Job creation: some doubts

The OBR reckons (pdf) that private sector employment will grow by a net 1.95 million between 2010-11 and 2015-16, more than enough to offset public sector job cuts. I agree with Anthony and Sunny that this is unlikely, for three reasons.
1. It’s a lot by historic standards. The OBR’s forecast is for an 8.3% increase. Although this is less than the 9.7% rise we had in 1993-98 - after the last recession - it is above the 5.6% rise we saw in the five years to the peak in 2008Q1.
2. And there’s a big difference between those five years and the next. Companies could borrow freely then. But unless things change a lot, they’ll not be able to in the next five years.
3. This recession has differed in one respect (at least!) from the early 90s’ one. Back then, firms were quick to shed staff, and so had to re-hire quickly as the economy picked up. This time, though, employment has held up well relative to output: since Q1 2008, private sector GDP has fallen by around 6.6%, whilst employment has dropped just 4.1%.
This suggests many firms have been hoarding labour and under-employing people. Perhaps they’ve been loath to sack skilled workers for fear of not being able to re-hire in the upturn. But this in turn suggests that if the economy recovers, firms will react by using existing labour more intensively, rather than by hiring new staff.
Of course, it could be instead that employment has held up not because of labour hoarding, but because of an adverse productivity shock. But if this is the case, how can employment rise quickly without generating inflation?
These suspicions make me wonder about the OBR. Their forecasts look very much like they are heeding Montagu Norman's  advice to a Bank of England economist: “Your job is not to tell us what we should do, but to explain to us why we’ve done what we have.”

Comments

[Glenn]

Chris - employers have been hoarding labour. All the BoE agent's surveys, EEF surveys, and other bus conf surveys report that.

Generally there's been a lot more businesses that have cash in the bank in this recession and have managed cashflow and business very tightly. I've been nicely surprised that closures and layoffs haven't been as high as expected.

OBR assumes 3% spare capacity at the moment - but this is nearer the amount when the economy is doing ok. I reckon spare capacity is 5-10%.

Also forecasting such ludicrous growth rates when the main UK export markets, US and EU are sluggish; and when credit is scarce as you say. Demand is slow.

Also investment growing by almost 60% between now and 2015 is ludicrously optimistic. Especially when much of the investment traditionally is in commercial property, which is now experiencing record vacancy rates btw.

If you look carefully at OBR, there is a margin of error in the calculations - and within that the economy could tip back into recession. Personally I think it will, if the public sector cuts go ahead as planned.

Oh and to cap it all off - absolutely no economic growth strategy beyond corporate tax, and NI concessions. Too reliant on loose fiscal policy.

And then again, labour's stimulus monies - what did they really go on? in the US they are building public transport systems and new roads and bridges. They invested it in something that will pay back for years to come.

I'm just afraid that this country will become like the 1970s and 80s again. Completely sh*t .

[Jimmy Hill]

Could it be that the increase in public sector hiring over the last decade crowded out private employment?

Here is some evidence to support this suggestion:

http://www.jstor.org/stable/3440860
http://www3.interscience.wiley.com/journal/118915430/abstract?CRETRY=1&SRETRY=0

Perhaps this could mean that public sector retrenchment will allow the private sector to expand employment more rapidly. Possibly.

[Jimmy Hill]

Just to add, I've only scanned those articles so they might actually say something different from what I think they say!

[John H]

Did you ever seriously doubt that the OBR's role was anything /other/ than that?

Seconded, though, on the "labour hoarding" point. That has definitely been happening: people put onto four-day weeks, sent on a year's sabbatical, that sort of thing. Employers in many sectors recognise how hard it is to recruit people once an upturn occurs.

[Luis Enrique]

Capitalism is supposed to operate via self-interest, so I'm not suggesting firms win any moral credit for this, but it is offten thought that capitalism protects capital and screws workers. That may be the case, and this small thing might not out weigh the bad, but firms hoarding labour in a recession is an example of capitalism helping out workers. Firms are effectively providing (some) workers with insurance against macroeconomic downturns. As I say, they're not doing it out of the goodness of their hearts, but that's not the point.

I wonder why the tendency to do so has increased? Has it go anything to do with a shift towards services? Has job-specific human capital become more important? It would be interesting to see how labour hoarding varies across industries.

[Corey]

1) I disagree with this point as the comparison you make clearly lends itself toward the OBR analysis. The 5.6% private sector growth pre-2008 appears very good given the certainty of crowing out occurring. This has been one of the most expansive periods of government spending. The fact it was higher than OBR estimates 93-98 is suggestive that the OBR estimate may be broadly along the right lines.

2) Credit constraints are beginning to ease, I don't see how this will maintain for the next 4-5years. I would expect things to return back to 'normal'.

3) Labour hoarding has happened not due to some 'protection' by firms or by the fact they recogonise that it might be hard to hire in an upturn. That logic should imply places like the US also saw significant labour hoarding.

The difference between US and UK unemployment trends recently is the US spiked much higher, but has now dropped lower quicker, the UK spiked lower and drops slower. I think this is broadly being driven by labour market regulation which makes it very difficult to sack employees of 18-24months as they obtain significant protections - and more employees fall under this banner due to the long period of steady growth. Hence, I think labour hoarding in the UK is more related to this.

I think you may well be right that the estimate of overoptimistic, but I would think somewhere in the region 7-8% can't be far wrong. This would take the vast majority of public sector job losses, and in theory replace them with much more efficient private sector jobs that are more conducive to raising growth rates.

[Alex]

"The 5.6% private sector growth pre-2008 appears very good given the certainty of crowding out occurring"

The certainty? What certainty? "because skydaddy...oops...Hayek says so" is not a sufficient answer. The current policy interest rate is 0.5% and the business sector ex-FIRE is a net saver.

[Graham Greene]

Chavez cut Venezuela's unemployment levels by half in four years, from 15% down to 8% in a recession. Maybe that's why Brits would rather have him than Cameron at the help of the UK...

http://southoftheborder.dogwoof.com/chavez_vs_cameron

[JustinShirley.com]

There appears to be quite a bit of fear still looming in all markets.. Unfortunately a healthy economy is often supported by relaxed spending. Everyone is scrutinizing their personal & corporate spending. Things are still slow.. Sarasota, Florida real estate is doing well though..
www.JustinShirley.com

[jameshigham]

There's the little matter of the end of September quarter 2010 crash to take into consideration as well.

[libertarian]

These figures will be achieved easily if HMG got out of the way and let businesses get on with creating jobs and wealth

As of June 2010 there are 498,000 unfilled vacancies in UK. The Number of vacancies has risen for the 8th consecutive month.

There are 4.3 million SME's if 25% of them employed 1 more person each that would create a million new jobs . Most of the SME sector has been holding off of recruiting waiting to see what the new government was going to offer.

If we could persuade the coalition to scrap IR35 we would instantly create 350,000 new businesses.

Job creation isn't the problem, motivation, skills and willingness to work is the problem