RDP 8806: Employment, Output and Real Wages 2. Trends in Employment, Output and Real Wages

Over the 1970s and 1980s, employment has grown at an average rate of about 1.8 per cent per annum. Within the total, part-time employment has increased more quickly than full-time employment; the average annual growth rates of these two categories of employment have been 5.2 per cent and 1.2 per cent respectively^[1]. Output (as measured by real gross domestic product) increased by 3.4 per cent per annum over this period. Trends in gross domestic product and full-time employment over the 1970s and 1980s are shown in Figure 1. (The data are provided in Appendix 3.)

The faster growth of output compared with employment reflects the rise in productivity, or output per employed person. After allowing for changes in hours worked, due in part to the compositional shift between full-time and part-time employment, productivity has increased on average by 2.1 per cent per annum over the period.

Movements in real wages over the two decades are shown in the lower part of Figure 1. Over this period, real wages have risen at an average annual rate of about 2.1 per cent. This is the same as the growth of productivity.

With real payments to labour on average increasing in line with productivity, the real cost of labour per unit of output showed little net change over the period. This is shown in Figure 1 by the line representing real unit labour costs which adjusts the increase in real wages for the increase in productivity. The index of real unit labour costs at the end of the period was approximately 100, much the same as it had been at the start.

There have been periods, however, when the growth of wages has diverged markedly from productivity. There were three such episodes in the past two decades. In the mid 1970s and early 1980s, real unit labour costs rose sharply while over the past five years they have fallen. These episodes have coincided with large changes in employment growth. In 1974/75 and 1982/83, there were sharp falls in full-time employment, while there has been a prolonged rise in full-time employment since September 1983.

Each of these episodes is discussed in detail below.

(a) The 1974/75 Episode

After growing steadily in the early 1970s, total employment peaked in June 1974 and then fell sharply over the next three quarters. From peak to trough, the fall was 78,000 or 1–1/4 per cent. Full-time employment fell more sharply over this period – by 137,000 or 2–1/2 per cent. The fall in employment in 1974/75 was, at the time, the largest since the 1930s.

The fall in employment was more than would have been expected given the behaviour of output. Output peaked in December 1973 and then fell by 1–1/2 per cent over the next two quarters^[2]. The typical response would have been for employment to fall less as, in the early phase of the downturn, firms change hours worked rather than simply reduce the number of people employed; i.e. they tend to “hoard”; labour. For example, in the recession of the early 1960s, output fell by 2–1/4 per cent between December 1960 and June 1961 but employment fell by only 3/4 of one per cent in the same period.

The atypical response in 1974/75 coincided with a dramatic rise in real wages and real unit labour costs. Nominal wages increased by around 37 per cent between December 1973 and March 1975. Although the rate of increase in prices also picked up at this time; real wages rose by 10–1/2 and real unit labour costs rose by 7 per cent.

Full-time employment did not return to its June 1974 level until March 1978, although total employment was quicker to recover because of the growth in part-time work. During this period, output increased by almost 10 per cent but real unit labour costs remained above their pre-recession levels.

(b) The 1982/83 Episode

Between March 1982 and June 1983, total employment fell by 191,000 (3 per cent) and full-time employment fell by 231,000 (4–1/4 per cent).

As in 1974/75, the decline in employment exceeded the fall in output; the latter fell by 2–1/4 per cent through 1982/83. Also in common with the earlier experience, the divergence in the paths of output and employment was associated with a sharp increase in real unit labour costs; over the year to September 1982, real unit labour costs rose by 5–3/4 per cent.

Unlike the 1974 experience, when the higher level of labour costs was sustained over a long period, the 1982 increase in labour costs was reversed quickly because of the “wage pause” that commenced in late 1982. In addition, output showed a rapid recovery. In the circumstances, it is not surprising that employment recovered much more quickly than had been the case in the mid 1970s. Full-time employment returned to its peak level in three years, even though the fall was larger than in the mid 1970s.

(c) The Past Five Years

The rise in employment that began in the second half of 1983 has been sustained over the past five years. Around one million jobs (over 60 per cent of them full-time) were created between mid 1983 and December 1987, representing an average annual growth rate of around 2–1/2 per cent in full-time employment and 3–1/4 per cent in total employment.

Part of this strong rise in employment would have been due to the strength of output over this period. However, it does not appear that output can fully explain the strength of employment. For example, the average annual growth of output over this period was around 4 per cent, compared with a long-term average of 3–1/2 per cent, but growth in employment was well above its long-term average. Also growth in employment continued virtually unabated through the slowing in output in 1985/86.

An additional factor contributing to the growth of employment is likely to have been the degree of wage restraint that was maintained over the period. Real wages have fallen by 5 per cent over the past five years and real unit labour costs have fallen by over 10 per cent (see Figure 1).

Footnotes

To abstract from compositional shifts betwen full-time and part-time employment, this study focuses mainly on full-time employment. [1]

This is on the basis of the latest statistics. When the figures for output were first published for this period they showed a sharper fall. For example, at one stage, the figures showed a fall in output of over 4 per cent from peak to trough (which, at the time, corresponded to March 1974 to September 1974). On the basis of these early figures, the behaviour of output and employment was not as inconsistent as it now appears. [2]