Written evidence submitted by Dr John
Philpott, CIPD Chief Economic Adviser, CIPD
CIPD NOTE TO
THE HOUSE
OF COMMONS
TREASURY SELECT
COMMITTEE
As requested by the Treasury Select Committee, the
CIPD has put together this short note on the forecasts for general
government employment, total employment and unemployment in the
Office for Budget Responsibility (OBR) Economic and Fiscal
Outlook. In the following note, we address:
- (a) Discrepancies between the OBR forecast
and that of the CIPD.
- (b) The relationship between economic and
private sector employment growth.
- (c) Areas for further clarification.
a) Discrepancies between the OBR forecast and
that of the CIPD
1. The CIPD accepts the OBR forecasts as the
best available official benchmark against which to assess short
to medium term labour market developments. However, as with any
forecasts those published by the OBR are best used as a guide
and starting point for discussion and therefore should not be
treated as if a statement of fact about the future course of events.
This is particularly true given the considerable uncertainty at
present surrounding the outlook for the global, European and UK
economies, an uncertainty wisely acknowledged by the OBR itself.
2. At the time of the Chancellor's budget statement
in June the OBR estimated that general government employment would
fall by 490,000 between the end of 2010-11 and 2014-15. This estimate
accounted for the period covered by the coalition government's
public expenditure plans as subsequently set out in the 2010 Comprehensive
Spending Review (CSR) but excluded the impact of spending cuts
of approximately £6 billion within 2010-11 and additional
spending cuts pencilled in for 2015-16. Including the 2015-16
cuts raised the OBR's June forecast for the fall in general government
employment to 610,000. The OBR in addition implied that general
government employment would also fall by 5,000 within 2010-11
(though that now looks like a considerable underestimate, with
the outturn likely to be closer to 50,000).
3. The total reduction in general government
employment projected by the OBR in June 2010 was not greatly out
of line with the corresponding estimate of a 725,000 fall in public
sector employment in the period to 2015-16 obtained by the CIPD
in June by surveying and consulting HR managers in public sector
organisations. However, the November 2010 OBR forecast is for
a fall in general government employment of 330,000 rather than
490,000 between 2010-11 and 2014-15, the figure including 2015-16
falling from 610,000 from 410,000. Of the OBR's 160,000 downward
revision to its initial forecast to 2014-15, 30,000 is due what
it describes as "methodological refinements", the remainder
to changes to the coalition government's spending plans as finalised
in the CSR which saw smaller cuts in departmental spending as
a result of the Chancellor's decision to instead cut more deeply
into the welfare budget.
4. As a result there is now clearly a very big
gap between what the OBR projects on the basis of its "top
down" modelling approach and what the CIPD obtains from its
"bottom up" survey based approach. Indeed the difference
between the two estimates for the period to 2015-16 is itself
almost as big as the total number of public sector job losses
the OBR forecasts for the period to 2014-15. While it is possible
to dismiss this difference by concluding that the OBR's modelled
estimate has greater analytical credibility than that of the CIPD,
it is also necessary to highlight the limitations the OBR recognises
in its own methodology: "All these projections are inevitably
subject to a large degree of uncertainty: they are based on a
set of stylised assumptions and do not reflect departmental pay
bill plans or policy."
5. An obvious weakness of stylised assumptions
is that they may not fully account for the precise way in which
spending cuts are targeted within organisations or the extent
to which organisations choose between simple cost cutting strategies
or instead attempt a thorough restructuring of workplace practices.
Similarly, the use of projected growth in specific public sector
budgets may not adequately identify the degree to which efficiency
savings impact on employment levels. A sector such as the NHS
which is ostensibly ring fenced and protected from spending cuts
is nonetheless likely to see a considerable reduction in back
office managerial and administrative staff.
6. If the OBR has correctly modelled the impact
of the spending change the "real world" effect should
eventually filter through on the ground within public sector organisations
and emerge into the CIPD's evidence base. Once it does so the
CIPD will revise its forecasts. However, there is to date no sign
of this. For example, the latest CIPD/KMPG Labour Market Outlook
survey, conducted in October by Ipsos Mori, finds four in 10 public
sector organisations planning redundancies in the final quarter
of 2010 alone, with these expected to affect 14% of staff in those
organisations. If ongoing, job cuts on this scale would in fact
exceed the CIPD's overall estimate for the period to 2015-16.
7. Moreover, it is not only CIPD evidence that
seems to conflict with the economic modellers at the OBR. According
to the OBR, the forecast reduction in general government employment
is heavily back-end loaded. The vast majority of the reduction
does not occur until after 2012-13, with the reduction in 2011-12
projected to be 40,000. Yet the Local Government Association estimates
that councils in England and Wales alone expect to shed 140,000
jobs in 2010-11 having decided to front load cuts.[7]
Table One
OBR AND CIPD ECONOMIC AND EMPLOYMENT GROWTH
FORECASTS COMPARED
| | OBR, June
| OBR, November | CIPD
|
| Gen-Government employment 2010/11-2014/15 |
-490,000 | -330,000 | -600,000
|
| Gen-Government employment2010/11-2015/16 |
-610,000 | -410,000 | -725,000
|
| Private sector employment 2010-2015 | ??? (gross)
1.9m (net)
| ??? (gross)
1.5m (net) | 1.9m (gross)
1m (net)
|
| Employment growth (net) | 1.3m
| 1.1m | 0.3m |
| ILO unemployment peak (percentage and year)
| 8.1% - 2010 | 8% - 2011 |
9.5% - 2012 |
| GDP growth (average 2010-2015) | 2.53%
| 2.48% | 2.25% |
b) The relationship between economic and private sector employment
growth
8. The OBR's November 2010 central economic and employment
forecast projects that the total number of people in work starts
to rise next year (2011) and continues to rise through to 2015,
resulting in a net gain in employment of 1.1 million between 2010
and 2015. Unemployment meanwhile peaks at 8.0% in 2011 and then
declines to 6.1% by 2015.
9. Given the OBR's forecast of net total employment growth
of 1.1 million accounts for a net fall in public sector employment
of around 400,000, the forecast shows that the private sector
will create 1.5 million jobs during the forecast period. This
amounts to an average increase in private sector employment of
1.1% (roughly 300,000 jobs) per year. The implicit effective
private sector job creation requirement is greater still given
that the fiscal consolidation will result in some job losses in
private sector. The latter arise in private sector businesses
dependent on public sector contracts and as a result of multiplier
effects of cuts in public spending and tax increases. The OBR
makes no explicit estimate of these potential effects on jobs.
The CIPD expects the effect to result in the loss of around 900,000
private sector jobs.
10. If the CIPD estimates are correct the private sector overall
actually needs to create around 2.4 million jobs by 2015 if the
OBR central employment forecast is to hold. The requirement would
of course be greater still if the fall in general government employment
were to prove greater than the OBR forecasts. It would be instructive
to discover whether the OBR has an estimate of the effect of the
fiscal consolidation on private sector employment and thus the
overall private sector job requirement. This might then be
compared with the experience of job creation following previous
recession in order to provide a guide to the likelihood of the
requirement being met.
11. Drawing on analysis of previous recessions, the CIPD has
previously estimated that the UK economy needs to grow by at least
2.5% per year in order to trigger 1% annual private sector employment
growth. This estimate is also consistent with the outturn for
UK private sector employment growth in the year to date.
12. In view of this the CIPD accepts as realistic the OBR's
projection for employment growth and unemployment assuming that
the OBR's central forecast for economic growth is also fulfilled.
Any difference of opinion between the OBR and the CIPD on this
matter rests solely on the CIPD's view that various headwinds
facing the UK economy are likely to result in slower economic
growth in 2011 and 2012 than indicated by the OBR's central forecast.
Consequently the CIPD expects the short-term outlook for employment
and unemployment to also be weaker than the OBR's central forecast.
13. The CIPD believes that the recovery may be "jobs
light" even if the OBR's central forecast holds true. Firstly
the percentage contraction in employment during the recent recession
was only a third as large as the percentage contraction in economic
output as many private sector firms hoarded labour and minimised
redundancies. This outcome was good for jobs but resulted in a
slump in labour productivity and a jump in unit wage costs. It
is possible that during the current economic recovery employers
will want to make good the loss of productivity before they start
hiring aggressively again. The Bank of England has made constant
reference to this in its quarterly Inflation Report, the latest
edition of which appeared more cautious than the OBR about prospects
for employment growth in 2011.
14. The strength of the jobs recovery may also be weakened
by the fact that growth in the economy is set to rebalance away
from consumption and government spending and toward investment
and exports. This rebalancing - which is a key feature of the
OBR central forecast - is beneficial for the long term health
of the UK economy but, especially in the short-term, will mainly
serve to boost capital rather than labour intensive sectors, notably
manufacturing.
c) Areas where the CIPD would welcome further clarification
from the OBR
15. As discussed above, the CIPD accepts the OBR forecasts
as the best available official benchmark against which to assess
short to medium term labour market developments. However, there
are a number of areas where we would welcome further clarification
from the OBR, to gain a better understanding of their own methodology
and to incorporate it into our own forecasting where relevant.
16. We would welcome any sense of whether the OBR plans to
supplement its model based estimates with additional information
obtained directly from public sector and private sector organisations.
It appears that business confidence surveys including the CIPS/MarkIt
Purchasing Manager's Index have been consulted and it would be
useful to know whether similar employment surveys are also considered.
17. The relationship between economic growth and private sector
job creation is also explored above. The CIPD estimates that the
UK economy needs to grow by at least 2.5% per year in order to
trigger 1% annual private sector employment growth. This is based
on analysis of previous recessions and the current rate of economic
and employment growth. With this in mind, if is surprising that
while the OBR expects a slower recovery than that experienced
following the recessions of the 1970s, 1980s and 1990s their employment
forecast seems relatively optimistic. We would be interested to
know why the OBR expects the present recovery to be so jobs rich
and the unemployment outlook so benign. Similarly it would be
good to know if the OBR has considered the impact of public spending
cuts and higher taxes (most notably VAT) on private sector employment.
18. Finally, as a member of the Treasury Select Committee
alluded to in our hearing on 2 November 2010, we would welcome
any efforts by the OBR to include a fan chart indicating the range
of possible outcomes for employment and unemployment around the
central forecast akin to show for GDP growth.
ADDITIONAL NOTES
ON CIPD FORECASTS
(i) CIPD forecast estimates are those made in June 2010 and
are subject to revision. The next set of CIPD forecasts will be
published in late December 2010.
(ii) The difference between the gross and net figures for
private sector employment in the CIPD forecast is taken as a measure
of any negative impact of fiscal consolidation on private sector
employment. The sum of this difference and the reduction in general
government employment is a measure of the total negative impact
of the fiscal consolidation. The latter measure gives the gross
job creation requirement necessary to offset the negative impact
of the fiscal consolidation.
(iii) The CIPD considers the job creation requirement a useful
analytical tool since it (a) provides a benchmark against which
to assess the ease and speed at which the private sector is likely
to be able offset the effects of fiscal consolidation, (b) when
considered in the light of historical precedent indicates the
kind of rate of economic growth necessary to achieve or exceed
the offset, and (c) highlights the extent to which macroeconomic
or supply side policy adjustments may be needed to assist progress
towards achieving the offset.
(iv) According to the CIPD estimates, the coalition government's
fiscal consolidation results in a total gross job creation requirement
of 1.6 million by 2015 (due to the direct loss of 0.7 million
jobs in the public sector and the indirect loss of 0.9 million
jobs in the private sector). Gross private sector job creation
is forecast to exceed the requirement by 0.3 million by 2015 but
falls short of the requirement in both 2011 and 2012 (hence the
CIPD's more pessimistic forecast for net employment and unemployment
in the early years of the fiscal consolidation). This net employment
outcome is considerably lower than that forecast by the OBR. Part
of the difference is due to the OBR's lower forecast reduction
in general government employment. Given that the OBR only provides
an estimate of what the CIPD analysis shows as the net change
in private sector employment, it is unclear whether and to what
extent the OBR also expects the fiscal consolidation to have any
negative impact on private sector employment. Consequently, it
is not possible to determine if a gross private sector job creation
requirement is implicit in the OBR's forecast over and above that
necessary to offset the estimated reduction in general government
employment.
December 2010
7
LGA press release: "140,000 council jobs set to be shed in
the next year - LGA", 25 November 2010 Back
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