Zero-hours contracts are actively fuelling the biggest problem in the British economy

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LONDON — Britain should be celebrating its record employment numbers but underneath the surface of last week’s jobs data, lies a huge problem for its workers and the economy.

People are just not earning enough to keep up with the cost of living. In other words, more people may be in work, but the pace at which wages is growing in the UK is stuttering.

At first glance, last week’s jobs data was pretty great. Headline unemployment dropped to a new post-crisis low of 4.7%, while employment ticked higher once again.

But behind the headlines, the story is very different.

4.7% unemployment in an economy like the UK’s would be considered by many economists to be pretty close to full employment — the point at which everyone who wants a job has a job.

If the economy was working as theory suggests it should mean employees would be pushing their bosses for higher pay. Essentially when the jobs market is booming, workers know that they can move to another job if they are unable to get a raise at their current place of work.

In reality, however, average earnings grew just 2.2% in the three months up to January, compared to the same three months a year before. By comparison, in the months up to December, that number was 2.6%. As Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics notes “wage growth often is volatile.”

However, Tombs’ analysis suggests that January’s slide is not down to volatility, but is part of a worrying trend.

“The slowdown in wage growth, however, was not driven just by bonuses [one of the volatile aspects of growth]. Year-over-year growth in regular wages also slowed, to 1.9% in January— the lowest rate since March 2016—from 2.3% in December,” he wrote on March 16.

Pantheon’s pair of charts illustrate the dichotomy perfectly:

Pantheon Macroeconomics

With inflation hitting 2.3% in February, according to new ONS figures released on Tuesday, Britain’s inability to create strong wage growth is even more troubling. Effectively, the average worker will now see their pay increase less than the price of the things they buy. Any way you try to spin it, that is not a great formula for prosperity.

Why is this happening?

The reasons for the disconnect between strong employment figures and weak wage growth are numerous, but it essentially boils down to shifts in the way Britain’s labour market functions.

Britain may have a lot of jobs — 31.85 million people in work to be precise — but a whole heap of those jobs are not what you could consider a good job. Those jobs usually entail low pay, lack of stable earnings, and little or no benefits. Zero-hours contracts and other forms of part-time employment are rife across the UK and tick all those boxes.

More than 900,000 people are on zero-hours contracts, giving them no guaranteed hours and far fewer employment protections than salaried workers.

Zero-hours workers are often treated like full-time staff by their employers, meaning they work the same number of hours, but with much less job security and fewer rights. Of course, a large number of zero-hours workers love the flexibility the contracts give them, but many workers take zero-hours simply because they pretty much have to in order to be gainfully employed.

Asking for a pay increase in a job where your boss is not obliged to even give you any hours can be a daunting experience, especially when we consider some of the reports about employers such as Sports Direct, which uses a large number of zero-hours contracts, and was accused by trade unions last year of discouraging staff on zero-hours contracts from taking sick leave. Sports Direct has since launched an independent inquiry into its employment practices, and started to undertake significant reforms.

Obviously, horror stories like those cannot be equated with the experiences of the vast majority of zero-hours workers, but it may go a very small way to explaining some of the UK’s inability to boost wages, despite high levels of employment.

Pantheon Macroeconomics

The change in the types of jobs Brits are doing has shifted hugely, which has impacted wage growth in its own way.

As the Guardian’s Economics editor Larry Elliott wrote last week, the last time UK headline unemployment was as low as it is today, it was 1975, and Britain’s economy focused far more on manufacturing as a means of creating GDP.

Now, the economy is dominated by the services sector, which accounts for around 80% of GDP. Services jobs tend to be less unionised than their counterparts in areas like manufacturing and construction, meaning that workers are far less likely to have the might of a union behind them when lobbying for pay increases and other changes.

Trade unions are also far less powerful than they used to be, meaning that even in highly unionised sectors, the lobbying they carry out has less impact.

Finally, Pantheon Macroeconomics puts forward another interesting argument, noting that: “Many of the self-employed are not fully utilised and so represent “hidden” slack in the labour market, which will continue to depress wage growth.”

The discrepancy between employment rates and wage growth has drawn the attention of the Bank of England, which in the minutes of its Monetary Policy Committee meeting last week, made frequent reference to pay growth, noting that “regular pay growth does indeed remain modest, consistent with the Committee’s updated assessment of the remaining degree of slack in the labour market.”