Employment and category errors

When talking about the Great Recession in the UK, we all know (I hope) that this is still the slowest recovery for at least a century and that we have only just regained pre-recession levels of output per head. I find it very frustrating when some people respond by saying the story is quite different when it comes to employment. The frustration is because the remark reflects a confusion which is not trivial to explain to non-economists, coupled with uncertainty about whether this is a real confusion or just political banter.

I was inspired to write about this again by a very good piece by Larry Elliott in the Guardian. He puts it well by talking about how we coped with recession, but I thought I could try and summarise the point slightly differently. In a recession, looking at output is all about the size of the cake. Looking at employment is about how that cake is distributed.

The recession of the early 1980s involved a smaller decline in output, but a bigger and much more persistent increase in unemployment. In contrast the really distinctive feature of this recession has been the decline in real wages. These differences are almost surely linked: unemployment increases were smaller this time, and unemployment then fell rapidly, because real wages declined. Low wages encouraged firms to first fire fewer workers, and later to take on more. There remains a lot we do not know, such as whether this is all a result of the recession or if other factors were involved, and to what extent is a more flexible labour market responsible. This is really just the UK’s productivity puzzle expressed in a different form.

I think most economists would agree with Larry Elliott that the Great Recession in the UK was distributed in a better way than earlier recessions. The high costs of prolonged involuntary unemployment are, I hope, also well known. Whether any of this better distribution should be credited to current politicians seems doubtful: if any politician deserves credit, the most obvious is Margaret Thatcher.

If you look at this in terms of the size of the cake (output) and its distribution (employment and real wages), then you can see why those who dispute the claims about how poor the recovery from this recession has been by pointing to employment are making a category mistake. It is almost certainly better that a recession should lead to declines in real wages rather than increases in unemployment. But to argue that rapid employment growth excuses poor output growth is just another way of celebrating a disastrous productivity performance.        

Mediamacro myth 8: employment growth

We have had the slowest recovery from a recession almost since records began, and a large part of that is down to the sharp fiscal contraction that the coalition government chose to undertake, despite there being no market pressure to do so. But, supporters of the coalition might say, employment growth has been very strong. This is an argument that is almost as ludicrous as the 2013 recovery vindicates austerity idea, but there is still a half-truth behind it. [1]

To see why it is ludicrous, you just need to note that - by definition - labour productivity is output divided by employment, and that over the medium to long run living standards are largely determined by productivity. So to try and take credit for strong employment growth despite lack of output growth is to take credit for poor productivity growth (or, in the UK case, the virtual absence of productivity growth over the last five years). Which is very close to wanting to take credit for the lack of growth in real incomes.

In short, it is output that matters, not employment. Employment growth due to output growth is good, but employment growth without output growth is not. To extol employment growth without output growth could be described as a luddite point of view!

The half-truth concerns the distributional impact of a recession. On average we are worse off in a recession, but those that really feel it are workers that lose their jobs. For a given level of output in a recession, it would be better if the pain was evenly spread through cuts in living standards and little increase in unemployment. So, if (and this if is critical) productivity growth just paused during a recession, but then made up for all the lost ground afterwards, that would probably be a good thing.

So, in that very specific sense, lack of productivity growth might be a good thing given the lack of a recovery, on the assumption that we get it all back again later. However I doubt very much whether the government would want to take credit for stagnant productivity during their term of office for two reasons. First, it probably has very little to do with them, and rather more to do with the flexible labour markets encouraged by their predecessors. Second, there are very strong doubts that we will get back all the lost productivity growth: the OBR is assuming we get back virtually none.

So to claim credit for strong employment growth is the same as claiming credit for poor productivity, and it is hypocritical to try to do the first and not the second. [2] Given that many economists argue that poor productivity growth is our number one problem right now, implicitly claiming credit for creating the problem in the first place is somewhat bizarre.

Previous posts in this series

(0) UK mediamacro myths: an introduction

(1) 2010 Britain faced a financial crisis

(2) Labour profligacy

(3) The 2007 boom

(4) The immediate necessity of belt tightening

(5) The long term plan

(6) 2013 recovery vindication

(7) The strong recovery

[1] There are many reasons to doubt the ‘quality’ of the employment growth (see for example David Blanchflower (pdf)), but that is not my concern here, except in so far as that helps explain lack of productivity.

[2] Although this highly unusual lack of productivity growth after a recession pretty well coincides with the period of the coalition government, it is far from clear whether there is a connection or not. If poor productivity is down to firms using workers rather than capital because the recession plus austerity has pushed down wages, then there is a connection between austerity and poor productivity. However other explanations are equally possible, which is why it is called the UK productivity puzzle. 

Behaving like Luddites

The Luddites were 19th-century English textile artisans who protested against newly developed labour-saving machinery from 1811 to 1817. Activists smashed Heathcote's lacemaking machine in Loughborough in 1816. At the time, the BBC said that the increase in employment that would result from destroying the machinery “was of course good news”, but there was a concern that output might fall as a result. But some experts proclaimed that, thanks to the Luddites, we should celebrate that Britain was now leading the way in employment creation. A prominent politician that supported the Luddites accused the BBC of being hopelessly biased, and “peeing all over British workers”. The BBC Trust subsequently held a seminar on impartiality and economics reporting.

OK, the first two sentences come from Wikipedia, and the rest is nonsense. The idea that the BBC might describe additional employment that resulted from not using labour saving machinery as good news is surely unthinkable. If a journalist pointed out that these actions were problematic because productivity would fall, it must be inconceivable that any serious politician would accuse that journalist of bias. Unfortunately, if you follow the links, you will see that I made very little of that paragraph up, but just transposed things that happened a year ago back another 200 years.

There is one sense in which my transposition may be slightly unfair. In a recession, low productivity growth means that unemployment is lower. So I would have no problem with a line that went: “Of course the growth in UK employment, given flat output, is bad news. However, if this slowdown in productivity growth is temporary, and we catch up in terms of productivity levels later on, it may have a silver lining. Low productivity growth means that unemployment is lower, so that the pain of the recession is being more evenly spread by (nearly) everyone receiving lower real wages.” In a car crash, it is good when things like seat belts mean that people escape with minor injuries. But no one should describe the car crash itself as good news. [1]

At the seminar that the BBC Trust did hold in November 2012, there was disagreement over “whether BBC coverage should reflect a consensus view, in areas where there is one, or whether instead it must reflect the range of opinions even if parts of that range are minority views.” I would suggest that the overwhelming view today is that high productivity growth is beneficial, and that low productivity growth is a serious cause for concern, even if it might in the short term keep unemployment low. Do we really want the media to portray this as just ‘one perspective’, and then give equal time to the ‘opposing view’ that strong employment growth and low productivity growth is simply good news. In the case of the BBC and UK productivity, the BBC currently follows the 'opinions on shape of the earth differ' approach, and is then accused of bias for even mentioning that low productivity growth might be a concern.

It is vital that the media does not let politicians dictate how facts are interpreted. In George Osborne’s Orwellian nightmare, support for his handling of the economy is growing, and opposition to austerity is crumbling, whereas in the real world the case for austerity has never been weaker. It was always obvious that when the economy started recovering, this would be proclaimed as proof that the government’s policies are working, whereas what it really tells us is how used we have become to a no-growth economy.

Now if politicians want to be Luddites that is of course their choice. We trust in the system to quickly find them out, so that they do not get to hold positions of responsibility. Yet how is that supposed to happen, when the media insists on giving the Luddites equal space. As the opinion poll results presented by Professor Schifferes to the Trust showed, many people follow economics news closely, but remain confused by it. They rely on the media not just to present the news, but to put that news into context. Reporting that says one day ‘output growth low: bad’ and the next ‘employment growth high: good’, without putting the two together, is bad reporting.

Tim Harford has a recent post that pokes fun at some of the common misperceptions that the UK public has, such as crime is rising, a third of the population was born overseas, or that teenage pregnancy is widespread. What Tim does not ask is where these incorrect perceptions come from. He does note that they often do not come from direct experience: “people generally believe that their own area is closer to the way they like it with lower crime, lower unemployment, better policing, fewer immigrants. It’s the rest of the country they worry about.” So where do these perceptions about the rest of the country come from, if they do not come from the official statistics? The answer is pretty obvious - they come from the media.

There is a large part of the media, in the UK and elsewhere, that would regard the perceptions Tim quotes as indications of success rather than failure. It is not a coincidence that these misperceptions all tend to encourage a rather illiberal political agenda. However these perceptions should be a source of deep concern for organisations like the BBC, whose mission is “To enrich people's lives with programmes and services that inform, educate and entertain.”

Of course the ‘two sides’ approach has its place. It is not clear, for example, how much of the productivity slowdown in the UK is the government’s fault. However given what we know about output, the strong growth in UK employment is self-evidently bad news. As the coincident slow growth in UK wages shows, we are (nearly) all significantly worse off as a result. It is time the UK media recognised that the Luddites were wrong, and update its reporting accordingly.

[1] In the US in particular, monthly employment numbers are used as an indicator of what is happening to output, which is something completely different. Here I am talking about commentary that at least has the potential to compare what is happening to employment and output.