The latest UK unemployment figures showed unemployment at its lowest level since the 1970s, but there has also been a decline in real wages of 0.4 over the last year. Drawing on a new report by the Institute for Public Policy Research, Grace Blakeley explains that despite the headline figures on employment, the UK still faces a number of major economic challenges

Blakeley, Grace

LSE Research Online

Is	the	UK’s	economy	really	as	strong	as	thegovernment	says	it	is?The	latest	UK	unemployment	figures	showed	unemployment	at	its	lowest	level	since	the	1970s,	butthere	has	also	been	a	decline	in	real	wages	of	0.4%	over	the	last	year.	Drawing	on	a	new	report	bythe	Institute	for	Public	Policy	Research,	Grace	Blakeley	explains	that	despite	the	headline	figureson	employment,	the	UK	still	faces	a	number	of	major	economic	challenges.As	the	UK	negotiates	to	leave	the	European	Union,	the	government	has	made	much	of	the	strengthof	our	economy	and	our	competitive	advantage	with	relation	to	our	major	trading	partners.	Ourgrowth	and	employment	rates	do	not	appear	to	have	been	damaged	by	the	vote	to	leave	the	EU,	and	manybusinesses	have	been	quick	to	identify	the	potential	opportunities	associated	with	an	independent	approach	toglobal	trade.But	despite	strong	growth	rates	in	2016,	the	UK	is	not	expected	to	experience	GDP	growth	as	strong	as	thatanticipated	in	Europe	and	the	US	over	the	next	several	years.	Our	predicted	growth	rates	of	1.6%	in	2017	and	1%in	2018	are	dwarfed	by	an	anticipated	2.1-2.4%	for	the	US	and	2%	in	Germany.	Part	of	this	can	be	put	down	tothe	uncertainties	of	Brexit.	But	slowing	growth	rates	are	also	partly	driven	by	long-standing	structural	issues	in	theUK	economy.In	fact,	as	the	Interim	Report	of	the	IPPR	Commission	on	Economic	Justice	highlights,	on	a	whole	host	of	issues–	from	wages	to	productivity	investment	to	trade	–	the	UK’s	economy	lags	behind	its	major	competitors.The	government	likes	to	boast	that	the	UK	has	recently	achieved	record	levels	of	employment.	But	this	has	beenaccompanied	by	the	growing	insecurity	of	the	labour	market.	Surveys	suggest	that	as	much	as	8%	of	theworkforce	is	now	under-employed	–	that	is,	wanting	to	work	more	hours	than	they	do.	The	number	of	people	onzero	hours	contracts	has	increased	more	than	five-fold	since	2007,	to	more	than	900,000.	Self-employment	hasincreased	from	13%	of	the	workforce	in	2008	to	15%	today,	yet	self-employed	people	earn	less	on	average	thanthey	did	20	years	ago.	This	insecurity	is	linked	to	the	‘flexibility’	of	our	labour	market,	which	is	ranked	8th	of	140	inthe	World	Economic	Forum’s	rankings,	achieving	the	same	score	as	the	United	States.Normally,	economists	would	expect	high	levels	of	employment	to	lead	to	increases	in	average	real	wages.	But	thereverse	has	happened.	Indeed,	the	decline	in	UK	real	wages	since	the	financial	crisis	has	been	the	largest	of	alldeveloped	countries	apart	from	Greece,	Mexico,	and	Portugal.	Between	2007	and	2016,	annual	real	wages	grew10.8%	in	Germany,	9.5%	in	France	and	6.4%	on	average	across	the	countries	of	the	OECD.	In	the	UK,	however,they	fell	by	2.6%.	If	inflation	continues	to	erode	nominal	wages	for	the	next	four	years,	as	projected	by	Office	forBudget	Responsibility,	the	period	since	2007	will	rank	as	the	longest	period	of	earnings	stagnation	since	the1860s.The	low-pay,	insecure	labour	market	that	exists	in	the	UK	is	partly	responsible	for	our	poor	performance	onproductivity.	Measured	by	output	per	hour,	productivity	in	the	UK	is	13%	below	the	G7	average,	and	productivitygrowth	has	more	or	less	completely	stalled	in	the	last	decade.	The	disparity	between	the	UK’s	productivity	andthose	of	our	major	competitors	is	sometimes	expressed	in	the	form	‘it	takes	the	average	British	worker	five	daysto	produce	what	a	worker	in	Germany,	France,	or	the	US	produces	in	four’.	But	of	course	this	is	nothing	to	do	withhow	hard	people	work:	it	arises	from	the	much	lower	levels	of	investment	in	physical	and	human	capital	in	the	UK.Public	and	private	investment	is	around	17%	of	GDP	in	the	UK,	more	than	5%	below	the	OECD	average.Corporate	investment	in	the	UK	is	much	lower	than	in	most	of	our	major	competitors.	Corporate	investment	infixed	assets	(not	including	construction)	fell	from	11%	of	GDP	in	1997	to	just	8%	in	2014,	compared	with	(forexample)	12%	in	the	USA.	This	is	much	lower	than	the	rate	of	depreciation,	meaning	that	the	stock	of	capital	inthe	UK	is	actually	declining.	This	disparity	is	partly	accounted	for	by	the	lower	share	of	manufacturing	in	the	UKeconomy,	but	is	still	lower	even	when	this	is	taken	into	account.	And	it	is	especially	reflected	in	the	lower	share	ofresearch	and	development	investment,	which	is	of	particular	concern	given	the	importance	of	innovation	in	drivingfuture	growth.LSE European Politics and Policy (EUROPP) Blog: Is the UK’s economy really as strong as the government says it is? Page 1 of 2		Date originally posted: 2017-09-16Permalink: http://blogs.lse.ac.uk/europpblog/2017/09/16/is-the-uks-economy-really-as-strong-as-the-government-says-it-is/Blog homepage: http://blogs.lse.ac.uk/europpblog/The	sectoral	make-up	of	the	UK’s	economy	has	also	led	to	the	emergence	of	a	large	current	account	deficit:	ourtrade	deficit	has	exceeded	2%	of	GDP	for	15	of	the	last	16	years.	This	is	at	least	partly	due	to	the	decline	of	ourmanufacturing	base,	which,	though	familiar	to	most	of	the	developed	world,	has	been	far	more	acute	in	the	UKthan	in	competitors	such	as	Germany	and	France.	The	depreciation	of	the	pound	which	followed	the	EUreferendum	has	helped	to	raise	exports	somewhat	–	but	not	by	as	much	as	might	have	been	expected,	becausethe	UK	is	particularly	reliant	on	a	small	number	of	exporting	sectors	(of	which	financial	services	is	much	thelargest)	and	many	exports	are	made	up	of	imported	components.	The	UK’s	trade	performance	is	a	consistentindicator	of	the	weakness	of	UK	productivity	and	competitiveness.As	such,	it	is	hard	to	accept	the	government’s	view	that	the	UK	economy	is	in	a	strong	position	to	cope	with	thechallenges	of	Brexit.	Underneath	the	headline	figures	it	is	actually	much	weaker	than	most	of	our	major	Europeancompetitors.	And	Brexit	will	make	many	of	these	weaknesses	more	difficult	to	address.	That	is	why	the	IPPRCommission	on	Economic	Justice	is	calling	for	a	fundamental	rethink	of	economic	policy	in	the	UK.	The	first	stepis	to	acknowledge	that	we	have	a	problem.Please	read	our	comments	policy	before	commenting.Note:	The	full	report	on	which	the	above	draws	is	available	here.	This	article	gives	the	views	of	the	author,	not	theposition	of	EUROPP	–	European	Politics	and	Policy	or	the	London	School	of	Economics.	Featured	image	credit:Pixabay/Public	Domain	_________________________________About	the	authorGrace	Blakeley	–	IPPRGrace	Blakeley	is	a	Researcher	at	IPPR.LSE European Politics and Policy (EUROPP) Blog: Is the UK’s economy really as strong as the government says it is? Page 2 of 2		Date originally posted: 2017-09-16Permalink: http://blogs.lse.ac.uk/europpblog/2017/09/16/is-the-uks-economy-really-as-strong-as-the-government-says-it-is/Blog homepage: http://blogs.lse.ac.uk/europpblog/

Is the UK's economy really as strong as the government says it is?

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