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Labour Market

THE CHANGING STATE OF THE SOUTH WEST 2012

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The South West labour market continues to experience difficulties as a consequence of fragile economic conditions. The relatively weak economic recovery has meant the sharp contraction in employment experienced during the recession of 2008 and 2009 is not being fully corrected.

Whilst not high by historical standards, unemployment is once again increasing and levels of economic activity, as measured by the number of people either actively engaged or looking for work, has fallen. Youth unemployment remains a particular concern.

Competition - for both labour and market share - has meant that wages remain under considerable pressure and, for many, working in part-time or temporary roles is a necessity rather than choice. The last 3-4 years has been as much a story of erosion of ‘value’ as it is has ‘volume’.

However, it is important to note, many parts of the region benefitted from starting the downturn from a position of relative strength - particularly with regards to employment levels. The subsequent adjustment has only reversed some of the strong employment growth of the previous decade.

Much of the policy focus of the Coalition Government has been on worklessness and reducing the ‘benefit culture’ in the UK. There are planned reforms to the welfare system, aiming to encourage greater returns to employment (societal as well as individual).
WHAT DO WE KNOW?

The recession starting in 2008 halted the long period of employment growth. Of the 300,000 jobs created since 2000 in the South West, the subsequent loss of 85,000 jobs has taken employment back to 2005 levels. The contraction is equivalent to a loss of 5% of job stock, relatively large compared with the national average (2.7%). It is significant that the pace of job loss in the region has accelerated during the ‘recovery’ period, whilst in the UK it has decelerated. It seems that economic growth throughout the early part of 2011 has not been strong enough to generate sustained demand for labour.

Unemployment

Both primary measurements of unemployment -
claimant count and the wider ILO defined measurement - began to increase in 2008 with levels since being broadly sustained. Figure 3.1 below shows that both regional measurements have broadly mirrored the national profile - albeit at a consistently lower level. One consequence of prolonged weakness is that unemployment remains ‘sticky’ for certain individuals who find it difficult to get back into work - long-term unemployment tends to increase. The number of people unemployed for more than 12 months trebled in 2008-09, dropped back somewhat to the summer of 2011 but shows signs of increasing once more. There are now 11,600 long-term claimants in the region. Due to difficulties with getting the long-term unemployed back into work, due to their deterioration of skills out of employment, it is likely this will remain above pre-recession levels for a prolonged period.

Figure 3.1: South West and UK Unemployment Measures

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South West and UK unemployment measures
Source: Claimant Count and Labour Force Survey - ONS

Figure 3.2: South West long-term unemployment

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South West long-term unemployment
Source: Claimant Count - ONS
Public sector adjustment

A major adjustment now taking place is the lack of strong job creation in the public sector and, indeed, a contraction in numbers employed. The effect is two-fold; in many ways the greatest impact is the loss of the job creation ‘prop’ that previously played an important role.

Between 1999 and 2009, over half of all jobs added in the region were in the public sector. These estimates are volatile, being subject to some reclassification through time, but indications are that the public sector share of total
FTE employment increased by almost 2.5 percentage points. The loss of this important source of job creation will be a major factor in how the labour market performs, certainly over the next 2-3 years.

Indications are that public sector employment is declining faster in the region than elsewhere, falling from a peak at the end of 2009 (553,000 to 508,000). The region has experienced the largest absolute (exc. London) and relative declines in public sector employment. Between Q4 2009 and Q2 2011, public sector employment declined by 8.2% - significantly higher than the 4.6% seen nationally. This partly reflects its higher reliance on public jobs in the first instance, given a sharp rise in the preceding decade. A major question will be how successfully the private sector will be able to counteract the loss of public jobs (For a more detailed analysis of this, please refer to the recently released Economy Module and SLIM reports ‘Prospects for Private Sector Jobs Growth in South West England’).

At a national level, there has been a notable decline in full time (FT) employment, partially offset by an increase in part-time (PT) work. There are 1.0 million fewer FT jobs now than in June 2008, whilst an additional 200,000 PT jobs exist.5 This loss represents 5% of UK FT employment stock.

Data suggests that whilst the region has experienced a similar contraction in FT employment, the loss has not been as severe. Over the same period, the region has lost 55,800 FT jobs - representing a 3% loss. Figure 3.4 shows the majority of FT jobs lost in the region have been in manufacturing (47,600 out of the total 55,800) with real estate representing a further 9,500.

The major difference is that the region has not seen a similar increase in PT jobs. Since June 2008, PT jobs have also decreased by 40,400. As a consequence, the region is not benefitting from the partial offsetting effect.

In particular, the region has lost relatively more PT jobs in the retail, accommodation and food services sectors. Of the 40,400 contraction (which is a net figure and therefore encapsulating sectors that have had an increase in employment), 40,200 were in these sectors which have held up relatively well nationally, suggesting that consumers here are suffering more than elsewhere.

The shift to PT and temporary employment is not always a ‘voluntary’ decision. It is clear that, for many, it is necessity rather than
choice. The lack of permanent or FT opportunities result in many working fewer hours, or on a short-term basis. In 2008, only 8% of employees were ‘temporary due to a lack of permanent opportunities’, rising to 12.5% by the end of 2010. Similarly, 25% of employees were PT in 2008 due to a lack of FT opportunities, increasing to 32.5%: one in three PT workers would like to work FT.

Figure 3.3: South West Workforce Jobs - Recession and Recovery Periods

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South West Workforce Jobs - Recession and Recovery Periods
Source: Workforce Jobs - ONS
Self employment and earnings

It appears there has not been a significant change in self employment levels, with rate changes within the confidence intervals of the data. The most significant absolute fall has occurred in the West of England (WoE) LEP; whilst in Dorset, Gloucestershire and Heart of the South West numbers have increased marginally over the last 3 years. Normally self-employment is expected to increase in recessions, as a response for many who have lost their job. The quarterly numbers do tend to be quite volatile but the overall picture is that self-employment levels have not changed significantly in most areas.

Earnings have also adjusted due to economic conditions, again following a period of steady earnings growth. Nominal and real wages had increased since 2002, extending previous gains. Since 2009, however, average nominal wages have been broadly level whilst real wages have suffered a relatively sharp decline. With annual inflation consistently above 5%, real wages have been eroded considerably and this is likely to continue given pay freezes in the public sector and the private sector continuing to control costs.

Sections of the income distribution have been affected differently, exaggerating their relative market ‘power’. This is demonstrated by highlighting recent real wage growth (or lack of), broken into wage percentiles (10 percentile refers to the bottom 10% of earners, the 20 percentile refers to between 10% and 20% etc.) and shows us where real wages are eroding most.

Those earners between the median (50 percentile) and 75 percentile experienced the greatest relative decline - an annual real wage decline of 2.5%. This could reflect particular pressure in typical ‘middle-income’ sectors such as manufacturing and construction. In contrast - although still in real decline - wages of those at the bottom of the wage distribution were less badly affected. This suggests there has been some narrowing - albeit it marginal - between the bottom and mid-range wage earners.

Demand for labour

It is difficult to draw conclusions through analysis of vacancies as they tend to fluctuate from month to month. All broad occupations in the South West are oversubscribed, some considerably more than others. Overall, there were 3.3 claimants for every Jobcentre Plus vacancy in December 2011. The most competitive occupations were sales and customer services (5.1 claimants per vacancy) and elementary occupations (3.9). Competition for vacancies is highest in Gloucestershire and Swindon
& Wiltshire LEP areas, although the unemployment rate is close to the regional average. The Dorset LEP area, on the other hand, appears to have fared more favourably. Vacancies fell at a similar rate to the regional average but employment rose, and both unemployment and competition for vacancies are lower than elsewhere. Within the WoE, the indicators for employment and vacancies are positive, or at least vacancies did not fall as quickly as elsewhere.

Figure 3.4: South West Full-time and Part-time Job Changes (June 08 - June 11)

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South West full-time and part-time job changes (June 08 - June 11)
Source: Workforce Jobs - ONS

Youth unemployment

Conditions remain extremely difficult for young people in the labour market, with high levels of youth unemployment. Whilst unemployment among 16-24 year olds in the region has fallen in the year to June, from 16.7% to 14.8%, and is a lower rate than the England average (19.7%), it remains well above the overall working age population rate (6.1%). Given the deteriorating conditions in the second half of 2011, we would expect this figure to have increased. However, even at regional level, there are wide confidence intervals, and at a local level they become so wide the data is fairly unreliable. A more accurate (and timely) source of data on unemployment by age at a local level is claimant count - although this excludes those who may be unemployed but not claiming (or be eligible for) Job Seekers Allowance (JSA).

On this measurement, youth unemployment actually increased in the last year across all local authorities, following the regional and national trends. Youth unemployment (18-24 years) has risen from 4.6% to 5.7%, a similar increase to that seen nationally. There are particular concentrations of youth unemployment in Torbay, Swindon and Cornwall. There is also considerable ‘worklessness’ not captured through measurements of unemployment. Although policy focus has marginally reduced the numbers claiming Incapacity Benefit (IB), levels still remain high in many areas. There is a particular issue in urban areas in the south and west of the region - Torbay, Plymouth and Bournemouth - where broadly 1 in 12 people are either claiming IB or
ESA.

Figure 3.5: South West Youth Unemployment

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South West Youth Unemployment
Source: Labour Force Survey - ONS
WHAT'S THE POLICY CONTEXT? 
Since the Coalition Government has formed there have been several policy announcements that will signify major changes, particularly around worklessness and youth unemployment.

Work Programme

In June 2011, the Coalition Government launched the Work Programme. It has become the primary chosen mechanism for aiming to address worklessness.
As discussed, the context for the Work Programme is one of relatively high levels of worklessness in a period of fiscal restraint. As with the objectives of most welfare reforms, the aim is that payments to providers are made from savings resulting from people leaving benefits and entering employment. The aim is to transfer financial risk from Government to providers, whose revenues will be linked to the proportion of customers who enter long-term, sustained employment. Eligibility is open to eight different groups of customers, mandatory for some and voluntary for others. The groups include JSA claimants aged 18 to 24 (mandatory for those claiming for 9 months), JSA claimants aged 25 and over (mandatory for those claiming for 12 months), JSA Early Access customers (generally people facing significant barriers to work) and JSA Customers who have recently moved from IB (mandated after
3 months of their JSA claim). The Government claims it has no pre-ordained content or structure and the ‘Black Box’ approach recognises that peoples’ circumstances vary. Instead, providers are asked to ‘deliver truly tailored support, based on individual need’.

Jobcentre Plus (JCP) will continue to have a major role in managing worklessness and will be a key partner for providers. They will refer early starters and volunteers on a discretionary basis, using their judgement about whom it will help.

Apprenticeships

The abolition of Train to Gain has left Apprenticeships as the main vocational education policy; it is one of the few to have received additional funding. However, there is recognition that expanding numbers in the current climate presents significant challenges, not least finding employers to take on new apprentices. The response has been largely positive; take-up has increased across all local authorities in the region, albeit to differing levels. Take-up has been concentrated in a limited number of sectors - the 10 largest accounting for two-thirds of provision nationally and regionally. These are linked to target expansion sectors such as construction, engineering, nuclear, social care
and retail.

Welfare Reform

The Government’s intention is to reform the welfare system by creating a new Universal Credit. It is an integrated working-age credit that will provide a basic allowance, intending to increase the ‘marginal returns’ of work compared to receiving benefits. It seeks to address the perceived problem for many of employment not providing enough of a financial incentive to leave benefits. It aims to improve financial work incentives by ensuring that support is reduced at a consistent and managed rate as people return to work and increase earnings. It will merge out-of-work benefits and in-work support.

WHAT HAPPENS NEXT?
Based on the above, we have the following near-term expectations:
1. if the South West economy returns to previous form, the private sector will not generate a significant amount of new jobs - most parts of the region are still highly dependent on domestic discretionary spending and that is likely to remain relatively subdued;

2. if employment prospects are to increase significantly, it will be because private efforts to increase investment and exports will have been successful - businesses in most parts of the region start behind the pack on this and will need to improve sharply;

3. many areas may find it hard to do anything other than produce minimal compensation for public losses in the short term;

4. the service sector will remain important to employment growth. It will be difficult to reverse the changing pattern of the labour market, largely driven by long term trends rather than the current cycle (although the majority of job losses in the past 2 years have been as a result of cyclical weakness in construction and manufacturing).
As a consequence, job creation will be, at best, weak in the short-to-medium term and the picture is of a difficult labour market; one which is experiencing large-scale reductions in public sector employment without the commensurate increase in high value private sector opportunities. Short term cyclical weakness has quickened longer-term structural shifts.
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