Can the private sector fill the public sector gap?

Eurfyl ap Gwilym examines the latest employment data for Wales


In a recent posting  I noted the surprising fact that 100,000 more people in Wales were in employment in the private sector in the third quarter of 2013 compared with the first quarter of 2010. Over the same period employment in the public sector fell 22,000 resulting in an overall increase in employment of 78,000. In April 2014 it was announced that the unemployment rate in Wales had fallen to 6.8 per cent compared with 6.9 per cent for the UK as a whole. In the year to February 2014 the employment rate (the proportion of the population aged 16 to 64 who were in employment or seeking employment) rose to 71.1 per cent compared with 72.6 per cent for the UK. Thus the recent employment news is quite striking although detailed employment figures from the Office for National Statistics need to be treated with care due to difficulties in their collection and collation.

A key part of the UK government’s strategy is to cut back public sector expenditure and employment and for the private sector to more than compensate for this loss by rapidly increasing employment. The changes to date in employment in Wales and across the UK will be taken by the UK government as a vindication, in part at least, of its strategy. One question that arises is will the private sector continue to expand employment and if so will it be in sufficient numbers to more than compensate for the expected loss of public sector jobs? Public expenditure cuts are expected to continue well into the next parliament.  According to the latest analysis by the independent Office for Budget Responsibility employment in the public sector across the UK is forecast to drop by approximately 1 million between 2011 and 2019. If Wales loses its proportionate share of these jobs then an additional 51,000 public sector jobs would be lost between now and the end of 2019.

Related employment questions which are difficult to answer are: where have the 100,000 additional private sector jobs in Wales  been created; are they sustainable; are most of the jobs low-paid or are they well spread across the earnings spectrum; and can we look forward to continued improvements in the coming years?

Quantitative data does not always reveal the quality of employment. In the year ending September 2013 there were 369,000 people in part time employment of whom 68,000 could not find full time work. There were 74,000 in temporary work of whom 28,000 could not find a permanent job. Thus in these two categories there appear to be some 96,000 people in Wales who could not fulfil their needs in terms of either full time work or permanent employment. This is a measure of the latent demand for more work or more assured work within the employed workforce and is in addition to the 100,000 who are unemployed.

Concern has also been expressed that much of the increase in employment may have been in the self-employed category. Between September 2010 and September 2013 the number of self-employed in Wales grew from 170,000 to 190,000, an increase of 20,000. The number of self-employed in Wales is 13.7 per cent compared with 15 per cent for the UK as a whole.

From where has the jobs growth come? Between the year ending September 2010 and September 2013 the major changes in employment were in: manufacturing (+9,200); distribution, tourism and restaurants (+9,300); banking, finance and insurance (+8.800); ‘other services’ (+12,600); and construction (-13,600). Of these sectors ‘distribution, tourism and restaurants’ tends to be a low paying sector (approximately 68 per cent of those employed in hotels and restaurants are low paid defined as earning less than two thirds of median hourly pay). In the other sectors fewer than 10 per cent are low paid.

Comparing employment patterns in the third quarter of 2013 in Wales with the UK provides an indication of where Wales is stronger and weaker in comparative terms. If employment in ‘Professional, scientific and technical activities’ were the same level as the UK then the number employed would be 109,000 compared with an actual level in Wales of 55,000: a ‘shortfall’ of 54,000. Thus the low level of investment in research and development in Wales and the corresponding low level of employment remains a concern.

Two other sectors where Wales is relatively weak are ‘Information and Communication’ where the actual employment level is 27,000 compared with an equivalent  ‘UK level’ of 53,000 and ‘Financial and Insurance Activities’ which employs 30,000 compared with 53,000 if employment were at the UK level. These are also sectors which pay relatively high salaries. In seeking to redress this imbalance the economic renewal strategy introduced by the Welsh government in 2010 appears in the case of these two sectors to be sensible although it is probably too early to judge whether or not implementation has been successful.

On the other hand a strong case can be made for reinforcing comparative success and Wales has higher proportion of its workforce employed in ‘Manufacturing’,  ‘Arts, Entertainment and Recreation’, ‘Human health and social work activities’ and ‘Public administration’.  Unfortunately the last three of these sectors are likely to come under additional pressure as public expenditure is cut in real terms over the coming years.

The strength and recent increase in manufacturing employment is encouraging given both the long term downward trend experienced in past decades and the fact that this sector tends to generate higher added value per employee than many other sectors of the Welsh economy. A recent report by the Boston Consulting Group claims that manufacturing in the UK is undergoing a revival and is now more competitive as wages have moderated in comparison with international competitors including costs in emerging markets which are increasing rapidly. Another reason for encouraging manufacturing is that according to recent reports this sector has a low proportion of workers who are low paid (approximately 12 per cent). However the recent upsurge in the value of sterling may act as a drag on manufacturing unless activity is concentrated on higher value products

Employment in construction has broadly mirrored the pattern across the UK with employment falling  This fall is disappointing although not unexpected given the sharp cuts in public sector capital investment introduced by Labour in its last UK budget in March 2010 and continued under the current UK government. Those who have called for public investment in infrastructure as a way of stimulating employment and raising productivity across the economy will see the fall in employment as evidence of successive governments’ failure in this area. Construction is also desirable given that fewer than 10 per cent of employees are low paid.

It is too early to draw firm conclusions regarding employment prospects particularly given both the planned cuts in public expenditure and continuing uncertainties in the global economy. An encouraging factor is that with the growth in private sector employment it may now be possible to focus more on the quality of employment rather than simply trying to create more jobs irrespective of their sustainability or pay levels. Improving the quality of employment would also be reflected in rising relative GVA per head which has been for far too long on a downward trend in Wales.

Eurfyl ap Gwilym is a Senior Economics Adviser to Plaid Cymru, and was a member of the Silk Commission.