Waging war on unemployment

One of the most famous British electoral posters was the Conservatives' 1979 “Labour isn’t working” slogan against a picture of a long, snaking dole queue. With a general election no more than nine months away and unemployment approaching three million again, it is tempting to assume history is repeating itself.

But that would be to ignore some important differences between the labour market in 1979 and in 2009 that pose questions for employers as well as political pundits.

The bald facts are dismal. Unemployment is rising at its fastest quarterly pace on record, by 281,000 between March and May, according to the official Labour Force Survey of households. Meanwhile, employment fell by 269,000 over the same quarter, close to the record seen in the February-to-April period. However, the more timely claimant count ­ the measure of people actually claiming unemployment benefit ­ posted its smallest rise for 13 months in June: the number of jobless on this measure rose by 23,800 that month and down from rises of 30,800 in May and a record 136,600 in February.

George Buckley, chief UK economist at Deutsche Bank, calculated that, relative to the same point in previous recessions, claimant count unemployment rose by around 100,000 less this time than in the 1990s and about 180,000 less compared with the 1980s.

Making claims
There are many possible explanations for this. Job losses have fallen heavily on the credit crunch sectors such as financial services, where workers see a stigma in claiming the dole. At the same time, the government has continually tightened benefit rules over the past decade, making it harder for people to claim.

These factors may play a role, but Buckley believes what’s really happening is that workers have made a trade-off between lower wages and keeping their job. “Real earnings have fallen at a faster pace than during the 1980s or 1990s recessions and employees seem more willing to accept lower wages and hours in return for keeping their jobs, a feature of more flexible working practices and less powerful unions than during past recessions,” he says.

An eye-catching example is the deal struck by British Airways and its unions in July for a 2.61% pay cut for its pilots, saving the company £26m. This followed June’s agreement by nearly 7,000 airline staff to volunteer for unpaid leave or work for free, saving up to £10m. As Tony McCarthy, BA’s director of people, puts it, “In this unique environment, we felt it was right to make it possible for colleagues from across the airline to play an active role in helping to secure the airline’s future and, by doing so, their own.”

As well as shoring up their finances, employers who persuade workers to take a pay cut can hang onto the skills they would lose in a traditional jobs cull. Incomes Data Services says this contrasts with the early 1990s when companies engaged in “de-layering” ­ stripping away layers of management and support services to create lean businesses that often provoked confrontation and industrial action. “On the whole, we have seen employers and unions negotiating to avoid compulsory redundancies, to retain skills and talk about the way to get through a temporary collapse in demand,” says Alastair Hatchett, head of pay and HR services at IDS.

Wage decline
A survey conducted in May by IDS showed that pay freezes accounted for one-in-three pay deals with the rest offering average increases of around 2%. This process is reflected in a decline in wage growth, according to official figures: underlying annual average earnings growth (excluding bonuses) was limited to just 2.6% in the three months to May, the lowest rate since the series began in 2001. This is a slowdown from 3.9% in May last year.

“Companies have imposed wage freezes or even pay cuts,” says Howard Archer, chief UK economist at analyst IHS Global Insight. It is likely that unemployment would have been higher without this flexible approach, but that pay has been depressed.

This should be good news for employers, but it could delay recovery. “Lower wages will have negative repercussions for household income, which could set back any recovery in consumption and therefore, the economy,” says Deutsche Bank’s Buckley. He adds that lower incomes also make it harder for households to pay down the debts ­ a move that would help to speed up economic recovery.

“The question seems not whether the UK is emerging from recession, but rather, what the post-recession macroeconomic environment looks like,” Buckley says. “With sizeable imbalances in debt levels, house prices and the saving ratio to work off, the UK recovery may prove lacklustre.”

The problem may not be so much that labour is not working, but that it is not earning.