Scottish Economy Watch

Scottish Job numbers: almost back to 2008

The latest Scottish labour market data continue to offer encouragement. However, not everything is rosy in the Scottish labour market.

First, the good news. Scottish employment is almost back to where it was in 2008 at its pre-recession peak. The chart below illustrates.

Jobs are currently-0.2% below the 2008 peak. So after more than 5 years we are almost back to where we were in terms of the number of jobs. The UK is still doing slightly better, having already attained its pre-recession peak, but with 75,000 jobs created in Scotland over the past year, jobs growth was faster than anywhere else in the UK except the South East of England as the chart below shows.

The less good news is that this strong jobs growth has not produced much of a boost to full-time employment; the next chart illustrates:

Over the year to July-June 2013 full time employment was 134,000, or -7%, lower than the 2008 pre-recession peak. (Note that this is annual average data to June so does not fully reflect where the economy is likely to have been in September.)

So, it appears that the growth in jobs is still heavily biased in favour of part-time employment, whether self-employed or employees.

The bad news is that unemployment in Scotland rose by 1,000, while UK unemployment fell. But there is a positive dimension to this, since the numbers inactive fell by 7,000 in the quarter and by 31,000 over the year. This suggests that the better prospect of a job is attracting people, and women in particular, back into the labour market. Secondly, the Scottish unemployment rate remains the same as the previous quarter and below the UK as the next chart indicates.

With UK unemployment falling by 48,000 in the quarter the unemployment rate fell from 7.8% to 7.6%. The lower UK unemployment rate is stimulating market interest in the prospect of a UK interest rate rise in 2014 if, as is now likely, the rate falls to 7%. Readers will remember that this is the rate below which the new Governor of the Bank of England, Mark Carney, in his forward guidance suggested the Bank's MLR could rise.

Of course, there is no guarantee that rates will begin to rise as soon as 7% UK unemployment is reached, it will also depend on what is happening to inflation and core inflation, largely wages, in particular. The latest UK labour market data show the growth in earnings averaging only 0.7% over the three months to September, with earnings in the private sector rising by 1.1% over the same period.

Even with the growth in consumer prices slowing to 2.2% - a 13 month low - in the year to October, down from 2.7% in September, this still suggests that real wages are continuing to fall. In these circumstances, the prospect of a sustained recovery driven by household spending is unlikely. Moreover, the froth in the financial markets at the prospect of higher UK rates has pushed sterling higher and then lower as the inflation data came in and now higher following the latest unemployment figures.

A high and volatile sterling rate will not help UK exports or the recovery.

The Governor should be more explicit in his forward guidance if the policy is not to damage rather than assist the UK recovery. He should explicitly adopt Paul Krugman's recent advice to the US Federal Reserve:

The lesson you should be taking here is, don't tighten, don't taper, don't exit, until you see the whites of inflation's eyes.

Jobs recovery? Yes! Strong labour market? No!

The latest Scottish labour market data published today show jobs continuing to be created as unemployment rose. During May-July Employment in Scotland rose by just under 6,000 (5,627) over the previous Feb-April quarter. But unemployment also rose by just under 10,000 (9,689) over the quarter, taking the unemployment rate back up to 7.4% from 7.1%.

Employment certainly appears to have been undergoing a sustained recovery since the middle of last year in Scotland and the beginning of 2012 in the UK as a whole.

The chart below plots the performance of Scottish and UK employment during recession and recovery to the latest data point.

The recovery is clearly evident in both series. What is also clear, is that the scale of the recession in employment was less in the UK than Scotland - a drop of 2.3% compared to a fall of 4.5% in Scotland. Moreover, the jobs recovery has been smoother and less erratic in the UK than in Scotland. As a result of these two features UK jobs are now 1% above the pre-recession peak while Scottish jobs are 0.6% below.

But the picture on unemployment is less rosy as the next chart indicates.

Measured unemployment is only 37,000 below the level at the trough of recession while being 92,000 above the number unemployed before the recession started 5 five years ago in May-July 2008. The good news here is that my measure of 'real' unemployment is moving back closer to measured unemployment as the number of inactive workers has been falling since Aug-Oct quarter last year.

So why the discrepancy between employment and unemployment?

The discrepancy is due to a growing labour force.

The final chart shows the ratio of employment to the population that is aged 16 or over during the recession and recovery in both Scotland and the UK.

This ratio is still significantly below the pre-recession peak position in both Scotland and the UK at -3.0% and -2.8%, respectively. The recent pick up in Scottish job creation is clearly evident in the ratio while the ratio in the UK did begin to pick up from the end of 2011 it is still only one percentage point higher than at the worst of the recession.

It must, therefore, be concluded that both Scottish and UK labour markets remain weak despite the recent jobs recovery.

Scotland's jobs market - February to April 2013

The latest labour market data published today provide further evidence of improvement. Employment rose by 47,000 in February - April compared to the November - January quarter, and unemployment fell by 6,000 to 194,000, a rate of 7.1%. The numbers inactive also fell by 37,000, suggesting that people may be coming back into the labour market.

Over the year, jobs rose by 43,000, unemployment fell by 25,000 but the numbers inactive remained unchanged.

The UK also experienced a rise in employment of 25,000 and a fall in unemployment of 5,000. But the numbers inactive rose by 40,000. Given the relative size of the two economies, the improvement was clearly greater in Scotland in the quarter than the UK.

But as I noted here I suspect that some of the recent stronger jobs and unemployment performance in Scotland could be an unwinding of the effects of the large loss of jobs here between the fourth quarter 2009 and first quarter 2010. GDP performance in Scotland and the UK is very similar, if a little weaker, as shown by the Fraser of Allander Institute's Economic Commentary which we published today - see my blog and here.

The latest figures on employment for Scotland are shown in the chart below

Employment in Scotland in Scotland is now -0.8% below its pre-recession peak. But this is still a weaker performance in the recovery than the UK where jobs are now +0.6% above their pre-recession peak.

We should also note that jobs growth does not necessarily mean a net growth in the demand for labour services. Part-time and self-employment have been rising while full-time employment has been falling. Against this background it is encouraging to see that in the latest release the total number of hours worked in Scotland rose from 77 million to 78 million. And average hours worked rose across all types of employment: full-time, part-time and self-employed. Although, the new data refer to the year Jan 2012 - Dec 2012.

One implication of the large fall in the numbers inactive in the present quarter is that the gap between my estimate of 'real' unemployment and measured unemployment has fallen markedly - see here - as this chart shows.

Finally, the surge in employment in Scotland has improved the employment population ratio as this chart shows:

But even so at -3.5% below the pre-recession peak the size of labour reserves in Scotland, and the extent of human misery at not having a suitable job, clearly still remains large.

Good news on Scottish jobs, but why?

The latest labour market data published today reveal that conditions in the Scottish labour market continue to improve. In the quarter January to March unemployment fell by just under 7,000 to below the 200,000 mark to 199,000, or a rate of 7.3%. The chart below shows that unemployment is now faring better in Scotland than the UK.

What is striking about these latest jobs market data is the surge in employment in Scotland. Jobs rose by 54,000 in the first quarter of this year compared to a fall of 43,000 in the UK as a whole. This brings Scottish jobs performance since before the recession more into line with the UK as the following chart shows.

Scottish jobs are now -1.3% below their pre-recession peak, whereas in the previous quarter they were more than 3% below the pre-recession peak. This is still worse than the UK, where, despite the loss of jobs in the recent quarter the total is 0.6% above the pre-recession peak.

So what is going on here?

First, we cannot discount the possibility that the Scottish data reflect measurement or sampling error, more so than the UK data where samples are relatively bigger. The latest 'surge' may reflect a correction of earlier errors, or a large error in the latest measurement. Only later data will help clarify that.

Secondly, if we assume no measurement error, the explanation could be as follows.

Since the fourth quarter of 2009 when there was a large loss of jobs in Scotland, the Scottish jobs market has been weaker than the jobs market in the UK as a whole. Yet, GDP growth has been very similar in Scotland and the UK. On the face of it, that meant that productivity worsened more in the UK than Scotland. Again we also cannot discount measurement error affecting the GDP estimates both in Scotland and the UK. There may also be different industrial/structural reasons, including the relative number of 'zombie' firms in Scotland and the UK, which would affect the relation of employment to output in Scotland and UK - I assume that the contribution of such firms to GDP is much less than their contribution to employment, other things equal.

But setting all those possible explanations aside, maybe, just maybe, Scottish employers took a more pessimistic view of the course of the recession and recovery than their UK counterparts. Hence, employment was cut back here but nor in the UK. Now we may be seeing a correction as Scottish employers revise their expectations up considering that conditions are not as bad as they expected. Conversely, UK employers may be in the process of revising their expectations downward: the recovery is not as strong as they anticipated, hence cutback on employment.

Only a theory, but it does reconcile the different Scotland-UK jobs market behaviour with the similar output/GDP behaviour.

What do you think?

Stronger signs of recovery in Scottish labour market

The latest Scottish labour market statistics published this morning serve further to reinforce the view that a more sustained recovery is now underway.

Employment during the quarter to Dec - Feb 2013 rose by 39,000, or 1.6%, and by 20,000 over the year, 0.8%. In the UK, employment was almost flat, falling slightly by just over two thousand. But over the year, the growth in UK jobs was strong than in Scotland, rising by 1.7%.

Despite this improvement, which is significant, jobs in Scotland are still -2.1% below their pre-recession peak, whereas in the UK jobs are 0.4% above their pre-recession peak. The Scottish jobs position is shown in the chart below

Unemployment fell in Scotland during the quarter by -11,000, or -5.2%. In the UK, in contrast, unemployment rose by 70,000, or 2.8%. The measured ILO unemployment rate is now 7.3% in Scotland compared to a much higher rate of 7.9% in the UK. Over the year, unemployment has fallen by -21,000, or -9.8%. In the UK the number unemployed fell by -71,000 over the year, or -2.7%, a much slower rate of decline than in Scotland.

One factor that has tended to flatter the Scottish unemployment figures compared to the UK has been the rise in the number of inactive workers, which has been stronger here. This has tended to depress the measured Scottish unemployment rate compared to the UK. However, in the most recent quarter the number inactive fell by -23,000, or -1.5%, whereas in the UK inactive numbers rose by more than 25,000, or 0.1%.

The fall in inactive numbers has reduced my estimate of the 'real' level of unemployment; see earlier blogs, as the chart shows

'Real' unemployment is now 55,000 higher, at 9.1%, than measured unemployment compared to 78,000, at 10.4% in the previous quarter.

The latest jobs and unemployment data are encouraging and taken with the latest GDP data, see forthcoming blog, do suggest that the Scottish economy is recovering if slowly from the recessionary period.

However, it is worth sounding a note of caution. From the latest data, to December 2012, it appears that full-time employment continues to fall, with jobs growth driven by the growth of the part-time and self-employed. As I noted here we can only be certain of a sustained recovery in the Scottish labour market when the number of full-time employees begins progressively to rise.

Whither full-time employment?

The latest labour market data for Scotland allow us to update the analysis of the composition or type of employment change.

The updated chart to Oct 2011-Sept 2012 is shown below

While these data lag the latest total jobs and unemployment data to Nov-Jan 2013, they offer a pretty stark reminder of the significant change in composition that lies beneath the overall employment numbers.

Full-time employment has been the main casualty falling by -7.2% from its pre-recession peak. Part-time and self-employment, in contrast, are +8.7% and +11.3%, respectively above their pre-recession heights.

While there are clearly structural changes occurring in the labour market on the demand side, with more workers expressing a preference for part-time and self-employment, the bulk of the change is largely driven by supply-side rather than demand side change. Put more simply this means that the switch is more a reflection of the wishes of firms hiring workers than the choice of workers themselves - see the STUC here.

I suspect we can only be certain of a sustained recovery in the Scottish labour market when the number of full-time employees begins progressively to rise.

Recovery or false dawn in Scottish jobs market?

Last week the latest Scottish jobs and unemployment data were published and somewhat lost amidst the media coverage of the Budget.

These labour market numbers were clearly better than they have been for some time. During the quarter to Nov-Jan 2013 employment rose by 19,000, unemployment fell by 4,000 and the numbers inactive also fell, by 11,000. The 16 plus activity rate rose slightly from 62.3% to 62.6%, the unemployment rate fell from 7.6% to 7.4%, and the inactivity rate fell from 37.7% to 37.4%.

All good news.

Moreover, given the fall in the numbers inactive my estimate of 'real' unemployment also dropped relative to the measured number and rate of unemployment - see chart

Clearly, one swallow doesn't make a summer.

The estimate of real unemployment is still 63,000 higher than the ILO unemployment measure for Scotland; that is 2.2% points higher than the official rate of 7.4%.

The jobs numbers also continue to look weak when compared to the pre-recession figures as this chart shows

After nearly 5 years employment remains 68,000 below the pre-recession peak, a short-fall of -2.7%.

Added to this, with the working population rising, the ratio of employment to working population still looks like an economy in recession:

One would like to hope that we are beginning to see the start of a more sustained recovery in the labour market in Scotland. But several more quarters of positive data are required before we can conclude that hope has finally triumphed over experience.

Jobs Market Weakens Again

The latest jobs market data provided further evidence that the labour market in Scotland continues to weaken. The positive element in the latest figures was a strong fall in unemployment of 14,000 or -6.4%. In the UK, unemployment also fell by 37,000, a much weaker fall of -1.5%.

Yet, the jobs market was much weaker in Scotland. Employment fell by 24,000, or -1%, in Scotland. But in the UK net new jobs were created. Employment rose by 90.000 in the UK. An increase of 0.3%.

So, falling unemployment in Scotland provides an illusory view of the absolute and relative state of the Scottish labour market.

It is also incorrect for the media to report the latest statistics as yet another fall in unemployment in Scotland as the BBC did here. In the data published last month a fall of 19,000 was reported. Now there is a fall of 14,000. But we are dealing with quarterly data not monthly data. The latest quarterly data published today compares the quarter September to November with the previous June to August quarter. Last month's data compared August to October with the previous quarter. Hence in the quarterly data published this month and last month, two of the three months are the same: September and October! The latest figures add November and exclude August.

So, while unemployment fell this quarter, it rose by 7,000 in the previous quarter after falling successively by 3,000 and 13,000 in the two quarters before that.

However, as I noted in earlier posts on the Scottish labour market - here and here - one reason for the apparently stronger unemployment performance in Scotland has been the rising number of inactive workers. In the latest quarter the numbers inactive in Scotland rose by 42,000 or 2.7%. In the UK in contrast the inactive number rose by absolutely less, 39,000, an increase of only 0.2%.

My hypothesis is that the rising inactive numbers in Scotland is a consequence of disproportionate weakness in the Scottish jobs market. Workers are discouraged by the lack of available jobs to cease looking for work and leave the labour market.

If, as before, I assume that the labour market was in equilibrium at the start of the recession then we can compute a 'real' level and rate of unemployment by adding back in this 'discouraged worker' effect. This is done in the chart below.

The hypothesised 'real' level of unemployment is some 80,000 higher than the official rate and on a rising trend.

It is what is happening in the jobs market that, I think, explains this rising trend in 'real' unemployment.

The latest fall in employment is included in the chart below which shows Scottish employment since the start of the recession.

With the latest data, Scottish employment is 96,000 or -3.7% below its pre-recession peak. It currently is only 23,000 above the trough of the 2008-2010 recession. Any recovery that there was in Scottish jobs faltered after the March - May 2011 quarter and has essentially stagnated ever since.

However, that is not the end of the story because it gets worse!

The working population is rising in Scotland so if you express employment over the total number of workers economically active and inactive we get the next chart.

The situation is now worse than at the worst of the recession with employment- working population ratio now -5.7% below its pre-recession peak compared to -5.6% in the trough of the recession.

I know that we must not put too much store by one month's or one quarter's figures. I know also that the Labour Force Survey has a fairly small sample and so is subject to sampling errors which are large.

Yet, my judgement leads me to believe that what we are dealing with here is not measurement error but a real problem in the Scottish jobs market.

 

'Real' Unemployment is Rising

The jobs market data published this morning show both employment and unemployment falling in Scotland. Total employment fell by 27,000 (-1.1%) in the quarter and by 7,000 (-0.3%) over the year. Yet, unemployment fell by 19,000 in the quarter and 25,000 over the year. The unemployment rate now sits at 7.6 percent, or 204,000, from 8.2% in the previous quarter.

The UK did better on employment with jobs increasing by 40,000 or 0.1% and rising by 1.7% over the year. But the drop in unemployment in the UK was 82,000, which was relatively less than in Scotland and so the UK rate only fell to 7.8 percent from 8.1 per cent.

However, the favourable Scottish unemployment performance is more apparent than real.

In the latest quarter there was a surge in the numbers inactive. That is there was an appreciable exit from the labour market with the inactive numbers rising by 50,000 or 3.2 percent. In the UK, too, there was an increase in the inactive numbers by 134,000. But that amounts to a much smaller rise than in Scotland of 0.7 percent.

The chart for inactive numbers in Scotland is shown below

Inactive numbers have been on a rising trend since almost the start of the recession, increasing by 102,000. This suggests as I noted in this earlier post that underlying unemployment is also rising as workers are discouraged by the lack of available jobs to cease looking for work and leave the labour market.

If, as before, I assume that the labour market was in equilibrium at the start of the recession then we can compute a 'real' level and rate of unemployment by adding back in this 'discouraged worker' effect. This is done in the chart below

On this basis, 'real' unemployment in Scotland is on a rising trend and rose in the latest quarter to 294,000 or 10.7 percent, not the 204,000 and 7.6 percent official figures.

That is a more true measure of the state of the labour market in Scotland.

Labour Income Shares in the Scottish Economy

The STUC's valuable report A Just Scotland see here, raises many interesting questions which the two campaigns for and against independence need to address. One issue they raise in the report is the labour market and the lack of a debate on the likely structure and regulation of the labour market in different constitutional scenarios.

The STUC clearly fears that the current UK approach favouring flexible labour markets has been accepted by both sides of the constitutional debate when they believe the issue should be debated.

I agree.

The STUC argue that flexible labour markets produce "an economy where work is less well paid, less secure and less permanent." In addition, they note the "completely overlooked" macroeconomic consequence of a falling wage share, which, they go on to suggest:

If the wage share in the economy of an independent Scotland continues to fall then the only way in which the products and services the economy produces can be consumed is through rising debt. This hardly provides for the foundations of a stable, prosperous society. (Page 13)

While welcoming further debate, I think the issue is a little more complicated than this.

First, there is an issue about flexibility. A labour market lacking in regulation seems certain to produce 'sweat shop' conditions, low wages and insecurity. Conversely, a labour market that is heavily regulated seems likely to lead to high hiring costs and low job creation. I'd like to see what the evidence shows on this.

The issue then is can we find an 'optimal' degree of labour market regulation and flexibility that protects workers from vindictive and exploitative employers, while at the same incentivising firms to hire workers and so create jobs? That is the question where I would like to see more theory, evidence and debate.

Secondly, the data on labour shares do not, as far as I can tell, support a view that labour's share of income has been consistently falling in Scotland. The latest Scottish National Accounts Project (SNAP) - experimental - data on compensation of employees is shown in the chart below

Clearly, the data only start in 1998 so I am not sure if the share was falling during the 1990s after the so-called 'Thatcher revolution'. But what the SNAP data show is a rising labour share from 59 per cent to 66 per cent between 1998 and 2001. Then the share fell gently to 62% at the beginning of 2008 when the recession was beginning to bite. During the recession and after the share has oscillated around 63 per cent.

So there is no downward trend during this period of data and other factors seem to be in play as a determinant of labour income share in addition to the UK's fairly flexible labour market regime.