Scottish Economy Watch

Scottish Labour Market in July-September 2015

The latest labour market data show the situation up to end September. The data clearly show the slowdown that has recently occurred in the Scottish economy. Some comfort can be perhaps be obtained from the latest quarter's data, which could be interpreted as showing that the slowdown is coming to an end. I think, however, that would be a premature conclusion until we see more data.

Employment did rise by 3,000 in the latest quarter and by 9,000 over the year. But as the chart shows there is clear evidence that job creation has been slowing down in Scotland leading employment to fall further behind the UK. So, by Jul-Sep 2015 UK employment was 5% above its pre-recession peak whereas Scottish employment was only 2.1% above.

The same conclusion can be drawn by looking at the unemployment rate which has now risen to 6% in Scotland compared to 5,3% in the UK. The next chart shows the rate in the two jurisdictions.

What is revealing from the chart is that the unemployment rate in the UK has now moved below where it was just before the recession started whereas in Scotland it is more than 40% higher.

The next chart, which graphs the employment to working population ratio shows that there is still a lot of 'slack' in the Scottish labour market.

The ratio stand at nearly 3% below its pre-recession peak. On this basis we should not expect there to be much pressure on wages in the Scottish economy.

This downturn may be the effect of the sharp fall in the price of oil and if so we should expect this to begin to unwind soon with job creation picking up and unemployment moving on a downward path again. But if not, then we might be witnessing the end of the recovery.

Fraser Economic Commentary - June 2015

 

I           Overview

In the latest Economic Commentary we note that the Scottish and UK economies are continuing to grow and recover from the Great Recession. With growth of 0.6% in the final quarter of last year – the latest data point - the Scottish economy has now enjoyed positive growth for the last 11 quarters (since 2012q1) while in the UK, also with growth of 0.6% in 2014q4, the sustained recovery period has been shorter at 8 quarters. But the recovery continues to be stronger in the UK.

When oil and gas production is removed – to compare like with like, since offshore activity is included in the UK but not the Scottish GDP data - we find that the gap in the strength of the recovery widens further in the UK’s favour. UK GDP stands 5.1% above the pre-recession peak compared to only 2.3% in Scotland. We speculate that the relatively stronger UK recovery under the new accounting system ESA 2010, under which the latest data were generated, could be due to the recovery in R&D activity being stronger in the rest of the UK after the recession than in Scotland and, if so, may not augur well for Scotland’s growth performance in the longer term. However, there may simply be a technical rather than an economic cause due, for example, to different sub-sectoral weights between Scotland and the UK.

 

II          Industries and sectors

When we examine the performance across different industries and sectors, we see that the pattern of growth between Scotland and the UK differed considerably in the fourth quarter.  In the UK, the service sector was by far the main driver of growth, while in Scotland the sector made no contribution to growth. In contrast, the principal driver of growth in Scotland was the construction sector while the sector in the UK was a drag on growth. In addition, the production sector contributed about a third of the growth in Scotland but made no contribution to growth in the UK. Within production, manufacturing in both Scotland and the UK made no contribution to growth, while in Scotland it was mining & quarrying and electricity & gas that provided the contribution to growth.

 

III         The labour market

The latest labour market data show that jobs continue to be created at a fairly fast pace, indeed in the latest February – April 2015 quarter at a faster rate in Scotland than the UK both in the quarter and over the year. However, the picture differs on unemployment with the numbers seeking work rising slightly in the latest quarter and the reduction over the year, while sizeable  is proportionately less than in the UK. By the end of the fourth quarter, Scottish jobs as reported in the LFS household surveys were 2.6% above the pre-recession peak, while UK jobs were 4.6% higher than the peak. So, the latest data show the recovery in the labour market to be continuing but there is now some evidence that the rate of recovery is slowing in Scotland and despite recent stronger Scottish jobs growth overall the recovery remains stronger in the UK.

 

IV         Progress of the recovery

Our conclusion on capacity utilisation is that despite the recovery the Scottish economy still has spare capacity available, most notably in the labour market where the number of total weekly hours worked in Scotland was close to but still -0.4% below the pre-recession peak. Moreover, by January - March 2015, the ratio of employment to working population stood at -2.4% below the pre-recession peak, a worsening of the position in the final quarter of last year, compared to -6.7% at the trough of the recession. In the UK as a whole, in contrast, the ratio is only -0.6% below its pre-recession peak but still below a peak that was attained 7 years ago.

 

(i)        Positive influences on the recovery

We note that there are clear positive influences boosting the demand for Scottish goods and services:

• Domestic demand is still growing strongly boosted by investment (see below);
•  Domestic inflation is close to zero, below nominal earnings/income growth and so boosting real income; and
•  External demand remains reasonably strong, with growth in the euro area beginning to strengthen while US growth having faltered earlier in the year looks set to pick up again.

 

 Yet, there are continuing threats to the further recovery of demand which policy should seek to minimise.

 

(ii)       Threats to the recovery

 

•  First, growth remains unbalanced with household spending the key driver fuelled largely by rising household debt, which we fear may soon become unsustainable. The growth of imports continues strongly outstripping the relatively weak growth of exports and so net trade acts as a drag on growth. Policy must seek ways of boosting exporting performance because it is becoming clearer that a more competitive price through a lower sterling exchange rate is insufficient to boost export demand. Issues of product quality and marketing would appear to be at the root of this Scottish and UK problem. One bright spot in this picture of unbalanced growth of demand is the performance of capital investment, which is now contributing significantly to demand and the growth of output in Scotland. Infrastructure spending is playing a big role in Scotland – think the new Forth Road Bridge – but also foreign direct investment where Scotland again enjoyed a successful year in 2014 with over 80 inward investment projects attracted.

• Secondly, the victory of the Conservatives with a small majority in the May UK General Election appears likely to lead to a continuation and perhaps a tightening of the previous Conservative / Liberal Democrat Coalition austerity plans. We shall find out more in the Chancellor’s forthcoming Budget. With more austerity households can expect a further reduction in their incomes, on average. What that means is that household spending will also be reduced and the fall is likely to be greater the more quickly the Chancellor seeks to bring the UK government’s budget into balance. Austerity will continue to be a major drag on capacity utilisation and economic recovery in Scotland and the UK.

• Finally, there is Greece. At the time of writing we do not know the outcome of the negotiations between the Greek government and its creditors. The risks of Greece both defaulting on its debt and leaving the euro have increased since we last reported. This issue is again fast becoming a major threat to the recovery not simply in the eurozone but perhaps, with the possibility of contagion, in the rest of the world, including Scotland.

 

It is against this background that we have prepared our latest forecasts.

 

V          Forecasts

 (i)        Output

Our GDP forecast for 2015 is 2.5%, which is revised down slightly from our forecast of 2.6% in March of this year due to the evidence of a slowing of the rate of growth through the first half of the year. For 2016, we have also revised down our forecast to 2.3% from 2.4% in March, in recognition that while the recovery is continuing the growth of demand is now anticipated to be slightly weaker than previously thought. We also are prepared to acknowledge that the negative effects of the oil price fall on the oil production and services, may be a little greater than we anticipated in March. We are forecasting 2017 for the first time and the underlying determinants suggest that growth will be little different from 2016 and so we retain the forecast of 2.3% for 2017.

 

(ii)       Jobs

The number of total employee jobs is forecast to continue to increase in each year of the forecast horizon 2015 to 2017, and at a faster rate than that seen during 2014 (although not as strongly as in 2013). Our forecast for the number of jobs added in 2015 has been revised down marginally since March’s forecast, from 51,350 to 51,250. The number of jobs at the end of 2015 is now forecast to be 2,444,250, an increase of 2.1% in 2014. Our current forecast is that the Scottish economy will add 49,600 jobs in 2016, down by 8,000 from our March forecast, while we forecast the addition of 51,700 jobs in 2017.

 

 (iii)     Unemployment

Given the small revisions to the growth in employee jobs over the next two years in our latest forecasts, there are only small revisions to the levels and rates of unemployment from our earlier forecasts. The improvement in the labour market is forecast to continue with unemployment rates and numbers falling to end 2017. Our projection for unemployment on the ILO measure at the end of 2015 is 138,200 (5.1%), falling further to 122,364 (4.5%) by the end of 2016, and 108,150 (3.9%) by end 2017. It is worth noting that our unemployment forecast for 2017 means that the unemployment rate finally falls to where it stood when the Great Recession started in 2008, nine long years ago.

Are the new jobs as good as the old?

The latest labour market data for Scotland, which were the subject of yesterday's post allow us to examine the type of jobs that are on offer, or are being taken up, in current conditions.

The chart below shows where we are.

 

In general terms, what we see is a shift since the recession away from full-time, permanent, employees, towards, part-time, temporary, and self-employment.

By the middle of last year total employment was back to its pre-recession peak, yet the shift appears to be enduring. That is not wholly accurate, though, since it is clear that full-time employment is recovering. But we cannot be certain it will automatically move back to pre-recession levels.

The growth in temporary and self-employment is large in percentage terms but small in absolute numbers: an increase of 19,000 and 33,000 respectively since the start of the recession. While some might argue that the growth in self-employment is an indication of greater entrepreneurship in Scotland, I doubt it. Many of these self-employed jobs appear likely to be more 'needs must' for people who have lost full-time jobs. The growth of temporary jobs suggest high levels of certainty exist amongst employers but it may also be something of a reflection of a developing 'zero hours' culture.

So. all of this begs the question: are the new jobs as good as the old?

Jobs and unemployment in Scotland and the UK

Following the release yesterday (18 February) of the latest labour market statistics the Deputy First Minister and Cabinet Secretary for Finance, John Swinney, is reported as claiming that:

"Scotland is outperforming the UK on all three headline labour market indicators with employment continuing to increase and unemployment down …."

While this is true if you simply focus on recent levels and changes in employment and unemployment, it is not true for the Scottish labour market if one takes the period from the Great Recession in 2008 and subsequent recovery.

The latest labour market data published on Wednesday provide information up to the end of last year: October – December to be specific.

Chart 1 shows that by Oct-Dec Scottish jobs as reported in the LFS household surveys were 2.4% above the pre-recession peak, but UK jobs were 4.0% higher than the peak. So, despite the good recent performance of the labour market in Scotland overall jobs performance in the recovery continues to be worse than the UK and as noted below, there appears to be more 'slack' in the labour market in Scotland compared with the UK.

An indication that there is still a deficiency of demand in the Scottish labour market in relation to the situation before the recession is provided by data on the number of weekly hours worked. Chart 2 graphs this statistic from 2007 for the total weekly hours worked compared to the pre-recession peak for Scotland and the UK.

By the period October 2013 – September 2014, the number of total weekly hours worked in Scotland was still -1.0% below the pre-recession peak. So despite the number of jobs being higher than before the recession, the demand for labour as measured by hours worked is still lower.

Finally, not only is the demand for labour in Scotland still lower than pre-recession but demand - measured in terms of jobs - is still considerably deficient when compared to the supply of labour. Chart 3 shows the employment to population (aged 16 and over) ratio relative to pre-recession peak for Scotland and the UK to October - December 2014.

By October - December 2014, the ratio stood at -2.1% below the pre-recession peak, compared to -6.7% at the trough of the recession. In the UK as a whole, in contrast, the ratio is only +0.7% above its pre-recession peak.

All of this suggests that while the jobs market has recovered substantially, the recovery has been weaker in Scotland both in relation to the situation before the recession and in relation to the growth of labour supply. In the UK, in contrast, a strong jobs recovery is evident compared to the situation before the recession and the recovery has just managed to keep pace with the growth of the labour supply. We might venture to suggest from the data in Chart 3 that sustained pressures on wages to rise should be starting to occur in the UK, but not so in Scotland.

This conclusion is also echoed in the unemployment rate data as shown in Chart 4.

While the unemployment rate is currently lower in Scotland, at 5.4% compared to 5.7% in the UK, the UK rate is approaching its pre-recession rate of 5.4%, whereas there is still some 1.2% points to go before that situation is reached in Scotland.

So, let us cheer the good news that jobs are being created and unemployment is falling but let us not fall into the trap of ignoring the particular problems of rapid job loss, unemployment increase and a recovery biased towards part-time, adult employment that befell the Scottish labour market over the earlier period of recession and recovery.

Scottish Jobs and the World Economy

In an earlier post I sought to establish the number of jobs that could be said to depend on economic links with the rest of the UK (rUK). That work suggested that almost 1 million jobs – 962,000 – were linked to the UK through rUK owned firms operating establishments in Scotland, exports to rUK, and through the jobs linked to the UK public sector, UK grant support and UK government purchasing contracts.

In this post I seek to establish the jobs in Scotland due to the Scottish economy's integration with the world economy, including integration with rUK: the globalisation effect if you like.

Method

In seeking to achieve this I ignore links via the public sector and focus largely on the private sector, with the exception of education, which has to be included because of its significant export activities. I again use the Scottish Government's input-output tables for 2009 but use 2014 workforce data for export jobs and 2013 data for jobs in rUK and foreign owned firms. As with the earlier post, I make an adjustment to remover the overlap between non-Scottish owned activities that are also exporters. Finally, I estimate secondary effects differently. In the present work I include only the domestic jobs that are the consequence of the indirect domestic supply links to the non-Scottish owned and exporting firms. (Technically, the Type 1 multiplier relation). I therefore ignore the potential further boost of the secondary spending in the Scottish economy due to the additional incomes generated by the non-Scottish links. But, in so doing I also ignore the favourable competitive price effect of the price and wage adjustments that would see domestic activity increase to some extent as non-Scottish activity reduced. The scale of these last two effects is much less certain, while the indirect supply link is more robust. The estimates are therefore slightly more conservative – lower - than in my previous post.

Estimates

Table 1 Scottish Jobs and Globalisation

Type of Job	Direct	Indirect	Total
rUK owned firms	313,000	138,000	451,000
rOW owned firms	286,000	114,000	400,000
Exports to rUK	283,000	125,000	408,000
Exports to rOW	100,000	40,000	140,000
Total	982,000	417,00	1,399,000

The estimates for each category are included in Table 1 above. So, about 1 million jobs are directly linked to the global economy outside Scotland and a further 400,000 are generated through supply links as local firms supply the exporters and the non-Scottish owned firms based in Scotland.

Total Scottish employment minus the public sector (Administration and Health but including education) is 2,113,000, hence the percentage of total 'private' sector employment in Scotland due to globalization, or external links, is 66% or two-thirds. Interestingly, about 40% or 859,000 jobs are dependent on trade and ownership links to the UK, while the remaining 26% are linked to the wider world economy.

In conclusion, the Scottish economy is significantly linked into the world economy with around two-thirds of jobs dependent on such links. Moreover, it is trade and ownership links to the rest of the United Kingdom that dominate these global links with the number of dependent jobs more than one and a half times greater than those linked to the rest of the world.

Scottish Jobs and the UK

Some time ago someone asked me in the context of the referendum debate: "How many jobs in Scotland depend on links with the UK?" I said: "I don't know but I can attempt to find out. But the harder question is determining how many of these jobs might be at risk if Scotland chooses to become independent."

So in a later post I shall look at the jobs in Scotland that can be said to be dependent on the UK.

In the next post I shall try and make an assessment of which and how many of those jobs might be at risk through the process of Scotland became politically independent.

Jobs dependent on the UK

We can identify 5 broad categories of jobs that depend on the UK in some sense. These are jobs in:

• Rest of UK owned/controlled companies
• Companies exporting from Scotland to the rest of the UK
• The reserved public sector, less financial institutions in current UK state ownership
• UK public sector contracts for Scottish companies, especially defence
• Scottish R&D in the HEI sector financed by UK grants

These jobs we can call the direct jobs dependent on the UK. But there are also further jobs that depend on the jobs that are dependent on the UK. These are the secondary jobs in local companies supplying the direct jobs in one or more of the above categories. They are obtained technically by applying Type 2 Employment multipliers at the appropriate sectoral level using the Scottish Government's input-output tables.

The grand table with source links and descriptions of the calculations is presented below

Source: Own calculations using the following

(1) http://www.scotland.gov.uk/Topics/Statistics/Browse/Business/Corporate/alltables Table 3

(2) BIS calculations based on Scottish Input-Output tables 2009 data, retrieved May 2013, http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/Input-Output/Downloads and http://www.scotland.gov.uk/Topics/Statistics/Browse/Labour-Market/BRES-Employee-Jobs-Sco

(3) http://www.scotland.gov.uk/Topics/Statistics/Browse/Labour-Market/TrendPublicSectorEmp

(4) http://ukdefencejournal.org.uk/what-impact-would-independence-have-on-scotlands-defence-industry/ 75% of jobs assumed to depend on MOD spending

(5) 9,034 research staff: active academics plus research fellows and assistants equals 12.1% of UK total. Assume at a minimum without UK R&D grants Scotland would have a UK population share at 8.3% - Source: http://www.universities-scotland.ac.uk/uploads/briefings/Research%20facts%20and%20figs(2).pdf

(6) Derived from 2009 Scottish Input Output tables by aggregation to appropriate sector http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/Input-Output/Downloads/IO1998-2009All

 

The source spreadsheets for these calculations can be accessed here: Download Business in Scotland 2013. Download Jobs in Sco-ruk exports 2009  Download Scottish I-O tables 1998-2009

Now this table must be viewed with great care.

First, there will be some, probably quite a bit of, overlap between at least two of the categories of direct jobs: in rUK owned firms and in companies exporting to rest of UK. Clearly, many jobs in rUK owned firms will be associated with export sales to rest of UK. We have no data for the overlap, so we take the share of employment that is in rest of UK owned firms in Scotland (18.7%) apply that to the estimated direct export jobs 247,000, giving 46,000, then reduce the jobs in rest of UK owned firms – 359,000 - by that amount. The adjusted – rounded - numbers are presented in Table 2.

Table 2: Scottish Jobs Dependent on UK adjusted for overlap

Type of Job	Direct	Secondary	Total
rUK owned firms	313,000	204,000	517,000
Exports to rUK	247,000	350,000	597,000
Other to UK	75,000	86,000	161,000
Total	635,000	640,000	1,275,000

 

There is a further problem with the estimates presented in Table 2: the estimated secondary effects are almost certainly too high. Where there is a large change in the demand for goods services, and labour in the economy prices and wages will adjust as well as output. In the event of a reduction in demand and loss of jobs prices and wages will fall and so the competitiveness of supplying firms will increase to partially offset the loss of demand. In our – the Fraser of Allander Institute's – analysis, in the June 2010 Economic Commentary,of the impact of cuts in the Scottish DEL under the austerity proposals of the new UK Government, a flex-price analysis led to a reduction in jobs which was about half – 51% - of the fall when prices were held fixed under the standard Input-Output multiplier approach.

Applying that adjustment uniformly across all categories to the secondary jobs in Table 2 we get Table 3

Table 3: Scottish Jobs Dependent on UK adjusted for price and wage change 

Type of Job	Direct	Secondary	Total
rUK owned firms	313,000	104,000	417,000
Exports to rUK	247,000	179,000	426,000
Other to UK	75,000	44,000	119,000
Total	635,000	327,000	962,000

 

So, with the adjustments in place, Table 3 tells us that almost 1 million jobs – 962,000 – depend on links to the rest of the UK. This is a clear indication, if anyone wanted one, of the extent to which the Scottish economy is integrated with the rest of the United Kingdom.

 

A jobs recovery but spare us the hubris

The latest Scottish and UK regional labour market data published by ONS today reveal a continuing and now strong recovery in the Scottish labour market. Over 29,000 jobs were created in the quarter Oct-Dec 2013 to Jan-Mar 2014 and more than 67,000 jobs created over the year. Unemployment fell by 18,000 in the quarter to just below 178,000 and the unemployment rate fell from 7.1% to 6.4%.

The Scottish Government and UK Government’s both moved quickly to claim the recovery as being the result of their policies. The First Minister Alex Salmond is reported by the BBC as saying:

"Today's employment figures …… demonstrate the Scottish government's policy of investing in infrastructure to boost the economy is making significant progress, with employment levels at a record high………

Scotland continues to outperform the UK across employment, unemployment and inactivity rates, which shows that even with the limited powers over the economy at our disposal we are improving our country's economic health."

Unfortunately, this is a significant distortion of the true picture. While employment, unemployment, and inactivity rates may be higher, lower, and lower respectively than in the UK as a whole this ignores both the comparative performance of the Scottish labour market over the period of recession and recovery and its starting point.

Take employment. The first chart shows employment in Scotland and UK in recession and recovery.

 

It is worth noting first, one piece of good news apparently missed by the politicians: the number of jobs in Scotland reached and passed their pre-recession peak in the current quarter, almost seven years ago. Let me repeat that: almost seven years ago. Given that there has been no growth in net jobs in Scotland for seven years, the trumpeting in the media that employment in the current quarter reached its highest level since records began in 1992 is a massive non sequitur.

Moreover, far from the Scottish labour market outperforming the UK during recession and recovery, the facts show the exact opposite. Employment contracted by -4.7% in Scotland in the recession but fell by only -2.5% in the UK. Jobs in Scotland reached their pre-recession peak in January – March of this year but in the UK the peak was attained in July – September 2012, eighteen months earlier. And currently, UK jobs are more than 3% above the pre-recession peak, while the figure is just over 1% in Scotland.

Even the unemployment situation in Scotland flatters to deceive. The chart below makes this clear.

 

Yes, Scotland’s unemployment rate is, at 6.4%, below the UK’s 6.8%. But when the recession started the Scottish rate, at 4.2% was more than one percentage point below the UK’s rate of 5.4%. Unemployment rose more quickly in Scotland than in the UK and for some of the recession remained above the UK reaching a higher peak of 8.6% compared to 8.4% in the UK. It is great news that we are now experiencing a sustained fall in unemployment in both Scotland and the UK. But with unemployment some 2.2 percentage points above its pre-recession starting point while the UK is only 1.4 percentage points above its pre-recession starting point, there is little here for the Scottish Government to crow about.

It is also quite ludicrous for the Secretary of State for Scotland, Alistair Carmichael to assert that

“We will do everything we can to create the conditions needed to support their growth, creating more sustainable jobs especially for our young people and long term unemployed."

It is ludicrous because the UK Coalition Government’s fiscal consolidation policy has effectively delayed the recovery by 3 to 4 years and when jobs did begin to be created they began to be created in large numbers because of the collapse in productivity, with the UK economy only just returning to its pre-recession peak in GDP terms. Moreover, as the Scottish Government’s recent youth employment briefing document shows youth unemployment stood at 18.8% in Scotland, in Dec – Feb 2014, higher than in the UK at 18.4% and rising over the year while the absolute number and rate fell in the UK.

We are experiencing a recovery that is getting stronger. There is a good chance that it will be sustained. Not everything is rosy though. The spectre of deflation haunts the Eurozone and we may not be immune from its effects. Growth in in China and perhaps even the US may be faltering. Meanwhile domestic households in Scotland and the UK remain burdened with historically high levels of debt, which could limit and constrain the growth of consumer demand. Investment is recovering but remains weak and there is very little positive news on the export front.

And in the labour market in Scotland there is still plenty of slack as the next charts shows.

 

By all means Scottish politicians should welcome the recovery but spare us the hubris please.

Labour Market Recovery Continues

The latest labour market data published this morning show that conditions in both the Scottish and UK labour markets continue to improve. In the latest quarter, August - October, employment rose by nearly eleven thousand (10,651) in Scotland an increase of 0.4%. UK employment rose by 250,000, an increase of 0.8%. Unemployment fell by more than seven thousand (-7,352) in Scotland, a fall of -3.6%, to a rate of 7.1%. In the UK, unemployment also fell by just under one hundred thousand (-98,718), a fall of -4.0%, to a rate of 7.4%.

So while both countries enjoyed an improvement in jobs and unemployment, the improvement in the UK in this quarter was slightly better than in Scotland.

The chart below shows where both Scotland and the UK now stand in jobs terms in their recovery.

UK employment is now about 2% above its pre-recession peak whereas in Scotland it is nearly at the peak but at -0.2% below just not there yet.

The next chart shows our estimate of 'real' compared with actual unemployment in Scotland.

This shows a slight widening again between the two because the numbers inactive rose again by more than ten thousand (10,456) in the latest quarter.

Finally, it would appear that there is still plenty of slack for growth in the Scottish labour market and more than in the UK as the chart of employment to working population shows.

The ratio in Scotland now stands at -2.9% below the pre-recession peak compared to 2.2% in the UK.

With earnings growth almost flat, and inflation falling, these data offer further evidence that there is still no justification for the Bank of England to 'apply the brakes', in the form of a rise in interest rates. This is likely to be the case even when the unemployment rate falls below 7%.

Scottish Labour Income: A Puzzle

The publication of the latest Scottish National Accounts Project (SNAP) quarterly accounts data on 13 November offers some interesting insights into, and raises a few questions about, the behaviour of labour income in Scotland.

Back in November 2012 I noted that contrary to a recently expressed STUC view, drawing on UK data, that labour income shares were falling, there appeared little evidence for this in Scotland from the SNAP data. The latest revised SNAP data to the second quarter of this year are presented in the chart below.

These data still show that the labour income share was rising in Scotland between 1998 and 2001. This might suggest that there is an absence of secular decline but clearly we do not know what was happening to the share before 1998. What is clear from the latest data though is that the share was declining from 2001 to 2011 - from 66% to just above 60% - whereas in the earlier data such a fall was not so evident.

However, the new data also show a clear uptick after the third quarter of 2011 with the share rising from just above 60% to nearly 64% of GVA and then dipping slightly.

The next chart shows the absolute real compensation of employees.

What the two charts suggest is that between 2001 and 2008 while the share of GDP going to labour was falling real compensation of employees was rising. This implies that labour income was growing but more slowly than non-labour income - e.g. profits - until the start of the Great Recession. However, once the recession started to bite and jobs were shed labour compensation fell and its share also fell, indicating that non-labour income held up much better during the recession.

But the experience after the third quarter 2011 is more difficult to explain.

Both total employee compensation and its income share began to rise. The first response is to suggest that rising total employee compensation is due to net job creation. But the data don't support this. Employment picked up from the trough of the recession in the middle of 2010 but then fell back again in 2011. The recent surge in employment did not occur until the end of last year. But the data do show growth in average employee compensation, as the next chart shows.

What we don't know is what this means! The rise in average compensation peaked in the third quarter of 2012, when job creation picked up again. That might be explained by more part-time jobs being created but the fall in full-time employment and rise in part-time employment pre-dates the change.

So, we have a puzzle. Labour income has been rising from 2011 until recently both overall and as a share of GDP. This appears mainly to be due to rising average remuneration and not net job creation. But I am not clear why average remuneration should have been rising when full-time employment was falling and part-time employment was increasing. Moreover, we know that at the UK level average earnings have been growing more slowly than consumer price inflation, implying a fall in real incomes and the implications that must have for household demand. Yet, from these Scottish data a fall in real incomes is less evident - although it must be noted that I have used a GDP deflator and not the CPI index to estimated real compensation.

Could this be one reason why household spending in Scotland has been stronger than anticipated?

Still a lot of slack in Scottish labour market

A reminder that there is still a lot of slack - people likely to work if job prospects improve - is illustrated by the following chart:

Jobs are being created in greater numbers. But the population is growing, so we need more jobs just to maintain the same employment rate: running to stand still. This is why statements heard on the lunchtime news that "the number of jobs in the economy are at their highest ever" are, quite frankly, ludicrous. Update: while for the UK this may be formally correct, it does not tell us very much about the state of the labour market, because it is bigger due to an increase in supply (population).