Scottish Economy Watch

Public sector jobs and fiscal austerity: update

Yesterday's publication of data on public sector jobs in Scotland for the third quarter of this year, enables me to update earlier posts on public sector jobs and fiscal austerity: here and here.

The latest data show there were 581,300 people employed in the public sector in Scotland in Q3 2012. That amounts to 23.5 percent of total employment and 22.3 percent if one excludes the public sector financial institutions that the state took a majority stake in during the financial crisis.

It is worth noting that the share of total employment accounted for by the public sector is now less than in Q3 1999 when 23.8 percent of total jobs were in the public sector.

The public sector has been shedding jobs since 2009-2010 when fiscal austerity began in earnest.

The track of jobs in total and in public and private sector is presented in the following chart:

The chart smoothes the data using a four-quarter moving average because the published data are not seasonally adjusted. What the chart shows is that around 7 percent of public sector jobs have been lost since either the pre-recession economy peak, or (in brackets in the chart) since the previous public sector employment peak. The figure for FTE jobs is similar. This amounts to 44,000 jobs lost using the smoothed series or 52,000 jobs from the actual data (I have excluded the banks and put them back in the private sector).

What has been the effect on the Scottish economy as a whole?

If we ignore possible multiplier, or knock-on, spending effects of the public sector job loss, and wages and price effects of the job loss, we can say that if public sector employment had remained unchanged at its peak then total employment would have followed the purple line in the graph. That is, by Q3 2012 total jobs would have been -1.6 percent below the pre-recession peak compared to -3.4 percent below.

So, if this calculation is anywhere near correct, the effect of the fiscal consolidation in departmental and local authority job losses alone - excluding cuts in spending in addition to jobs and tax rises - has not been trivial. The recession would have been little different but the recovery would have been stronger.

There is no evidence here that public job losses have led to much, if any, private sector job creation as resources have been freed up. This is because the economy has laboured under a prolonged deficiency of aggregate demand and has not been constrained by supply.

And sadly, the cuts themselves will have contributed to that deficiency of demand.

Public Sector Jobs and Fiscal Austerity

Yesterday saw the publication of the public sector jobs data for both Scotland and the UK. I examined in this earlier post what could be deduced about the impact on public sector jobs of fiscal austerity when data for the fourth quarter 2011 were published back in March.

The new data show fiscal consolidation continuing with more jobs being shed. And Scotland still seems to be leading the way as this chart shows:

However, the 8.9% fall in public sector jobs in Scotland includes the banking employment in HBOS and RBS, which were included in the data from the fourth quarter 2008 after the UK government took a majority stake in each. Transferring those jobs to the private sector reduces the fall in public sector jobs to -7.6%. This makes the job loss broadly the same as England.

There is some evidence that the part-time jobs have initially been more vulnerable than full-time jobs. But recalculating the job loss in terms of FTEs leads to an estimated fall of -7.3%, not much different from the percentage fall in the ex banks headcount. But the FTE numbers are smaller.

Overall, some 57,000 public sector jobs have been cut if the banks are included, 44,000 if the banks are excluded, which translates into about 37,000 FTEs. This is still a sizable job loss whichever way you look at it.

It is also worth noting that at the Fraser of Allander Institute, in a CGE model simulation published in the Economic Commentary in June 2012, we estimated that the public sector job loss from departmental spending cuts would likely be in the range 78,000 to 90,000. It would appear, sadly, that we are well on the way to attaining that range of job loss.

The overall public and private jobs position since the start of the Great Recession is given in this chart:

What is again clear from this chart - I have smoothed the data in the absence of seasonal adjustment - is that the recovery of private sector jobs has not in any significant way compensated for the public job loss.

So much for the UK government view that there would be a crowding in of private jobs as the public sector contracted.

Jobs the public sector and fiscal austerity

So how's it going? How badly hit have jobs in the Scottish public sector been since fiscal austerity began? How has the Scottish private sector fared? The publication yesterday of the latest public sector employment data for both Scotland and the UK offers some help in answering these questions.

The issue is complicated for Scotland by the inclusion of the Scottish employment in HBOS and RBS in the public jobs data from the fourth quarter 2008, after the UK government took a majority stake in each. For ease of analysis I have put this employment back into the private sector. That done we get the following chart:

Public sector jobs (not FTEs but the head count) peaked in Scotland and Wales in 2008q4, in Northern Ireland in 2009q1 and in England in 2009q4. So, it is interesting that in Scotland, Wales and Northern Ireland, at least, public sector jobs were contracting even as the UK government was introducing a temporary fiscal stimulus. But when that stimulus turned to fiscal consolidation and austerity public sector job losses continued apace.

The chart suggests that Scottish government (and the reserved public sector in Scotland) was both quicker out of the blocks in introducing cuts and in the scale of the job losses. The reserved public sector - ex banks - contracted in Scotland at -10.7% from the peak at a faster rate than devolved public sector jobs. But the loss of Scottish government jobs was still large at -7.2% from the peak, compared to Northern Ireland and Wales.

So, what were the implications of all this for total employment and private sector employment in Scotland. The chart below offers some insights

Because the data are not seasonally adjusted I have smoothed the series using a four-quarter moving average. Public sector jobs in Scotland were falling through the recession and the decline accelerated as the recovery in the economy began. By 2001q4, the smoothed public sector series was -5.7% below its peak. But employment overall was -2.8% below peak. Clearly, it appears that there was no burst of private sector job creation as public sector jobs fell. This would appear to provide strong evidence against those who argued that cutting back the public sector would 'crowd-in' private sector employment. Conversely, at first sight it does not appear that the loss of public sector jobs would have made much difference to the path of the recession and recovery. The purple line is a hypothetical jobs figure with public sector jobs held at their peak throughout the subsequent period. On that basis, the recession would have been little different while the recovery would have been somewhat stronger. Total jobs in 2001q4 would have been -1.6% below the pre-recession peak compared to the actual -2.8%.

But wait! The latter calculation ignores any demand or multiplier effects on private sector employment of the reduced incomes and spending from the lower level of public jobs. If we use a public sector multiplier drawn from the Scottish input-output tables (Technical: Type II employment multiplier of 1.66) total employment would have been 0.7% below the pre-recession peak rather than 2.8%. Once that is done, the effect of fiscal austerity on overall employment is seen not to be trivial. However, the exercise should be viewed as illustrative. It might overstate the austerity effect because any 'crowding in' effects from lower wage costs and improved competitiveness in the private sector due to job shedding in the public sector have been ignored.

Nevertheless, that caveat apart, on the unsmoothed series total jobs have fallen by -90,000 since the pre-recession peak, private sector jobs have fallen by -48,800 and public sector jobs by -44,200 from their peak (The numbers don't added up to 90k because the peaks are different). In the absence of fiscal austerity, on a best case scenario, we might have been looking at a much lower job loss of around -16,000 instead of -90,000. This is one price we in Scotland appear to have paid for the UK government's policy of appeasing the bond markets and encouraging the confidence fairy.

Public procurement: the bottom line

The report by the Cuthbert's for the Jimmy Reid Foundation into the public procurement system in Scotland finds

that the overall process of public procurement in Scotland is not working satisfactorily from an economic and social development perspective. In many cases, contracts have been made very large and there are significant barriers to participation by small and medium sized enterprises. Procuring bodies also find it difficult to reflect social and economic requirements in their procuring decisions. This reflects, to a large extent, the big business friendly/low burden approach .... This unsatisfactory outcome, however, is not inevitable. Evidence from elsewhere in the EU indicates that much more can be done within the scope of the EU Directive, for example to assist the involvement of small to medium sized enterprises.

The report provides a thought provoking critique of the present system and makes a strong case for greater involvement by Scottish small to medium sized firms in public procurement. This could have job creation and economic development advantages.

What the report does not, however, say clearly enough is that in the final analysis the interests of the Scottish tax payer and consumer of public services must be paramount. The Scottish government must purchase from suppliers that offer the best quality, reliable delivery and at the lowest cost. There may be an industrial policy argument for subsidising through the procurement process certain 'infant' companies or industries. But there has to be a strong expectation that these supplier firms and industries would become the best quality, lowest-cost suppliers in the future.

The adoption of a mercantilist policy in the end benefits neither the Scottish tax payer nor small and medium sized firms in Scotland

Hitting the buffers

This week the ONS published Regional Economic Activity (GVA) data for the UK. The release contains much interesting information on annual GVA, employee compensation and gross operating surplus/mixed income, on a residence and workplace basis, by region and sector, in nominal terms. Unfortunately, the data only go up as far as 2009. Nevertheless, the data offer some interesting insights into the incidence of the Great Recession.

The data reveal, as would be expected, that the public sector acted as a buffer in all NUTs 1 regions as the growth of nominal income slowed and in some cases fell, between 2007 and 2009. See chart which shows shares of the 'public sector' in regional GVA in the two years.

Broadly, those regions which depend more heavily on the public sector and/or where manufacturing is important, such as Northern Ireland, Wales, the North East, West Midlands and East Midlands, experienced the greatest increase in their public share as the recession started to bite. Manufacturing was hit strongly during the recession.

It is therefore tragic that those regions that had to rely the most on the public sector as a buffer during the recession are now being hit badly by Cameron and Osborne's austerity programme. There's a lot more analysis to be done here, but the current pattern of unemployment rates goes some way to support that story - London is affected, I think, by a difference between resident (unemployment) and workplace (GVA in this example) indicators.

Oh, and what about Scotland? Its middling position is, I suspect, due to a relatively lesser reliance on the public sector as a buffer in the recession - its share rose by a little over one percentage point in Scotland compared to a rise of nearly four percentage points in the North East. Moreover, manufacturing held up better in Scotland, with its share of the Scottish economy remaining largely unchanged at between 11% and 12%. But in the North East the share of manufacturing fell by nearly two percentage points to just above 13%.