Employment rises despite growth stagnating

Posted on August 8, 2012

When economic growth is stagnating, it is usual to expect that employment growth is stagnating too, or perhaps even contracting as businesses scramble to cut costs and improve profit margins.

But in Britain, that is not what is happening. Even with three consecutive quarters of contracting output, employment is rising. Indeed, since mid-2010, private sector employment has expanded by roughly 600,000 jobs. And although public sector jobs are falling as government cuts expenditure, it has fallen by less than the growth in the private sector.

    What is happening instead is that growth in productivity – the growth in the value of goods and services produced by each worker – is slow. Indeed, over the fourth quarter of 2011 through the first quarter of 2012, whole-economy productivity fell by 2 per cent. That weakness, Bank of England officials concede, is the single biggest element of economic performance that cannot be explained away.

    One possibility is that the weakness that shows up in gross domestic product data wildly understates output.

    Charlie Bean, BoE deputy governor, said on Wednesday that the discrepancy was simply too great to be explained by data errors. “We really are in a genuine economic puzzle,” Mr Bean said, in a refreshingly frank response to a question at the BoE’s inflation report briefing. “We really don’t have any explanation.”

    One possible interpretation, the Bank suggests, may lie in the changed composition of the nation’s workforce since the recession hit. Roughly a quarter of the increase in new hires since mid-2010 is represented by part-time workers. But there is little evidence that part-timers are less productive than full-timers. And in any event, the total number of hours worked is rising as fast as employment generally.

    Another explanation is that self-employment is growing rapidly. Indeed, since mid-2010, the number of part-time self-employed has risen by 528,000 while those self-employed full-time have risen by another 50,000.

    One possibility is that these self-employed individuals are producing less per hour each day than they had been when they were working for someone else.

    Another reason for weak productivity growth, the BoE said, could be that constrained credit means that employers have not invested cash in new and more efficient systems and machinery.

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