Austerity and Employment trends in Wales

As we approach the UK General Election attention will be concentrated on the UK Government’s austerity strategy and whether or not it is being successful. Comment will tend to be focused on the public finances but another key consideration is employment. One of the central elements of the UK Government’s strategy when it came into office in May 2010 was to reduce public expenditure as a proportion of GDP which would lead, in turn, to a cut in public sector employment with such  job losses being more than off-set by growth of employment in the private sector.

Concern was expressed at the time as to whether such a rebalancing of employment would be achieved both at the UK level and more particularly in Wales with its greater dependency on public sector employment and a more fragile private sector. After four and a half years it is time to evaluate what has happened in practice and to assess the outlook for the coming years given that both the principal UK parties are committed to continuing the austerity programme and in particular to cutting current expenditure which impacts directly on public sector employment.

Table 1 shows employment figures for Wales and the UK from 2008 to 2014. The statistics are based on place of work. For the UK the evidence suggests that the employment element of the austerity strategy has worked insofar as the decline in the number employed in the public sector of 0.9m since 2010 has been more than offset by the increase in employment in the private sector of 2.2m giving an overall net increase in employment of 1.3m.

Table 1: Key Employment Statistics (thousands)

Of course this simple, statistical analysis ignores crucial questions such as the quality of the jobs created and their geographical distribution. Evidence suggests that many of the new jobs are low paid and/or part time: factors reflected in disappointing growth both in productivity and in income tax revenues.

In the case of Wales there is scant evidence that the austerity strategy has worked from the viewpoint of employment. Between 2010 and 2014 there has been an increase in total employment of 17,000 but there are 26,000 fewer in employment now compared with 2008. This is in sharp contract to the picture for the UK as a whole where employment has increased by 1 million since 2008.

The financial crisis broke in late 2008 (Lehman Brothers went into administration in September 2008) and the immediate impact of this can be seen from the sharp drop in employment in the private sector in 2009.  No doubt the current UK Government will point out that in the case of Wales their policy has gone some way to repairing the damaging loss of 59,000 private sector jobs in 2009 as a result of the financial crisis when Labour was in office. Across the UK in 2009 there was a decline of almost a million in private sector employment. Since the trough in 2009 private sector employment in Wales has steadily increased and is now back at pre-crisis level. While encouraging this performance compares poorly with the UK where private sector employment has grown by 6.7 per cent since 2008 and by 12 per cent since its nadir in 2009. Had private sector employment in Wales tracked that of the UK since 2009 (the low point in both cases) then there would be an additional 44,000 people in private sector employment in Wales by September 2014.

To put the private sector figures for Wales in context Table 2 sets out changes in employment in various parts of the UK. As can be seen London enjoyed the highest increase in employment (almost 20 per cent) whereas Wales was a laggard.

Table 2: Private Sector Employment (thousands).

Employment in the public sector presents an interesting contrast. Public sector employment in Wales has been quite resilient although for both the UK and Wales the figures are flattered by the reclassification of some banking jobs (RBS and Lloyds Banking Group) from the private to the public sector. It is only since 2013 that public sector employment in Wales has shown a significant drop. In the UK as a whole public sector employment started to decline more sharply beginning in 2011. If employment in the public sector in Wales had shown the same rate of decline as in the UK between 2010 and 2014 then an additional 12,000 jobs would have been lost. A key question is whether or not job losses in the public sector in Wales will ‘catch up’ with those across the UK over the coming years.

What of the future? The Office for Budget Responsibility (OBR) estimates that an additional million public sector jobs are at risk in the UK between 2015 and 2020. If this is the case then taking into account the higher proportion of public sector jobs in Wales an additional 60,000 to 70,000 public sector jobs could be at risk depending on whether or not there will be an element of ‘catch up’. At the same time the OBR forecasts an increase in UK private sector employment of 1.8 million. Can the private sector in Wales compensate for public sector losses through increased employment? If the pattern of the past few years continues then it might prove possible given that the private sector in Wales has been adding some 14,000 jobs a year. Of course such an analysis does not take into account the ease with which those employed in the public sector might find work in the private sector and it ignores the impact of such cuts on public services. However the figures presented here give too static a picture in that in practice there is a continuing flow of new people into the job market and an outflow of those retiring. In the case of Wales roughly 30,000 people enter the workforce each year and a comparable number retire. Thus rebalancing employment between the public and private sectors over a number of years need not be limited by the challenge of placing former public sector workers in the private sector.

Is there a danger that the switch from public sector to private sector employment will squeeze out from the job market those who are already unemployed? Currently there are 103,000 unemployed in Wales and if the rate of unemployment fell to the UK average an additional 18,000 people would be in work. Thus if growth in private sector employment continues on its current track there will be scope for the private sector both to absorb the reduction in public sector employment and to offer job opportunities for the unemployed. Furthermore the number of people in Wales who are economically active i.e. the proportion of those of working age (16 to 64) who are either employed or seeking a job is 74 per cent compared with 78 per cent for the UK: this is equivalent to 67,000 fewer people in Wales of working age being either in employment or seeking work compared with the UK rate. Thus a key priority needs to be to ensure that the pool of economically inactive is reduced over the coming years. Since 2009 the number of economically inactive in Wales aged 16 to 64 has fallen by 39,000 with the major fall coming in a reduction in the number of long term sick. Interestingly 120,000 of the 472,000 economically inactive claim that they would like a job and a question that arises is why they are not economically active i.e. either employed or actively seeking work. Thus among the employment challenges facing Wales are not only reducing the rate of unemployment but coping with the switch from public to private sector employment and also raising the rate of economic activity to the UK level. These are challenges in addition to the UK wide ones of raising productivity and pay levels. It is to be hoped that in the run-up to the UK and Welsh general elections the political parties will set out how they intend to address these challenges.