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Can’t grow, won’t grow

Image: Julian Partridge

While politicians and “Westminster Village” journalists trumpet the latest headline employment figures, the UK economy continues its post-2008 slump.  We know this because within the Office for National Statistics (ONS) employment report is this incongruous fact:

“For August 2017 in real terms (constant 2015 prices) average regular pay (excluding bonuses) for employees in Great Britain was £459 per week before tax and other deductions from pay, £14 lower than the pre-downturn peak of £473 per week recorded for March 2008.  [And] average total pay (including bonuses) for employees in Great Britain was £488 per week before tax and other deductions from pay, £34 lower than the pre-downturn peak of £522 per week recorded for February 2008.”

The claim that the employment rate is higher than it has been since 1975 – when workers were able to force employers and governments to concede huge inflation-busting pay rises – cannot be correct if this data about real wages is true.  Quite simply, if labour is in short supply, then employers will pay more to retain existing workers and to attract additional ones.  With the exception of inner London and a few hi-tech enclaves elsewhere in the UK, that hasn’t happened.

The question, then, is which statistic is most likely to be correct?  Of course, some degree of black market payment still goes on (although the trend away from cash makes this less prevalent than it was a few decades ago).  However, given that most payments are recorded in tax and company records, national pay statistics are considerably easier to obtain than those for employment.  Indeed, whereas we may have broad agreement about what constitutes “pay” there is considerably less agreement about what constitutes “employment.”

You might be forgiven for thinking that being employed means having a job.  However, for the purposes of the ONS data:

“Employment consists of employees, self-employed people, unpaid family workers and people on government-supported training and employment programmes.”

Hidden within the term “employment,” then, are the precarious part-time and zero hours jobs, low-paid self-employment and so-called “gig-economy” work, people who hope to earn profits from a family business, and people on various so-called “training” schemes (including those where jobseekers are obliged to work for their benefits).

Here, perhaps, we begin to see where the real supply and demand curve is operating – not between employment and pay, but between an increasingly punitive benefits system and the consequent desire to access anything that counts as employment.  As Hannah Jane Parkinson in the Guardian observes:

“The gig economy has always existed: cash-in-hand or on-call work or people turning up at building sites or dockyards in the hope of a day’s work. But since the 2008 crash, jobs that provide a secure income have become harder to come by. It is true that the unemployment rate among 16- to 24-year-olds in the UK is 12%, while in parts of Europe it is 40%. But that doesn’t mean much if many of those people are in precarious “self-employment” – the McKinsey Global Institute estimates this may be up to 30% of working-age adults across Europe…  We laugh about George Osborne having six jobs; if he was a millennial, this would be par for the course.”

On the other side of the equation here are increasingly over-taxed and over-regulated employers – not the tax-avoiding multinational corporations; but the myriad small and medium firms that in earlier periods helped to drag the economy out of recession.  Employers’ National Insurance – effectively a tax on jobs – transfers the equivalent of the pay of an additional employee to the Treasury for every four or five workers employed.  Add to that an enforced pension payment and a minimum wage, and potential workers have to be capable of generating an enormous amount of profit before it is worth hiring them.

Instead, since 2010 (when the Tories began to convert the social security system to something more akin to the nineteenth century Poor Law) employers and individual workers have been colluding to create the means of escaping the benefits regime while simultaneously providing value for employers.  The way this has occurred is more akin to digital feudalism than to market capitalism.

To escape every previous recession, we have increased profitability by utilising increasingly energy-efficient technologies that created more units of output (goods and services) as a ratio of inputs.  What makes this time different is that we have done the opposite.  Productivity has fallen.  There are two reasons for this.  First – and most obviously – the majority of the employment that has been created since 2010 is in the most labour intensive sectors – health and social care, transport and storage, accommodation and food.  Nor is it an accident that these are precisely the sectors where the worst practices of the gig-economy have come to light – the social care workers not paid for their traveling times, the delivery drivers obliged to pay a fine for taking time off due to illness, the Deliveroo and Uber drivers not afforded basic employment rights, etc.

The feudal overlords in this new employment landscape are the (often American) owners of the digital landscape who can charge a premium for the right to work their digital strips of land.  By stretching the boundary between employment and self-employment, they strip away all of the overheads that a more traditional employer would have to endure.  And yet, as Hannah Jane Parkinson observes, for the customer the experience is positive:

“In London, the rallying cry of ‘We must support our black cabs!’ is loud, but they are eye-wateringly expensive. Some still do not take cards. One has to flag them down, or trek to a taxi rank. Contrast this with Uber, which offers lower prices; drivers who often carry bottled water, magazines, sweets and phone chargers; the option to play one’s own music in the car; and drivers usually no more than five minutes away.”

This can only be a race to the bottom.  Unless consumers are able and prepared to pay a sufficient price for the goods and services they use – and they never have been – then the businesses that provide those goods and services will have to cut costs even further.  This applies in the public sector as much as the private.  Councils and government departments regularly enter into contracts with private providers that can only be fulfilled if the provider either breaks employment law or goes down the gig-economy route.

It was not supposed to be this way.  The justification for bailing out the banks in 2008 was precisely so that they would lend new businesses the currency they needed to invest in the very productivity-enhancing capital technologies that a genuine economic recovery requires.  A large part of the problem since 2008 is that the banks have found pumping up asset bubbles to be far more lucrative (for now) than making loans to businesses.  This said, at least in the immediate aftermath of 2008, banks struggled to find businesses prepared and able to take up the loans that banks had made available.

This points to a far deeper malaise that has impacted the UK economy particularly hard, but that is gradually spreading across the developed world.  Britain has led the charge toward national energy poverty.  The North Sea oil and gas fields, on which most of the prosperity of the 1990s and 2000s was based, peaked in 1999 and are producing 60 percent less today.  The coal industry on which the UK economy was built has all but disappeared.  The aging fleet of nuclear power plants are being retired, and, to be frank, a couple of GWs of wind turbines and solar panels simply doesn’t fill the void.

What has this to do with employment?  Well, remember that productivity growth is the result of combining capital (and often labour) with energy to increase output per input.  Mistakenly, we have given far more weight to technology, while ignoring energy almost entirely.  Labour – being by far the biggest cost – is precisely what productivity is intended to substitute for.  Energy, however, we have simply taken for granted.  In this we were tragically mistaken, because not all energy is equal.

Energy comes at a cost.  Oil and gas companies have to invest billions of pounds to open up a new oil field.  Shale gas companies pay millions of dollars just to hydraulically fracture a single well.  Nuclear power plants cost billions of pounds to construct and millions more to operate.  Even lower energy producing technologies like wind turbines and solar panels have to be constructed (mostly in China) and transported to where they are deployed; all at a cost of energy and resources.  This means that there is a net energy benefit that varies from one energy source to another.  In the UK since the peak of North Sea production, that net energy has fallen like a rock.

The only way to offset falling net energy – other than finding a new, abundant and energy-dense energy source – is to deploy technologies that allow us to waste less of the energy we consume.  This is easier said than done, because technological improvement suffers from diminishing returns.  The easy technological efficiencies were developed in the 1970s (in response to a series of oil shocks) and deployed in the 1980s.  Since then, energy efficiencies have improved only incrementally while our demand for energy continues to grow exponentially.

In the first third of the twentieth century, relatively backward technologies were coupled with high net energy resources with the result that productivity increased despite the technology.  In the second third of the twentieth century, we made major improvements to the efficiency of energy technologies, which then harnessed high net energy.  In the final third of the twentieth century we experienced declining net energy.  By the end of the century we were forced to seek highly efficient technologies to offset the shift to low net energy sources (such as fracked oil and gas, biofuels, tar sands and ultra-deep sea drilling).  However, technological efficiency has failed to keep pace with falling net energy.

Net energy - falling productivity
Even with energy efficient technology, falling net energy means falling productivity.

The impact on productivity has been devastating.  Because harnessed energy is the true driver of productivity, even a relatively small increase in energy costs (which may also be felt in the higher taxes that accompany energy subsidies) will significantly lower per-unit output.  One result of this is that the desirability of cheap labour has begun to increase – in effect, transferring the rising cost of energy onto the workforce in the shape of falling real wages.

For the time being, this process of labour devaluation is felt primarily at the bottom of the employment ladder.  But as net energy continues to fall, demand for ever cheaper labour will spread across even the highest paid sectors of the economy.  This is what makes the next round of technology very different to previous ones.  Whereas earlier rounds – the steam engine, the diesel engine and the electronic computer – freed up energy and resources to open up entirely new sectors of the economy, this round is about undermining existing ones.  This is about driverless cars and trucks destroying transport employment; computer AI obviating the need for lawyers, doctors, bankers, and a host of creative professions.  But in the absence of a new energy source providing an increased net energy benefit, these technologies cannot usher in a new round of prosperity.

This is because the fundamental flaw at the heart of market capitalism is that the very workers whose cost is cheapened by the gig-economy race to the bottom are also the consumers that the gig economy companies need to sell to in order to remain in business.  If the workforce is too poor to buy the goods and services, then the companies that provide them are bust… it is only a matter of time.

This, perhaps, is the main reason why the beneficiaries of the gig economy – tech godzillionaires like Bill Gates and Mark Zuckerberg have pushed for some form of Universal Basic Income (UBI) as an alternative to our inherited industrial social security system.  If the workforce cannot afford to buy the new gig-economy services, then the state will have to print money and give it to them.

UBI is superficially attractive – particularly when compared to the Tory dog’s breakfast that Universal Credit (which isn’t universal and doesn’t provide even a basic income) is fast becoming.  Not only does it provide a basic standard of living to every citizen, but it does away with the bloated bureaucracy employed to oversee and enforce the current punitive system.  UBI would make working in the gig economy more humane while simultaneously making it more affordable.  But unless we can find a means of increasing the net energy benefit that productivity depends upon, then UBI and the gig economy are merely temporary ledges on our headlong fall off the economic cliff.

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