Sunday, March 24, 2019
Britain shouldn't be too glad to be grey
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

In recent days we have had another stunning demonstration of the potency of the job-creating machine that is the British economy. While surveys have suggested that employers are beginning to cut back on recruitment, there was no evidence of this in the official figures.

Overall employment rose by 222,000 in the latest three months for which data are available, November-January, and the employment rate for the 16-64 age group rose to 76.1%, a new record. The unemployment rate dropped to 3.9%, its lowest since November-January 1974-5. And, while only a minority of the net new jobs created over the latest three months were traditional full-time employee jobs, 93,000 out of 222,000, weaker than recently, the others being part-time employment and full and part-time self-employment, these were still strong figures.

And so we have the usual trade-offs. We have strong employment but weak business investment; the weakest of any major economy over the past 2-3 years. Are firms recruiting as an alternative to investing? For some that is not a choice, but for others it is, and it is being made.

There is also strong employment versus weak productivity, which has stagnated for a decade and has weakened again recently. These latest employment figures, alongside weak gross domestic product figures, guarantee further productivity weakness.

Then there is the pay puzzle. Average earnings growth is currently 3.4%, which in the case of total pay (including bonuses) is marginally lower than it was. Real wages are rising, but not by much. And, while you would not expect the kind of pay growth we had when unemployment was last as low as it is now, 44 years ago, when wage increases were well above 20%, you might expect it to be stronger than it is.

All these things; falling business investment, stagnant productivity and weak growth in wages are, of course, intimately linked. A return to the pay norms, not of the 1970s but the pre-crisis era, in which you would expect earnings to be rising by 4.5% to 5% rather than by less than 3.5%, requires a sustained revival in productivity.

There may, however, by another factor which helps to explain the current combination of circumstances, certainly weak pay and productivity, and it is the greying of the labour market. The average age of British workers is increasing and that may have important consequences.

More than half of the increase in employment over the past year has been concentrated in the 50-64 age group. And, if we look a little longer term than that, the concentration of employment growth in older age groups is striking.

Thus, in the past 10 years, there have been 3.175m net new jobs created in Britain, a great achievement. Of these, 591,000 have been among people aged 65-plus and 1.868m have been for those in the 50-64 age group. Thus, 77% of the rise in employment over the past 10 years has been among workers aged 50 and over. This is quite a figure.

Over 20 years, to provide a longer-term comparison, there has been an increase of just over 5.7m in employment. Of this, 854,000 is among the 65-plus age group and 3.2m among 50-64 year-olds. Over 20 years, 71% of the rise in employment has been among workers aged 50 and over.

Why is this happening? Some of it is a cohort effect; people moving from younger into older age groups. Much of it is to do with pensions. The gold standard of UK occupational pensions two decades ago has been badly tarnished and many older people can no longer afford to retire.

A bigger effect has been changes in the state pension age, both actual and in prospect, and this has impacted particularly on women, who have seen their state pension age increase rapidly from 60 to 65-plus. Nearly 60% of the increase in 50-64 employment over the past decade has been among women.

Add in age discrimination legislation and the removal of the default retirement age, which means that retiring old Joe when he reaches the age of 65 is now a matter of negotiation, and often compensation, and there is a cocktail of factors pushing up the average age of the British worker. Another is that younger people are staying longer in education.

How does this relate to the bigger picture of stagnant productivity and weak wages? I realise here that I am steeping into a minefield, but I shall do so gingerly. On the old adage that you can’t teach an old dog new tricks, there is quite a body of evidence that suggests that, the older the workforce, the weaker that productivity is likely to be. They are in general less innovative and less open to new ideas.

Research conducted on behalf of the government, and published a couple of years ago, suggested that a reduction in the proportion of 22-49 year-olds in the workplace, either because of more older or more younger workers, is associated with a drop in productivity.

An International Monetary Fund study three years ago, The Impact of Workforce Ageing on European Productivity, found that “workforce ageing in likely to be significant drag on productivity growth over the next few decades”. Every 1 percentage point increase in the 55-64 age cohort in the workforce was likely to be associated with a drop of 0.8 percentage points in productivity growth, it said.

For this and other reasons, the rise in the proportion of older workers is likely to be associated with weaker wage growth. Among other things, with fewer dependants and mortgages perhaps paid off, they are less likely to push for big pay rises.

A new study by the Bank for International Settlements in Basle, Can an ageing workforce explain low inflation?, concludes that a rising participation rate of older workers is one of the explanations for weaker growth in wages in recent years. It is still the case that falling unemployment will mean faster wage growth – the Phillips curve – but older workers nevertheless mean weaker than otherwise wage growth.

I would be the first to say that it is good that more older people are working, assuming that they want to. One constant theme from readers over the lifetime of this column has been discrimination against older workers. But we also have to accept that the greying of the workforce has other consequences, for pay and productivity