 2012 employment in the top three occupations has increased by 162,600, which is more that the overall increase in employment.

– The large majority of the rise in employment has been amongst the over 50s.

…..BUT unemployment / inactivity is currently much too high – and prospects for the next few years are not good.

Projections of potential output (update due late November will probably show further deterioration):

Risk from Eurozone: Latest forecast

Real GDP Unemployment2011 2012 2013 2014 2011 2012 2013 2014

Germany 3.0 0.8 0.8 2.0 5.9 5.5 5.6 5.5Ireland 1.4 0.4 1.1 2.2 14.4 14.8 14.7 14.2Greece -7.1 -6.0 -4.2 0.6 17.7 23.6 24.0 22.2Spain 0.4 -1.4 -1.4 0.8 21.7 25.1 26.6 26.1France 1.7 0.2 0.4 1.2 9.6 10.2 10.7 10.7Italy 0.4 -2.3 -0.5 0.8 8.1 10.6 11.5 11.8Portugal -1.7 -3.0 -1.0 0.8 12.9 15.5 16.4 15.9Euro area 1.4 -0.4 0.1 1.4 10.3 11.3 11.8 11.7Denmark 0.8 0.6 0.6 1.3 7.6 7.7 7.7 7.6Sweden 3.9 1.1 1.9 2.5 7.5 7.5 7.4 6.9UK 0.9 -0.3 0.9 2.0 8.0 7.9 8.0 7.8EU 1.5 -0.3 0.4 1.6 9.7 10.5 10.9 10.7World 3.8 3.1 3.3 3.9

Source: European Commission – Economic Forecast Autumn 2012

….and additional risks from USA “fiscal cliff”.

Medium to longer term performance in UK context

Welsh relative economic performance: a summaryWelsh Economic Performance: Rank amongst UK countries/regions - latest data

Measure Rank (/12) Below Wales DateGross Value Added per Capita 12 None 2010

Gross Disposable Household Income per Capita

10 Yorkshire & the HumberNorth East

2009

Primary Income per Capita 11 North East 2009

Employment Rate 9London

Northern IrelandNorth East

Average over 12 months to Sep

2012Full-Time Employee Earnings

(median)12 None 2012

Poverty (all ages) 7

North EastNorth West

Yorkshire and the HumberWest Midlands

London

2008/9-2010/11

Wealth per Household (mean)1 5

East MidlandsYorkshire & the Humber

North WestWest Midlands

ScotlandNorth East

2008/10

1Excludes Northern Ireland

What makes Wales “different”?

• Skills / qualifications (especially at the bottom end)

• Lack of major city / cities (“agglomeration”)

• Demography (more non-working elderly)

Percentage of Working Age Adults in Employment in Wales by Level of Highest Qualification Obtained

30

40

50

60

70

80

90

2001 2002 2003 2004 (r) 2005 (r) 2006 (r) 2007 (r) 2008 (r) 2009 (r) 2010

Per

cen

t

No quals Below Level 2 Level 2 Level 3 Level 4 and above

(a) Working age adults are defined as males aged 18-64 and females aged 18-59(r) Data for this year have has revised Source: Annual Population Suvery 2003 - 2010

Individual and family characteristics are more important for people’s outcomes than geography – eg employment rates link more strongly to qualification levels than to area:

Employment Rate by Level of Highest Qualification, 2011

0

10

20

30

40

50

60

70

80

90

NQF4Plus NQFOther None All

Heads of the Valleys Rest of the Valleys South East Wales exc. Valleys Rest of Wales Wales London UK

Welsh economic performance in UK context partly reflects qualifications mix:

74%

53%

34%

72%

51%

31%

75%

57%

38%

20%

30%

40%

50%

60%

70%

80%

NQF Level 2+ NQF Level 3+ NQF Level 4+

England

Wales

Scotland

Source: Welsh Government

Qualifications of working age population (2011)

International context reinforces story: Wales (and indeed UK) has a long tail of people with low qualification levels:

Source: OECD March 2012

Human capital (particularly low skills) important everywhere:

Infrastructure important for lagging regions (but less so at the “frontier”):

Incorporating “material deprivation” reflects lasting poverty, and highlights the protective effect of employment (1):

Percentage of children in poverty or having low income and material deprivation. Couple families, UK, three year average to 2010/11

47

29

60

75

1 2

12

33

56

0

10

20

30

40

50

60

70

80

Both in full-time work One in full-time work,one in part-time work

One in full-time work,one not working

One or more in part-time work

Both not in work

Poverty (after housing costs)

Low income and material deprivation

Poverty defined as income less than 60% of median (after housing costs). Low income and material deprivation defined as income less than 70% of median (before housing costs) plus as score of 25 or over on the material deprivation scale.

Source: DWP

Note also impact of employment on well-being……

Impact of unemployment on well-being:

Estimated Effect of Life Event on Life Satisfaction by Year

Clark, A., Diener, E., Georgellis, Y. and Lucas, R. (2008), "Lags and leads in life satisfaction: A test of the baseline hypothesis", Economic Journal

Long run impact of lack of employment on young:

Long term disconnection from employment or education leads to lasting scars on wages, employment and health & well-being.

Effect on outcomes in later life from each year NEET 16-24

Source: Gregg, University of Bath

Average earnings ages 30-34

Workless spells ages 26-29

Life satisfaction age 34

Self reported health age 34

-10% +10% -18% -9%

Importance of cities in regional economies

Wales ranked bottom in UK

LONG RUN: Evidence that allocation of public spending matters for growth (but relationships differ across regions):

Impact of WG influenced spending on jobs and growth (policy impact differs, e.g education policy vital long term)

Priorities for improving Welsh economic performance Priorities for maintaining Welsh economic performance

Areas where jobs and growth not principal focus, but scope for invest to save and exploit synergies

Welsh economic proformance based on UK regional and wider comparisons

Housing supply

Energy costs

City regions - other policies

Rule of law / stability

Transport links & gateways

Imp

ac

t on

job

s a

nd

gro

wth

Other education - non-capital

Regulation

City-regiontransport

Flexible labour markets

English language

Proximity / links to London & Heathrow

HE Research

Capital spend on social infrastructure

Landscape - natural

Yellow - short term (<3 years) & long-term impact on jobs & growth.Orange - long term impact on jobs & growth

Urban environment

ICT connectivityICT

Enterprise

Climate adaptation

Planning

Early years

Key messages

• Slow and halting recovery• Labour market performing better than expected• But unemployment too high, and still big risks ahead• Lack of employment matters – not just for economic

performance….• …but (more importantly) for avoiding poverty, for health,

for general well-being, and for children’s prospects.• In-work poverty exists, but is focused on families which

contain adults working less than full time (or self-employed)

• Long run action to increase employment must include action to improve skills, particularly at the “bottom end”

• There are other things that can be done as well, but no panaceas.