Scottish labour market remains weak

Despite the spin that ministers on both sides of the border are putting on today's jobs market figures it is clear that both the Scottish and UK labour markets remain weak.

The good news for Scotland was that net job creation rose over the quarter to May-July by 4,000 but remained unchanged over the year. But this was proportionately less than in the UK where jobs growth of 236,000 was the largest quarterly rise for two years.

The bad news for Scotland was that unemployment began to rise again, by 4,000 during the quarter to stand at nearly 223,000. In the UK unemployment fell slightly by 7,000.

When we graph the employment and unemployment data back quarter by quarter from the latest quarter we see the following.

In the first chart we see that employment has risen over the last two quarters after falling for two quarters. But jobs are still 2.4% below the pre-recession peak. That is not much more than half way back to where we were before the Great Recession started.

The unemployment chart shows that falling unemployment was short-lived, just one quarter. We are still much closer to where we were at the trough of the recession, 239,837 unemployed, than to the position before the recession started 111,206 unemployed.

There is nothing to be really cheerful about in the data. Except, that the jobs market is less weak than the output of goods and services. There is a puzzle here that economists are struggling to resolve.

One key explanation is that there has been a shift away from full-time, permanent employment to part-time, temporary and self employment. Much of this is forced i.e. there is a large cohort of part-timers who would prefer full-time employment. Allowing for this moves the situation in the jobs market closer to what is happening to GDP and output.

But I don't think the full-time part-time shift accounts for all of the difference between jobs and product market.

There has been a clear drop in productivity. And there lies a further conundrum. It is not clear to what extent the lower productivity is simply due to demand deficiency. That is workers are underemployed because of lack of demand, with companies able to keep workers on through flexible practices such as reduced hours and part-time working. On this explanation when/if demand does pick up output will grow more quickly than employment and productivity will rise.

Alternatively, if the lower productivity reflects a permanent reduction in productive capacity due to the nature of the recession, then more workers are required to produce a given output. Jobs will rise in line with output when demand picks up and may rise more quickly than at previous recovery times. The permanent reduction in productivity would mean that the scope for a non-inflationary expansion of output was limited, unless companies began to invest significantly.

I favour the demand side explanation more than the loss of supply capacity view.

But I cannot be certain.

Comments

[Ilir Deebran]

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