Flexible jobs market means anxious workers and declining living standards

The painful, post–crisis adjustment in the UK’s economy is being felt on the bottom line of millions of households’ finances

When Gordon Brown deigned to pop across to Brussels to commune with his continental counterparts during his years at Number 11, he often spent as much time lecturing them about the benefits of Britain’s flexible labour market as discussing the latest wrinkle in EU growth policy.

But regimes drawn up in good times only reveal their full meaning when they’re tested by adversity, and the grim reality of the flexible labour market in this non–recovery is falling real wages, mass underemployment, and millions of families living hand–to–mouth.

Wednesday’s jobs figures signalled another rise in employment, so that a record 29.6m people are now in a job in the UK, the highest number since records began in 1971. That must be good news.

But Wednesday’s figures, showing that incomes are still rising at just 1.7% a year, when inflation is a percentage point higher, also lay bare the fact that the painful, post–crisis adjustment in the UK’s economy is being felt on the bottom line of millions of households’ finances.

As the Bank of England’s chief economist Spencer Dale put it in a speech on Wednesday, shortly after the jobs figures were published, “the harsh but inescapable reality,” is that, “households and families in our economy are worse off. Much worse off.”

He highlights the “extraordinary flexibility” of wages. Once adjusted for inflation, pay is now more than 15% lower than where it would have been if it had followed the pre–crisis trend.

In other words, the “flexibility” of the labour market has meant that anxious workers have had little choice but to accept paltry pay rises in exchange for holding on to their jobs.

The Office for National Statistics has also revealed that the number of people who are “underemployed” – working fewer hours than they would like – has increased by more than a million since 2008, suggesting many are struggling to get by on less income than they would like.

And at the same time as workers are accepting these unenviable choices, sterling is weaker on the world’s foreign exchange markets, making imports more expensive. And the slow rate of economic growth, despite the improving employment picture, suggests productivity – measured as the amount each person produces per hour – has plunged.

Economists aren’t sure how to explain this last development – it may be because the battered financial sector is still casting a shadow across the rest of the economy, or some of the productivity uplift in the boom years was illusory.

But as Dale points out, when combined with the decline in sterling, a sharp fall in productivity means we are producing less, just at the same time as “the pound in our pocket” buys less on the global market.

“The less we produce,” and the less “we can purchase using the proceeds from our domestically–produced output”, he says “the less we can ultimately consume”. In other words, most households are just going to have to get used to their living standards being lower than they were before the bubble burst – an extraordinary turnaround, after decades of steady improvement.

No one would argue that mass unemployment on the scale seen in previous downturns would be preferable to the long, slow decline in living standards the UK’s families now face. Unemployment brings with it severe social, economic and psychological problems, as well as the immediate damage to laid–off workers’ livelihoods. It’s clearly better that the pain is being more widely shared.

But it also means ministers seizing on the happy news of another rise in jobs – or tempted to laud the flexibility of Britain’s labour market – must be senstive to the fact that millions of workers up and down the country may see little reason to cheer.

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