1. A summary explanation of London’s labour market in the recent recession by Melisa Wickham

4. UK Background BACKGROUND

5. UK GDP fell faster, and further, in the 2008 recession than in the 1990s and 1980s recessions: Source: ONS, GDP chained volume measure, constant 2006 prices, SA And in the 1990s it fell by 2.5% over 5 quarters This is equal to a steady rate of decline of 3.7% a year This is equal to a steady rate of decline of 4.3% a year In the 1980s GDP fell by 4.7% over 5 quarters This is equal to a steady rate of decline of 2.0% a year In 2008, GDP fell by 6.4% over 6 quarters

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 And had increased by 4.9 percentage points in 1980s recession The claimant count rate has increased so far by only 2.2 percentage points But by the same time had increased by 4.1 percentage points in 1990s recession

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 3.9% so far during this recession But by the same time fell by 4.3% in the 1990s recession

8. London Background

10. Like the UK, London’s GVA also fell faster in the 2008 recession than in the 1990s recession: Source: GVA at basic prices, constant 2005 prices, Experian This is equal to a steady rate of decline of 4.2% a year This is equal to a steady rate of decline of 2.8% a year And has fallen by 5.3% over 5 quarters in the recent recession London’s output fell by 6.2% over 9 quarters in the 1990s recession

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 1.7 percentage points so far in this recession And by 3.7 percentage points in the 1980s recession But by the same time in the 1990s it had risen by 5.7 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 8.1% in the 1990s recession Has fallen by 2.6% so far in this recession

13. Background summary: 1 London figures are derived from Experian’s regional GVA estimates. UK figures are derived from ONS GDP estimates. 2 From UK output peak to nine quarters after. 3 For the UK this is over the period from UK output peak to eight quarters after. For London this is over the period from UK output peak to seven 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 London’s and the UK’s labour market have held up relatively well And although London’s labour market performed worse than the UK’s in the 1990s recession ……….. ……… .. London’s labour market has performed better than the UK’s so far in the 2008 recession - - 1980s -4.3 -8.1 1990s -3.9 -2.6 2008 Change in employee jobs numbers (%) 3 4.9 3.7 1980s 4.1 5.7 1990s 2.2 1.7 2008 Percentage point change in claimant count rate 2 -3.7 - 1980s -2.0 -2.8 1990s -4.3 -4.2 2008 Constant annual growth rate (over peak-to-trough period) (%) 1 4.7 - 1980s 2.5 6.2 1990s 6.4 5.3 2008 Peak-to-trough output decline (%) 1 UK London

14. Why? Why?

15. We examine seven possible reasons POSSIBLE EXPLANATIONS

16. Summary of analysis of possible explanations: Next page Low Measurement error Medium Less economic structural change Medium Reduction in working hours Medium Labour market structural change High Growth in the public sector High Strong corporate profitability and low rate of business failures High Reduction in relative wages Likely contribution to labour market strength during the 2008 recession so far Possible explanations

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 Reduction in working hours For more detailed explanations see the main report: ‘Working Paper 44: London’s labour market in the recent recession’ by GLA Economics’.

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

19. Reduction in relative wages 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. 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. Real unit wage costs show how real wages (wages adjusted for inflation) have moved compared to firms’ productivity (output per worker).

20. Reduction in relative wages However………. ………… at the same time the drop in the value of Sterling has meant that the UK’s relative unit labour costs have fallen significantly so far in this recession Return to list Source: IMF 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.

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 has played a significant role in mitigating employment falls during the 2008 recession in the UK Growth in public sector Source: Workforce Jobs, ONS ……… then the movement of workforce jobs so far in this recession is not too different from the movements seen in the 1990s and 1980s recessions Employment during the 2008 recession in some sectors has moved as would be expected given the fall in output. Others, however, have played an important role in protecting the labour market.

24. Growth in public sector Return to list Around 25% of the public sector employment increase between 2008 and 2010 was in London. Around 40% of this is due to the reclassification of financial institutions into the public sector However, a lot of this increase is due to the incorporation of financial institutions (e.g. Lloyds) into the public sector 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 specifically at public sector employment in the 2008 recession: There has been a large rise since the recession Looking forward, the OBR estimates that public sector employment will fall by around 400,000 by 2015/16. This means that public sector employment will contract at a similar compound rate over the next 5 years as the private sector experienced between 2008 and 2010.

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 Thus far in the 2008 recession average weekly hours have fallen by 1.7% By the same time in the 1990s recession average weekly hours fell 2.1% And in the 1980s average weekly hours fell by 3.5% So average weekly hours have not fallen by as much as may have been expected so far in this recession given the GDP decline. 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 0.8% Compared to a fall of 1.6% in the UK between 2007-2008 Looking forward, as GDP recovers average weekly hours of work should rise. During this period employment growth is likely to be slow. Average weekly hours worked in London : Between 2008-2009 average weekly hours worked in London fell a further 1.4% But in the UK as a whole, average weekly hours rose by 1.3% between 2008-2009 Overall, between 2007-2009 average weekly hours worked in London fell by 2.2% But have only fallen by 0.3% between 2007-2009 in the UK

27. Labour market structural change 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. 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. Less economic structural change 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. 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 firm’s 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?

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