1. A summary explanation of Londons labour market in the recent recession & recovery (updated Sept 2011) by Melisa Wickham

2. Looking forward: How might the factors that have supported the labour market thus far change going forward? How might this make the recovery from the recent recession different from the recovery in the 1990s and 1980s recessions? What the summary covers: Background: How does the economy in the recent recession, in the UK and London, compare to that in the 1990s and 1980s recessions? How is GDP/GVA moving? How is unemployment and employment moving? Possible explanations: Why has the labour market in the UK and London been more resilient during the recent recession so far? We examine seven possible explanations

3. Note: These slides were last updated in Sept 2011, and will be updated quarterly to track the performance of both the UK and Londons economy. Where possible, data on the underlying factors supporting the labour market in this recession and recovery will also be updated. These will all continue to be benchmarked against the performances during and after the 1990s and 1980s recessions. It is not presumed that the full impact of the 2008 recession on the labour market has necessarily been experienced yet. For a more detailed examination and explanations see the main report: Understanding why the labour market impact of the recent recession has been less pronounced so far than in the 1980s and 1990s recessions.

4. UK Background BACKGROUND

5. UK GDP fell faster, and further, in the 2008 recession than in the 1990s and 1980s recessions, but GDP recovery is slower: Source: ONS, GDP chained volume measure, constant 2006 prices, SA Updated to Q2 2011 (preliminary estimate) GDP fell by: 4.6% in the 1980s recession (at a CAGR of -3.7%) 2.5% in the 1990s recession (at a CAGR of -2.0%) 6.4% in the 2008 recession (at a CAGR of -4.3%). After just over three years (13 quarters) from the start of the recession in the 1980s and 1990s GDP had fully recovered to pre-recession peaks. However, in the recent recovery, GDP remains 3.9% below it pre-recession peak.

6. But the claimant count rate has not risen as much in the 2008 recession as it did in the 1990s and 1980s recessions: Note: Claimant count denominator = claimant count + WFJ Source: ONS But by the same time had increased by 4.5 percentage points in 1990s recession And had increased by 5.9 percentage points in 1980s recession The claimant count rate has increased so far by only 2.3 percentage points Updated to Q1 2011

7. Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession: Source: LFS, ONS Employee job numbers have fallen by 3.0% since the start of this recession But by the same time fell by 5.9% from the start of the 1990s recession Updated to Q1 2011

8. London Background

9. CAUTION: The GVA estimates used here for London are not national statistics, and there are causality issues between the labour market performance and output. Specifically, the past relationship between the labour market and GVA along with the latest ONS labour market statistics (as well as other variables) are used to estimate GVA. What this means is that if Londons labour market has performed relatively better during this recession then it is almost a pre-built condition that the output estimates will also be stronger. These estimates are also often subject to significant revisions. Therefore, the Londons GVA estimates shown next should be taken as indicative (and not necessarily definitive) of how output may have performed in London over the recessions. Note: Next page

10. Like the UK, Londons GVA also fell faster in the 2008 recession than in the 1990s recession: Source: GVA at basic prices, constant 2005 prices, Experian Updated to Q1 2011 Londons output fell by: 6.2% in the 1990s recession (at a CAGR of - 2.8%) 6.5% in the 2008 recession (at a CAGR of - 5.3%) After 11 quarters from the start of the UKs recession, GVA remains 3.5% below its peak By the same time after the 1990s recession, output remained 5.7% below its peak

11. And like the UK, the claimant count has not risen as much in the 2008 recession as it did in the 1990s and 1980s recessions: Note: Claimant count denominator = claimant count + WFJ Source: ONS The claimant count rate in London has risen by 2.0 percentage points so far in this recession Updated to Q2 2011 And by 4.6 percentage points in the 1980s recession But by the same time in the 1990s it had risen by 6.5 percentage points

12. Employee jobs have also not fallen by as much in the 2008 recession as they did in the 1990s recession: Source: Nomis But by the same time fell by 11.3% in the 1990s recession Has fallen by 2.7% so far in this recession Updated to Q1 2011

13. Background summary: LondonUK Peak-to-trough output decline (%) 1 20086.56.4 1990s6.22.5 1980s-4.6 Constant annual growth rate (over peak-to-trough period) (%) 1 2008-5.3-4.3 1990s-2.8-2.0 1980s--3.7 Percentage point change in claimant count rate 2 20082.02.3 1990s6.54.5 1980s4.65.9 Change in employee jobs numbers (%) 3 2008-2.7-3.0 1990s-11.3-5.9 1980s-- 1 London figures are derived from Experians regional GVA estimates. UK figures are derived from ONS GDP estimates. 2 From UK output peak to thirteen quarters after. 3 For UK output peak to twelve quarters after. Both London and the UK have had a steeper fall in output over the 2008 recession than the 1990s and 1980s recessions At the same time, both Londons and the UKs labour market have held up relatively well And although Londons labour market performed worse than the UKs in the 1990s recession ……….. ……….. Londons labour market has performed better than the UKs so far in the 2008 recession

14. Why?

15. We examine seven possible reasons POSSIBLE EXPLANATIONS

16. Summary of analysis of possible explanations: Possible explanations Likely contribution to labour market strength during the 2008 recession so far Reduction in relative wagesHigh Strong corporate profitability and low rate of business failuresHigh Growth in the public sectorHigh Labour market structural changeMedium Reduction in working hoursMedium Less economic structural changeMedium Measurement errorLow Next page

17. Jump to conclusion Less labour market structural change Less economic structural change Measurement error Reduction in relative wages Strong corporate profitability and low rate of business failures Growth in the public sector Labour market structural change Click on a potential reason for evidence Reductio n in working hours For more detailed explanations see the main report: Working Paper 44: Londons labour market in the recent recession by GLA Economics.

18. Have workers accepted larger pay cuts/smaller pay rises to reduce their risks of unemployment? Reduction in relative wages

19. Real unit wage costs show how real wages (wages adjusted for inflation) have moved compared to firms productivity (output per worker). Source: ONS (ROYJ, MGRN, MGRZ, ABML), GLA Economics calculation Updated to Q1 2011 We can therefore look at real unit wage costs to see if wages have fallen enough to ease financial pressures on employers, thereby reducing the need for job cuts. Wages per £ of output have actually risen since the recent recession Compared to the 1980s and 1990s recessions it does not seem that wages in the UK have fallen sufficiently to compensate for lower firm output.

20. However………. ………… at the same time the drop in the value of Sterling has meant that the UKs relative unit labour costs have fallen significantly so far in this recession Return to list Source: IMF Reduction in relative wages Looking forward, slow employment growth during the recovery should minimise pressure on wage rises in the UK. However, Sterling is unlikely to fall much further, so further falls in the relative unit labour costs in the UK seem unlikely. The early 1990s also experienced a large drop in Sterling value, but that did not occur until after GDP returned to growth. The peak to trough fall in relative unit labour costs in the 1990s recession was only around half of that in this recession. In an increasingly globalised world, relative unit labour costs are more important to firm hiring and firing decisions.

21. Strong corporate profitability and low rate of business failures 1990 s peak 2008 peak Source: PSNFC net rate of return (%, SA), ONS Higher than historical average, and rising, profits are likely to have minimised unemployment rises in the 2008 recession by: (a)Affording firms time to rely on natural wastage to reduce headcount (i.e. freezing recruitment whilst staff leave voluntarily/retire), and (b)Limiting the number of firms going bankrupt Private sector profits were higher (and rising) prior to the 2008 GDP peak than prior to the 1990s GDP peak. Private sector profits were already being squeezed ahead of the 1990s recession. Updated to Q4 2010 Profits have shown signs of recovery much earlier than in the previous recession and remain much higher than during the 1990s recession

22. Return to list Strong corporate profitability and low rate of business failures Note: Historic business failures are based on data for compulsory liquidations, creditors voluntary liquidations, administrative receiverships, administrative orders and company voluntary arrangements from The Insolvency Service Actual business failures 1980 s 1990s 2008 Compared to the rise in the 1980s and 1990s recessions and given the fall in GDP, the rise in company liquidations has been modest during the 2008 recession. In the 1980s recession, business failures rose by 97% In the 1990s recession, business failures rose by 105% In the 2008 recession, business failures rose only by 57% Two potential reasons for the strength and survival of business in this recession (compared to those previously) are: The speed and magnitude of the change in the Bank of Englands monetary policy, and Government policy measures such as time to pay business support Looking forward, special Government support measures are gradually being withdrawn and this could make future liquidations a risk. Particularly if private finance is still tight and economic activity places demand for working capital. However, the forecast low real interest rates in the near term should continue to support business survival. Especially as firms remain relatively highly leveraged/indebted by historical standards.

23. If we exclude jobs in public administration, defence, education, health and social work from the total number of jobs in the economy…….. If we take these sectors (public administration, education, and health) as a proxy for the public sector then this suggests that the public sector played a significant role in mitigating employment falls during the 2008 recession in the UK Growth in public sector Source: Workforce Jobs, ONS ………then, until more recently, the movement of workforce jobs during the 2008 recession was not too different from the movements seen in the 1990s and 1980s recessions Employment during the 2008 recession in some sectors has fallen in line with output. Others, however, have played an important role in protecting the labour market. Updated to Q1 2011

24. Growth in public sector Return to list Note: Other public sector includes financial corporations. In the timeframe above, RBoS and Lloyds were included in the 3 rd quarter from UK output peak (2008 Q4). Northern Rock was included prior to the GDP peak. Source: ONS London has benefited from the recent growth in public sector jobs. However, a lot of this is due to the reclassification of some financial institutions. These jobs are unlikely to be lost. Further, public sector employment in London is a relatively small percentage of total employment. The public sector job cuts should, therefore, be less costly for London compared to other parts of the country. Looking forward, in March 2011 the OBR estimated that public sector employment will fall by around 400,000 by 2015/16. Looking specifically at public sector employment : Updated to Q1 2011 There was a large rise since the recession Public sector employment (excl. publically owned financial corporations) has fallen and is now below its pre-recession peak However, much of this was due to the take over of financial institutions (e.g. Lloyds) by the public sector

25. Reduction in working hours Note: Average weekly hours worked is taken as total actual weekly hours worked divided by numbers in employment. In employment does not include second jobs. Source: LFS, ONS And in the 1980s average weekly hours fell by 3.8% So although average weekly hours have fallen quite a bit in the recent recession, much of this was only experienced in the last quarter. Thus far in the 2008 recession average weekly hours have fallen by 3.3% Updated to Q1 2011 By the same time in the 1990s recession average weekly hours fell 2.3% Have firms just adjusted the hours that their staff work rather than the total number of staff?

26. Reduction in working hours Note: Average weekly hours worked is taken as total actual weekly hours worked divided by numbers in employment. In employment does not include second jobs. Source: LFS, ONS Return to list Between 2007-2008 average weekly hours worked in London fell by 0.6% Compared to a fall of 0.3% in the UK between 2007- 2008 Average weekly hours worked in London : Between 2008-2009 average weekly hours worked in London fell a further 1.4% And by a further 1.3% in the UK between 2008- 2009 Overall, between 2007- 2009 average weekly hours worked in London fell by 2.0% But only fell by 1.3% between 2007-2009 in the UK However, between 2009 and 2010 average weekly hours worked in London rose by 0.8% Compared to a 0.2% increase in the UK Looking forward, as GDP recovers average weekly hours of work should continue to rise. As this occurs employment growth is likely to be slow.

27. If the economic recovery is slow firms may eventually have to layoff these workers. At the least, it will be some time before they hire additional workers, so growth in employment may be slow. Labour market structural change Return to list Since the 1990s there has been an increase in the proportion of skilled jobs in the UK Specialist jobs often involve higher costs (e.g. in the recruitment process) This is likely to have created some reluctance for firms to cut their workforce during this recession

28. During the 1980s (and to some extent the 1990s) recession there was a structural transition in the UK economy; businesses were moving from the manufacturing industries to service industries. Less economic structural change Return to list Labour retention would have arguably been less rational for firms in the 1980s and 1990s recessions than in the 2008 recession So firms long-term economic outlook is likely to have been more pessimistic (and for many more businesses) during the 1980s and 1990s recessions Economic structural transition (such as manufacturing to services) is a lengthy process so it is likely that employment will pick up faster during this recovery than the 1980s or 1990s recoveries.

29. Measurement error Return to list Two possible sources of error in official national statistics: Overestimation of the fall in GDP Underestimation of the fall in employment But the fall in UK GDP is not too different from the fall in GDP of comparable countries affected by the global downturn Have they all miscalculated GDP? But the workforce jobs series shows a similar pattern to that of the labour force survey Have they both been underestimated? Not very likely Could the official statistics be wrong?

30. Factors that are likely to support the labour market further as the economy grows: Reduced relative wages Strong corporate profitability and low business failures Lower economic structural change Looking forward summary

31. Factors that may slow any improvement in the labour market as the economy grows: Reduced working hours Labour market structural change Reductions in public sector employment

32. END Return to start For a more detailed examination and explanations see the main report: Working Paper 44: Londons labour market in the recent recession by GLA Economics.