Graduates lose ground amid earnings churning

New research from the Bank of England has been done in relation to the jobs market

Budget Day 2016: we can expect to hear from George Osborne about the strengths of the British jobs market, and particularly its capacity for job creation?

Although monetary policy seems ever more entrenched in crisis mode, the worst fears of mass unemployment have turned out to be misplaced.

Three hours ahead of the Chancellor's speech, we'll hear the latest from the Labour Force Survey, filling out the picture for 2015. That will reflect moves, during the downturn years, to more self-employment and more flexible part-time work.

However, these monthly figures have been poor at telling us quite a lot about other underlying movement in the labour market. The three month rolling survey doesn't tell us how much churn there is - for instance, of people leaving jobs for brief periods of unemployment before taking up new roles.

Nor does it tell us much about under-employment, of people whose job requirements fall short of their qualifications and skills.

NICE years

Interesting details of the bigger picture of the jobs market have been filled in by new research from the Bank of England. Its economists wanted to know why pay has risen so slowly, even though the jobs market has become much tighter.

In the NICE years (non-inflationary continuous expansion) running up to the financial crunch, average wages grew 4.25%, nearly half of that through productivity growth. Between 2008 and 2012, wage growth was below 2%.

Then, although unemployment was falling, wage growth in 2013-14 averaged only 1.25%.

With more competition for workers, and particularly skilled ones, and less fear among workers of being made redundant if they push for higher wages, economists would expect to see pay growth pick up.

They figure that some of that has been down to low productivity growth of late, though there's been a lot of head-scratching about what has caused that. Wages have also been subdued by expectations of low inflation.

Age, gender, skills, sector and job location change over time and that can affect average pay

But there's also something called the "compositional effect". That is, the people in the workforce - their age, gender, skills, sector, location, and so on - change over time and that can affect average pay.

The central bank's economists found that has had a marked effect. In the early stages of the Great Downturn, lower-skilled workers were shed by employers.

As that left more skilled workers in jobs, that effect alone pushed up average pay by as much as 1%.

More recently, lower skilled workers have been getting recruited again, and more skilled people have been leaving the workforce.

That helps explain why average pay has been so subdued, dragged down by around 0.75%.

Labour churn

But it's only part of the story. Behind this is a lot of hidden churn in the labour market - far more than the stark monthly figures for employment and unemployment would suggest.

And over time, the Bank of England research shows a fascinating picture of change.

Between 1994 and 2007, in the average three month period, one in thirty workers left the labour market, and slightly more joined it. At least one in 50 workers changed jobs in any quarter, and up to one in 30.

Over time, what that means is that one in ten workers had changed jobs in the preceding year, and one in ten had started in work, having been out of work, for various reasons.

So how has this churn changed the workforce?

• in 1981, 37% of the workforce was aged over 45. That has risen to 43%

• in the same period, the female share of the workforce has risen from 41% to 47%

• in the past 30 years, the proportion in part-time work has risen from 20% to 27%

The most striking change is the growth in the graduate workforce. In 1985, one in 12 workers was a graduate. By 2000, that was up to one in six. By last year, it was one in three.

The skills they have brought with them from university have helped boost the economy's productivity.

But has the benefit of those years spent studying given them a big lift in pay? Not as much as it did - and this is the most striking figure of all from the Bank of England report.

In 1995, graduates had a 45% premium in pay over those with no qualifications. By last year, that has fallen to 34%.

There was a fall also in those whose formal education ended with a school leaving certificate, but it was far less of a decline.

Are today's graduates as good as yesterday's?

Why? The report suggests that as more people have become graduates, there has been "a fall in the signalled value" of a degree. In other words, employers now see a graduate as less smart and skilled than they used to.

That is perhaps reflected in the move towards testing out graduates in intern posts, to see if they are up to much.

What the report doesn't seem to examine is how many graduates are working below their skill level.

Have the strength of the trade union weakened in the modern-day economy?

There's also a significant effect of age. It used to be that you rose up the pay ladder until the age of about 40, and typically stayed around there until a drop in pay close to retirement.

That's not so clear now. The older worker premium continues well past 50. That may have to do with new age discrimination law.

However, the rewards for longevity with one employer have reduced significantly. The report doesn't say why, but it is possibly due to the weakening of trade union bargaining power to gain annual increments which are unrelated to performance.

Makers benchmark

That trade union decline is partly explained by the falling away of manufacturing, down from quarter of the workforce in the later 1970s to only 8% now.

And using a manufacturing worker as a benchmark, there is another insight into the jobs market that the Bank of England report has highlighted, though without showing how much this has changed over time.

Those who work in finance, for doing a comparable type of job to the average manufacturing worker, get a 19% average premium.

In information technology and computing, the gap is 9%, and in professional services, it is 3%.

But others in comparable grades do worse than manufacturers - health workers by 13%, in education by 17%, and the hospitality and food services sector by an unappetising 21%.

These are just the raw economic figures calculated to show the effect of underlying churn in the labour market.

But the impact of the expansion of Britain's universities from 1988 is far more than just economic.

It's hard to think of anything, over those years, that has had a more profound impact on society.