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Analysis: Britain bears costs of jobs without growth

Commuters walk towards the financial district via London Bridge, three days after the end of the London 2012 Olympics August 15, 2012. REUTE
Commuters walk towards the financial district via London Bridge, three days after the end of the London 2012 Olympics August 15, 2012. REUTE

By Olesya Dmitracova

LONDON (Reuters) - A near-record number of Britons are in work despite a shrinking economy, but new employment has come at the expense of pay and job security, capping any boost to vital consumer spending.

Britain's economic output is now 4 percent lower than in the first quarter of 2008, just before the slump that followed the global financial crisis, while the number of people in work has risen to 29.56 million, close to an all-time high.

But the new jobs, many of which are precarious and low-paid, have failed to encourage consumers to spend, blunting the boost to the economy higher employment normally provides.

Jobs growth may also run out of steam. Disappointing recent data has dimmed hopes of a meaningful economic recovery in Britain, which has been mired in recession since late last year.

For now, thousands of Britons are having to accept either a fall in real income, low job security or having to toil more for the same earnings just to stay in work.

"Wages staying quite low and below inflation prices people into work," said Kevin Green, head of the Recruitment and Employment Confederation, which represents Britain's recruiters.

"Employers are trying to keep their fixed costs down ... Whereas we used to see lots of temps, flexible working happening in the low-skill, retail, office professionals type-of-activity, we now see that growing in the professional groups."

'Jobs without growth' has been a conundrum for economists in the past year, translating into a steep fall in productivity which even the central bank struggles to make sense of.

Explanations range from inaccurate GDP statistics to the effects of the financial crisis constraining the economy's ability to grow, while debate has focused recently on the kind of jobs being created and what they mean for growth.

Sean Cannon, who set up a business with his brother in 2010 selling British fine foods, is a case in point. He left his job as a youth worker following deep cuts in funding and now works about twice as many hours for a similar income.

Would he still recommend starting a business?

"I'd recommend it if you are prepared to literally give up all of your social life," he said in his small deli, Cannon & Cannon, in the London district of Brixton, where jars of pickled pears and tapenade line the shelves.

ALL THAT GLISTERS

In the past four years, self-employment and part-time work have grown strongly, while full-time jobs have fallen.

There are also now more temporary workers as a share of all employees, and a much larger proportion of people say they are working part-time or on temporary contracts because they could not find full-time or permanent work.

A January report by the Chartered Institute of Personnel and Development said that many of the newly self-employed looked like "'odd jobbers' desperate to avoid unemployment".

Meanwhile, 349,000 of typically secure public-sector jobs have disappeared as the government takes an axe to spending in a bid to erase Britain's huge budget deficit.

Pay has not kept up with rising living costs, leaving Britons with less money to spend. Wages grew at just over half the rate of inflation in July, compared with earnings growth of close to twice the rate of inflation in March 2008.

Real wages are also pressured by a rise in labor supply, caused by higher life expectancy, worries over pensions, the low level of state benefits and reduced availability of long-term sickness benefits, notes Citi economist Michael Saunders.

In addition, more Britons aged between 18 and 24 are joining the workforce, probably in response to higher university fees.

Sectoral rebalancing also helps explain the discrepancy between falling economic output and growing employment.

"Some sectors with high measured value-added are shrinking and some with low value-added are increasing," said BNP Paribas economist David Tinsley.

For example, in the finance and insurance sector, where output per job has traditionally been very high, there were 45,000 fewer jobs in June 2012 than in March 2008.

By contrast, hotels, restaurants, bars and the like - whose average employee produced only a fifth of the output of a financial worker four years ago - have added 103,000 jobs.

Moreover, Nomura economist Philip Rush notes much of the new hiring that does exist in the financial sector is driven by stricter regulation and so is not conducive to greater output.

"The new business in financial services is compliance and that is an input cost, it's not a productive output of the sector. That is one of the major reasons why productivity within financial services is falling so heavily," Rush said.

COLD COMFORT

While policymakers, economists and trade unions agree that any job is better than no job, not least because it keeps skills up, recent employment growth has done little to aid the economy.

Consumer spending, which drives 60 percent of Britain's GDP, has barely grown over the past year and remains well below its pre-crisis level, despite a faster rise in employment.

Consumers have become all the more important as prospects for a boost to growth from other sources, such as exports and public spending, have faded.

But not only are people in insecure and low-paid jobs unlikely to splurge, they also find it harder to get loans and mortgages, notes Daniel Solomon, economist at the Centre for Economics and Business Research.

That has contributed to the feeble state of Britain's housing market. A shortage of finance is also a major stumbling block for house building, which could give the economy a short-term shot in the arm.

With 473,000 vacancies recorded between June and August and 474,000 in May-July, the highest level since early 2011, there are signs the 'jobs miracle' will endure. But if the bumpy recovery hits firms' confidence and leads to job culls, more difficult times may lie ahead.

Surveys of purchasing managers showed services firms shed jobs last month for the first time since November 2011, while employment in manufacturing also fell. The Bank of England meanwhile said its agents around Britain reported little private-sector job creation planned in the coming months and said that job cuts in construction and retail were likely.

(Editing by Catherine Evans)

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