Brexit, the Bank of England and the Gig Economy: How not to interpret today’s labour market

By Professor Alex de Ruyter, Centre for Brexit Studies

News that the Bank of England’s Monetary Policy Committee (MPC) unanimously agreed to raise the base interest from 0.5% to 0.75% yesterday was not unexpected, but nevertheless raises eyebrows at a time when the economy remains fragile and Brexit uncertainty continues to cast a cloud over expectations on the economy going forward. In their official statement released yesterday, the Bank attempted to justify the rate increase by pointing to recent labour market developments:

The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further. In the MPC’s central projection, therefore, a small margin of excess demand emerges by late 2019 and builds thereafter, feeding through into higher growth in domestic costs than has been seen over recent years…. [and] CPI inflation was 2.4% in June, pushed above the 2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices.”[1]

Conventional opinion has it that the Bank has been warning for some time now of an interest rate rise to come given the recent performance of the economy, and that financial market expectations were such that for the Bank to continue crying wolf would eventually lead to a loss of “credibility”, and that a rate rise now would give it some “wriggle room” to lower the base rate again should Brexit negotiations fail spectacularly (i.e., “No Deal”).

It is therefore worth pondering their assumptions further. The Bank essentially is tasked by the UK Government to keep inflation within range of the set target of 2% p.a. and has to consider a range of economic factors in assessing this, unemployment and wage rates being two of them. In their decision, an official unemployment rate of 4.2% during the March-May quarter (its lowest rate since March 1975)[2], means that there is little “slack” left in the economy. The Bank clearly feels that this will feed into inflationary pressures, as the unemployment rate has seemingly dipped below the NAIRU (Non Accelerating Inflation Rate of Unemployment).

But is the UK economy really at “full employment”? Whilst it is notable that the Bank’s regional officers have been feeding in reports of businesses struggling to fill vacancies (no doubt in part caused by the decline in the number of EU nationals wanting to work in the UK since the 2016 referendum), does this still translate into wage inflation pressures? That is, are we still living in a world akin to the 1970s, when trade union membership as a % of the workforce (i.e., density) hovered around 50%?

I would say, “no”. Or, to put it more precisely, that whilst there are skills gaps and shortages in certain areas manifest in the UK economy, “full employment” today should not be implicitly equated with a saturated jobs market dominated by permanent full-time employment, with strong trade union representation (as per the 1970s). As such, there is evidence to suggest that the wage pressures cited by the Bank have eased, with Larry Elliott reporting that growth in total pay has fallen rather than risen: annual growth in total earnings fell from 3.1% in December to 2.5% in May, whilst regular pay (this doesn’t include bonuses) fell slightly from 2.7% to 2.6.[3] In today’s UK labour market, trade union membership is at record lows, with a density of around 23% during 2016; and much jobs growth over the last 10 years has been in what can be labelled “precarious jobs”.

Analysis by John Philpott for the Resolution Foundation[4] reported that over 7 million workers, or some 22.2% of the workforce in 2016 (up from 18.1% in 2006) were in precarious forms of employment. Of these, a breakdown of this 22.2% suggests that 15.1% were “self-employed”, 4.3% on a temporary contract, and 2.9% on “zero hours” contracts (which only comprised 0.5% of the workforce in 2006). Of the self-employed category, Philpott’s analysis suggested that half were low paid and took home less than two-thirds of median earnings and that 2 million self-employed workers were earning less than £8 per hour. These are the people that we often associate with the “Gig Economy”.

The variable hours associated with these jobs suggest that there may be more “slack” (or underemployment) in the labour market than the MPC thinks. The essential precariousness of work for many in the UK now is reinforced by findings from the Resolution Foundation that reported that real weekly earnings were expected to only grow by about 1.6% over this decade, as opposed to 12.7% during 2000-2009, and over 20% during all decades prior to this, since the 1920s. In the tax year 2016/2017, the median average salary was estimated to be £26,500[5].

It is only in the context of understanding the relatively weak bargaining power of workers and stagnant real wages today that we can resolve the seeming contradiction between “full employment” and record use of food banks in the UK. It goes without saying that for these people in particular (and especially in the current period of Brexit-induced uncertainty), the last thing needed is a rate rise by a Central Bank that could be accused of using an outmoded view of the UK labour market.

[1] https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2018/august-2018

[2] https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms

[3] https://www.theguardian.com/business/2018/aug/02/interest-rate-rise-the-lack-of-dissenting-voices-came-as-a-surprise

[4] https://www.theguardian.com/uk-news/2016/nov/15/more-than-7m-britons-in-precarious-employment

[5] https://www.incometaxcalculator.org.uk/average-salary-uk.php

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5 comments

  1. Hi Tony, many thanks for commenting on this. The issue of Universal Credit (UC) and those receiving Working Family Tax Credits is important, though let us separate the two of them for this purpose. Department of Work and Pensions (DWP) figures suggested that 660,185 households were claiming Universal Credit in December 2017. UC should be considered as a poverty indicator rather than a proxy for unemployment per se, though there are clearly strong overlaps.

    WTC though is indicative of a wider class of “working poor”, which, I think reinforces my earlier point about the growth of precarious forms of work post-2008 financial crisis. The current Government has sought to reduce eligibility for these, choosing to frame their rationale in terms of raising the National Minimum Wage (NMW) and thereby not “subsidising low pay employers”. However, the net loss of these for recipients according to most estimates to the best of my understanding has outweighed the rise in NMW.

    Apologies though, but I can’t find anything up to date from a reliable source for Working Tax Credits. Wikipedia states that around 7 million are entitled to claim, but 2 million chose not to do so (which is interesting). see https://en.wikipedia.org/wiki/Working_Tax_Credit

    Still, to put this in context, the UK labour force is about 35 million people, so we are talking about what, 1 in 5 workers entitled to WTC?

    hope this helps and thanks again.
    Alex de Ruyter.

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  2. The most surprising thing about the MPC decision was the 9-0 score in favour of a rise. This brings back memories when the England football team would beat the likes of Luxembourg by the same score but failed to qualify for the World Cup.
    The decision had no impact on sterling as any initial effect was undermined by Carney’s Brexit warning, suggesting
    that any inflationary pressure has been discounted.
    The other issue is the role of the Bank’s regional agents who reported skills shortages in some sectors that could lead to some regional wage push. Upon the election of the May government her siren song seemed to be “Kick out the Jams, brothers and sisters!” by MC5, referring to families just about managing of which there is a distinct regional dimension as evidenced by the severe and continuing economic and spatial imbalances in the UK.
    One would have thought there would have been more dissenting voices within the MPC on the implicit assumption that the cost of capital is the same across the UK . The signalling from the rate rise is that the regional risk premium becomes larger so any ‘animal spirits’ to invest the large amount of corporate savings in poorer regions is undermined. For all the talk of a transformative industrial strategy, the lack of an institutionalised framework to fund it or even the BoE and HMT to investigate its regional dimension and their potential role in its creation is puzzling.
    One consequence of Brexit will be greater decentralisation and devolution if the Union is not to fragment further and break-up. In this context, comprehensive financing of a regionally-based industrial strategy will be an imperative.
    Yet the MPC chose to suspend judgement and not explore the deeper and wider evidence in favour of a political group think of ‘something must be done’ but their response was hardly Leninist in nature. In the case of a no deal Brexit outcome, how will they prepare the markets for potentially huge overnight inter-bank rate rises, the last of which we saw with the ERM crisis in 1992? I hear Paddy Power are offering odds so will Carney and Haldane be making ante-post bets?

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  3. Dear Les, thanks for your comment. You are right to raise concerns about the effect on regions, devolution and the incipient effects of a “no deal” outcome on inter-bank lending rates. That serious issues such as these are not seemingly being debated at the MPC just poses more cause for concern.

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