The age of flexibility

Alistair Darling's notorious 2008 prediction of the worst downturn since the Great Depression has been more than vindicated, and George Osborne's competence is under attack from left and right. But there is one confusing fact behind the headlines: growth is reducing but unemployment is not growing anywhere near as fast as that drop would suggest.

The problem with characterising recessions is that their effects are usually uneven. Output may fall by only a few percentage points, but the impact can be disastrous for those who lose their livelihoods.

In the current UK downturn, the pain has so far been pretty evenly spread, though many would argue that the top end – particularly finance – has escaped its fair share. The big labour-market surprise, leading some economists to talk of a "phoney recession", is that unemployment has not risen by nearly as much as the fall in output would have suggested.

At the low point of the recession, UK output was down 7.2%, and with the anaemic recovery since then our economy is still 4.3% smaller than before – or 15% below what it would have been if trend growth had continued.

But employment fell by only 2.4% at its worst, and is just 1% below peak today.

As the Stirling University economist Professor David Bell puts it: "The labour market has performed as well as can be expected given the huge shock to output.

"Unemployment is well below what we saw in the recession of the 1980s, even though the fall in output has been longer and larger."

The trends are the same in Scotland, even if the detailed figures are different.Here, the recession has been less severe, although employment fell more than the UK average, and has recovered more slowly. But in both Scotland and the UK unemployment has fallen for three months in a row.

The ONS's GDP figures have baffled economists, given the relatively benign jobs story.

The private sector has in fact led a recovery in the jobs market. In the last two years nearly a million jobs have been created by UK business, double the public-sector job losses caused by Government cuts.

What explains the jobs phenomenon? According to Professor Brian Ashcroft, of the Fraser of Allander Institute, a number of trends might be making a difference. There has been a big shift from permanent to temporary work, some of it involuntary, but some that fits with changing lifestyle tastes, particularly among older workers.

At the same time companies have managed to negotiate lower pay settlements on the back of more flexible employment legislation introduced in the 1980s and 90s. Better labour relations have also helped, a result of weaker unions, particularly in the private sector, improved management practices, or both.

In effect, then, the drop in output has resulted in slightly lower pay across the board, or most of the board, rather than mass redundancy. The economic pain is being shared.

Contrast this with other parts of Europe. The credit crunch hit hardest in countries like Ireland and Spain that enjoyed big property booms. In Spain property prices have fallen by 23% from their peak, resulting in heavy job losses in the construction industry and in regions where the boom was concentrated.

Compounding the problem is that Spanish employment legislation has created a two-tier labour market. Compensation for redundancy increases with length of job tenure, which means that long-term, older employees are expensive to let go. So unemployment has soared among the most vulnerable, with few or no employment rights. Youth unemployment in Spain is now more than 50%.

So far the UK is avoiding the social and economic catastrophe of mass unemployment. Jonathan Tweedie, a divisional director at fund managers Brewin Dolphin, believes the key to the good news on jobs was the private sector's rapid adjustment to the credit crunch in 2008.

"UK plc is generally speaking in a healthier state now due to early actions. Companies cut costs effectively as the recession stuck, and yes, this meant that some jobs were lost at that stage. But now they're leaner and able to take on new people as business opportunities arise. That explains the recent rise in private-sector employment."

Tweedie points to changing lifestyles to explain some of the flexibility in the labour market. "Compared to previous recessions, many more households are double-income now. With both parents working, the effect of one cutting their hours or pay, or even becoming self employed, has less of a detrimental effect than when there was just one breadwinner. There's therefore slightly less pressure to cling onto full-time jobs, which means the work can be spread around."

The bonus system has acquired notoriety in the City, with high-flyers collecting huge sums apparently irrespective of performance. But many non-financial firms pay bonuses at all levels, so it's easier to freeze or cut salary costs when times are hard without lay-offs.

Another method is to recruit new staff on short-term contracts of six months to a year, giving greater flexibility and managing staff expectations at the outset, rather than having to lay someone off from a permanent contract.

With all these trends – part time work, flexible payments, short-term contracts – risk is transferred from employer to employee. Life is less secure for the worker, but companies are more likely to take people on in the first place.

Another feature of this is the growth of contracting – where firms do not employ people at all, but simply contract with self-employed workers to fulfil specific jobs when needed. A record 4.17 million people are now self-employed in the UK, up by 84,000 in the last quarter, and some of this increase is explained by the shift from employed to contracted labour.

The advantages to firms of such arrangements are clear – they can adjust the size of their workforce to fit the order book, and do not face costs such as insurance and holiday pay (see panel)

The relatively upbeat performance of the UK labour market bodes well for eventual economic recovery. Britain could emerge stronger from the recession – less reliant on debt, consumer spending, and pubic-sector largesse. It could be more productive, with essential skills and experience retained in a workforce ready to respond to any upturn.

But problems do remain. Trade unions decry "underemployment", with workers cowed by employers, unable to exploit their full potential. And if the recession has been relatively kind to older and more skilled workers, youth unemployment, at 22%, while nowhere near Spanish or Greek levels, is damagingly high. As David Bell warns, the evidence from the last two recessions shows people who experience long-term joblessness early in their careers can suffer lifelong effects in terms of employability and health.

What is worse is that youth unemployment began to rise in 2004, while Britain still enjoyed the Blair-Brown boom. This suggests the problem is not just cyclical and will not be cured by recovery alone. Instead the Government needs to ensure young people get their chance in the jobs market.

It is clear Britain stands at a fork in the road. Optimists believe one direction leads to a reduction in the euro crisis, and growth resuming later in the year. This scenario is based upon the view that the economy is capable of generating new private-sector jobs to more than compensate for Government cuts. Welfare reforms reduce the poverty trap, just in time to save a generation from the blight of joblessness.

But there is another, darker view that argues that we are far from out of the woods yet. If the eurozone crisis deepens, and fears generated by the ONS figures are vindicated, the damage to our economy and society could be lasting.

Brain Ashcroft's Fraser of Allander Institute has estimated that 144,000 jobs would be lost in Scotland amidst the turmoil of euro disintegration, and 50,000 even if just Greece left the single currency. That would blow the recent modest gains in unemployment out of the water, proving that discussion of UK jobs policy is a sideshow in the story of the UK economy.

ONE COMPANY'S STORY

'Yes, we've had to let people go, but it could have been so much worse'

'FLEXIBLE" workforce arrangements, often seen as euphemism for employee exploitation, have become a matter of survival for Spencer Pitman, owner of Magenta, a small construction business in the Borders specialising in house conversions. His sector, which appears to have slumped in Q2 by a staggering 5.2%, has been fingered as the main domestic cause of prolonged stagnation.

But, with flexible contracts, Pitman says: "I'll consider jobs now that were too small or bitty for me in the past. I know that I can take people on just for a short period, whereas you'd never employ someone new on the basis of a month's work. So with contracting I'll probably end up providing more work in the long run."

In the last four years Magenta has grown and shrunk several times with demand, with anything between three and 20 staff on its books.

"Trading conditions have been very tough," he says. "When we do find work, clients are very cost conscious. In particular, the VAT hike to 20% seems to have made an impact, with clients fed up with having to pay that amount on top. Meanwhile, material costs have gone up considerably."

Pitman has tried to stay loyal to a core group of employees, sometimes taking on loss-making work to keep them on.

But in fallow periods he has to let people go, and the costs of doing so come at a time when the business is already struggling.

"The mental tipping point for me was when statutory holiday entitlement rose from 20 to 24 days in 2007, and then again to 28 days in 2009. That basically meant an extra two weeks a year of paying people and getting nothing in return. I can't afford that. The holiday increase, on top of redundancy costs, means that I'll be very reluctant to employ people directly in the future, even in an upturn."