January 18, 2008 | posted by Michael Baxter in UK economy |

It’s a funny kind of downturn. If the economy is dropping like a northern rock, and we face the very real prospect of recession, then explain the latest data on jobs, published this week by the Office for National Statistics.

The number of people in employment for the three months to November 2007 was 29.36 million. This is the highest figure since comparable records began in 1971 and is up 175,000 over the quarter and 263,000 over the year. The period enjoyed the largest quarterly increase in the number of people in employment since 1997.

Okay, we know what you are thinking, employment is up, but that’s because the size of the workforce is growing, and unemployment is probably up too.

Well, drop your cynicism. Apparently, the unemployment rate is at its lowest level since 1975.

Mind you, the rise in employment was much greater than the fall in unemployment, for while employment rose 175,000, unemployment fell by 13,000. The unemployment level is now 5.3 per cent.

Normally, of course, when employment rises at a faster rate than the fall in unemployment, economists put it down to immigration. This time around though, the figures show that more than half of the people who returned to work were over 50. These are individuals who were mostly counted as economically inactive, and so did not show up in the unemployment data.

So, that means the labour market is booming, and since employment and unemployment both now stand at their most desirable levels in 30 years, you can’t even say immigrants are putting a strain on the economy. How can they when the unemployment level is so impressive? As for talk of a recession, and a crash in property prices – surely that must be overdone.

But, if you are a regular reader of this newsletter, you will know we are about to reveal the catch, and here it is.

Sure, unemployment might be down and employment up, but it appears these rosy figures come at a price. Maybe the reason why the outlook has improved so, is that we are charging less for our time. For the real rate at which we are being remunerated is falling. As for our remuneration per unit of output, well that’s way down.

Apparently, average earnings before bonuses were up 3.7 per cent in the 12-month period to December, while the retail price index (RPI) jumped by 4 per cent. Even if you include bonuses, then average wages went up by 4 per cent, only matching the RPI index.

You might argue, ah yes, but the Bank of England no longer targets the RPI rate, instead it targets the consumer price index, which rose by 2.1 per cent in December. But that is a fatuous argument; the RPI index is a much more realistic account of the inflation rate we all experience, because it includes mortgage payments and council tax.

Don’t forget, by the way, that with all the woe currently coming forth from the City, bonus rates are surely set to fall, meaning we will be even worse off relative to inflation in the months to follow.

But then the picture gets even more murky, because during the 12 months to December, when average earnings with bonuses, and the RPI, both rose by 4 per cent; productivity, that’s output per worker, jumped by 2.6 per cent.

Now, you would normally expect productivity plus RPI index to equate to average earnings inflation. That this is not happening, means someone else is benefiting from the improvements in productivity.

Until recently, this explained the ever-growing level of uneven distribution of income, with the return to capital, which is owned by shareholders, growing faster than the return to labour.

So that’s a little odd. If the return to capital is doing so well, how is it that the economy is apparently on the rocks? (No Northern Rock pun intended.)

It seems that maybe the real problem is that, while the economy has been growing, our spending has grown even faster. This has led to the debt crisis.

The good news: average earnings minus productivity are at such a low level, that inflationary pressures from the labour market seem minimal, which in turn will give encouragement to the Bank of England, when it considers reducing interest rates.

But does this mean the UK will as a result avoid a recession, or that the property market will avoid a major crisis. The answer is No. In the US, unemployment is even lower, and yet the economy is in a horrible mess.

Don’t forget, the big argument made by bulls is that rises in earnings will eventually make all our debt affordable. But if earnings are not even keeping up with inflation, this argument must be about as solid as those rocks you find in the north (pun intended).