a summary explanation of london s labour market in the recent recession
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The London Labour Market in Recession

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The London Labour Market in Recession

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what the summary covers
What the summary covers:
  • Background:
  • How does the economy in the recent recession, in the UK and London, compare to that in the 1990s and 1980s recessions?
    • How has GDP/GVA moved?
    • How has unemployment and employment moved?
  • Looking forward:
      • How might the factors that have supported the labour market thus far change going forward?
      • How might this make the recovery from the recent recession different from the recovery in the 1990s and 1980s recessions?

Possible explanations:

Why has the labour market in the UK and London been more resilient during the recent recession so far?

We examine seven possible explanations

slide3
Note:
  • It is not presumed that the full impact of the 2008 recession on the labour market has necessarily been experienced yet.
  • These slides will be updated quarterly to track the performance of both the UK and London’s economy. Where possible, data on the underlying factors supporting the labour market in this recession will also be updated. These will all continue to be benchmarked against the performances during and after the 1990s and 1980s recessions.
  • For a more detailed examination and explanations see the main report: ‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics.
uk background
UK Background

BACKGROUND

uk gdp fell faster and further in the 2008 recession than in the 1990s and 1980s recessions
UK GDP fell faster, and further, in the 2008 recession than in the 1990s and 1980s recessions:

This is equal

to a steady rate

of decline of

2.0% a year

This is equal

to a steady rate

of decline of

3.7% a year

In the 1980s GDP fell by 4.7% over 5 quarters

And in the 1990s it fell by 2.5% over 5 quarters

In 2008, GDP fell by 6.4% over 6 quarters

This is equal

to a steady rate

of decline of

4.3% a year

Source: ONS, GDP chained volume measure, constant 2006 prices, SA

slide6
But the claimant count rate has not risen as much in the 2008 recession as it did in the 1990s and 1980s recessions:

But by the same time had increased by 4.1 percentage points in 1990s recession

And had increased by 4.9 percentage points in 1980s recession

The claimant count rate has increased so far by only 2.2 percentage points

Note: Claimant count denominator = claimant count + WFJ

Source: ONS

slide7
Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession:

Employee job numbers have fallen by 3.9% so far during this recession

But by the same time fell by 4.3% in the 1990s recession

Source: LFS, ONS

slide9
Note:

CAUTION:The GVA estimates used here for London are not national statistics, and there are causality issues between the labour market performance and output. Specifically, the past relationship between the labour market and GVA along with the latest ONS labour market statistics (as well as other variables) are used to estimate GVA. What this means is that if London’s labour market has performed relatively better during this recession then it is almost a pre-built condition that the output estimates will also be stronger.

These estimates are also often subject to significant revisions.

Therefore, the London’s GVA estimates shown next should be taken as indicative (and not necessarily definitive) of how output may have performed in London over the recessions.

Next page

like the uk london s gva also fell faster in the 2008 recession than in the 1990s recession
Like the UK, London’s GVA also fell faster in the 2008 recession than in the 1990s recession:

This is equal to a

steady rate of decline

of 2.8% a year

This is equal

to a steady rate of

decline of 4.2% a year

London’s output fell by 6.2% over 9 quarters in the 1990s recession

And has fallen by 5.3% over 5 quarters in the recent recession

Source: GVA at basic prices, constant 2005 prices, Experian

slide11
And like the UK, the claimant count has not risen as much in the 2008 recession as it did in the 1990s and 1980s recessions:

But by the same time in the 1990s it had risen by 5.7 percentage points

The claimant count rate in London has risen by 1.7 percentage points so far in this recession

And by 3.7 percentage points in the 1980s recession

Note: Claimant count denominator = claimant count + WFJ

Source: ONS

slide12
Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession:

But by the same time fell by 8.1% in the 1990s recession

Has fallen by 2.6% so far in this recession

Source: Nomis

background summary
Background summary:

Both London and the UK have had a steeper fall in output over the 2008 recession than the 1990s and 1980s recessions

……….. London’s labour market has performed better than the UK’s so far in the 2008 recession

And although London’s labour market performed worse than the UK’s in the 1990s recession ………..

At the same time, both London’s and the UK’s labour market have held up relatively well

1 London figures are derived from Experian’s regional GVA estimates. UK figures are derived from ONS GDP estimates.

2 From UK output peak to nine quarters after.

3 For the UK this is over the period from UK output peak to eight quarters after. For London this is over the period from UK output peak to seven quarters after.

slide14
Why?

Why?

slide17
Strong corporate profitability and low rate of business failures

Growth in the public sector

Reduction in relative wages

Labour market structural change

Click on a potential reason for evidence

Less labour market structural change

Reduction in working hours

Less economic structural change

Measurement error

For more detailed explanations see the main report:‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics’.

Jump to

conclusion

reduction in relative wages
Reduction in relative wages

Have workers accepted larger pay cuts/smaller pay rises to reduce their risks of unemployment?

reduction in relative wages19
Reduction in relative wages

Compared to the 1980s and 1990s recessions it does not seem that wages in the UK have fallen sufficiently to compensate for lower firm output.

We can therefore look at real unit

wage costs to see if wages have

fallen enough to ease financial

pressures on employers, thereby

reducing the need for

job cuts.

Real unit wage costs show how

real wages (wages adjusted for inflation)

have moved compared to firms’

productivity (output per worker).

reduction in relative wages20
Reduction in relative wages

However……….

………… at the same time the drop

in the value of Sterling has meant that

the UK’s relative unit labour costs have

fallen significantly so far in this recession

The early 1990s also experienced a large drop

in Sterling value, but that did not occur until after

GDP returned to growth. The peak to trough fall in

relative unit labour costs in the 1990s recession

was only around half of that in this recession.

In an increasingly globalised world, relative unit

labour costs are more important to firm hiring

and firing decisions.

Looking forward, slow employment growth during

the recovery should minimise pressure on wage rises

in the UK. However, Sterling is unlikely to fall

much further, so further falls in the relative unit

labour costs in the UK seem unlikely.

Return to list

Source: IMF

strong corporate profitability and low rate of business failures
Strong corporate profitability and low rate of business failures
  • Higher than historical average, and rising, profits are likely to have minimised unemployment rises in the 2008 recession by:
  • Affording firms time to rely on natural wastage to reduce headcount (i.e. freezing recruitment whilst staff leave voluntarily/retire), and
  • Limiting the number of firms going bankrupt

2008 peak

1990s peak

Private sector profits were higher (and rising) prior to the 2008 GDP peak than prior to the 1990s GDP peak.

Private sector profits were already being squeezed ahead of the 1990s recession.

Source: PSNFC net rate of return (%, SA), ONS

slide22
Strong corporate profitability and low rate of business failures

Actual business failures

In the 1990s recession,

business failures rose

by 105%

In the 2008 recession,

business failures rose

only by 57%

Compared to the rise in the 1980s and 1990s recessions

and given the fall in GDP, the rise in company

liquidations has been modest during the 2008 recession.

In the 1980s

recession,

business failures

rose by 97%

Looking forward, special Government support measures are gradually being withdrawn and this could make future liquidations a risk. Particularly if private finance is still tight and economic activity places demand for working capital.

However, the forecast low real interest rates in the near term should continue to support business survival. Especially as firms remain relatively highly leveraged/indebted by historical standards.

  • Two potential reasons for the strength and survival of business in this recession (compared to those previously) are:
  • The speed and magnitude of the change in the Bank of England’s monetary policy, and
  • Government policy measures such as ‘time to pay’ business support

1990s

2008

1980s

Return to list

Note: Historic business failures are based on data for compulsory liquidations, creditors’ voluntary liquidations, administrative receiverships, administrative orders and company voluntary arrangements from The Insolvency Service

slide23
Growth in public sector

If we exclude jobs in public administration, defence, education, health and social work from the total number of jobs in the economy……..

If we take these sectors (public administration, education, and health) as a proxy for the public sector then this suggests that the public sector has played a significant role in mitigating employment falls during the 2008 recession in the UK

………then the movement of workforce jobs so far in this recession is not too different from the movements seen in the 1990s and 1980s recessions

Employment during the 2008 recession in some sectors has moved as would be expected given the fall in output. Others, however, have played an important role in protecting the labour market.

Source: Workforce Jobs, ONS

growth in public sector
However, a lot of this increase is due to the incorporation of financial institutions (e.g. Lloyds) into the public sector

Around 25% of the public sector employment increase between 2008 and 2010 was in London. Around 40% of this is due to the reclassification of financial institutions into the public sector

Growth in public sector

There has been a large rise since the recession

London has benefited from the recent growth in public sector jobs. However, a lot of this is due to the reclassification of some financial institutions. These jobs are unlikely to be lost.

Further, public sector employment in London is a relatively small percentage of total employment. The public sector job cuts should, therefore, be less costly for London compared to other parts of the country.

Looking forward, the OBR estimates that public sector employment will fall by around 400,000 by 2015/16. This means that public sector employment will contract at a similar compound rate over the next 5 years as the private sector experienced between 2008 and 2010.

Looking specifically at public sector employment in the 2008 recession:

Note: ‘Other public sector’ includes financial corporations. In the timeframe above, RBoS and Lloyds were included in the 3rd quarter from UK output peak (2008 Q4). Northern Rock was included prior to the GDP peak.

Source: ONS

Return to list

reduction in working hours
Reduction in working hours

Have firms just adjusted

the hours that their staff

work rather than the total

number of staff?

So average weekly hours have not

fallen by as much as may have been

expected so far in this recession

given the GDP decline.

Thus far in the 2008 recession average weekly hours have fallen by 1.7%

And in the 1980s average weekly hours fell by 3.5%

By the same time in the 1990s recession average weekly hours fell 2.1%

Note: Average weekly hours worked is taken as total actual weekly hours worked divided by numbers in employment. In employment does not include second jobs.

Source: LFS, ONS

reduction in working hours26
Reduction in working hours

But in the UK as a whole, average weekly hours rose by 1.3% between 2008-2009

Compared to a fall of 1.6% in the UK between 2007-2008

Looking forward, as GDP recovers

average weekly hours of work

should rise. During this period

employment growth is likely

to be slow.

Average weekly hours worked in London:

But have only fallen by 0.3% between 2007-2009 in the UK

Between 2007-2008 average weekly hours worked in London fell by 0.8%

Between 2008-2009 average weekly hours worked in London fell a further 1.4%

Overall, between 2007-2009 average weekly hours worked in London fell by 2.2%

Note: Average weekly hours worked is taken as total actual weekly hours worked divided by numbers in employment. In employment does not include second jobs.

Source: LFS, ONS

Return to list

labour market structural change
Labour market structural change

Since the 1990s there has

been an increase in the

proportion of skilled jobs

in the UK

If the economic recovery is slow firms

may eventually have to layoff these workers.

At the least, it will be some time before

they hire additional workers, so growth in

employment may be slow.

Specialist jobs often

involve higher costs

(e.g. in the recruitment

process)

This is likely to have

created some reluctance for

firms to cut their workforce

during this recession

Return to list

less economic structural change
Less economic structural change

During the 1980s (and to some extent the

1990s) recession there was a structural transition

in the UK economy; businesses were moving

from the manufacturing industries to

service industries.

So firm’s long-term economic outlook

is likely to have been more pessimistic

(and for many more businesses) during

the 1980s and 1990s recessions

Economic structural transition (such

as manufacturing to services) is a

lengthy process so it is likely that

employment will pick up faster

during this recovery than the

1980s or 1990s recoveries.

Labour retention would have arguably been

less rational for firms in the 1980s and

1990s recessions than in the 2008 recession

Return to list

measurement error
Measurement error

Two possible sources of error

in official national statistics:

Could the official statistics be wrong?

Underestimation

of the fall in

employment

Overestimation

of the fall in GDP

Not very likely

But the fall in UK GDP

is not too different from

the fall in GDP of

comparable countries

affected by the global

downturn

But the workforce jobs

series shows a similar

pattern to that of the

labour force survey

Have they all

miscalculated GDP?

Have they both been

underestimated?

Return to list

factors that are likely to support the labour market further as the economy grows
Factors that are likely to support the labour market further as the economy grows:

Looking forward summary

  • Reduced relative wages
  • Strong corporate profitability
  • and low business failures
  • Lower economic structural
  • change
factors that may slow any improvement in the labour market as the economy grows
Factors that may slow any improvement in the labour market as the economy grows:
  • Reduced working hours
  • Labour market structural
  • change
  • Reductions in public sector
  • employment
slide32
END

For a more detailed examination and explanations see the main report: ‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics.

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