Does firm-level jobs data show a 'canary in the mine' for the UK economy?

By Professor Mark Hart, Professor of Small Business and Entrepreneurship, March 2019

Economic forecasters have had a tough time second-guessing the UK's trajectory in recent years. Ever since the Great Recession of the late noughties, and especially since the 2016 referendum, Britain's economy has displayed conflicting signs that can seem to confirm or refute the overall narrative simultaneously.

Brexit, of course, with all of its implied uncertainty, has dominated discussion for so long that it would be surprising if this hadn’t affected business and consumer confidence.

And yet many headline metrics on the state of the economy appear to show a benign picture.

This is especially true when we consider job creation, where we’ve seen an alleged ‘employment miracle’. Earlier this month we heard, yet again, that the number of employed people in the UK has hit a new record number of 32.7 million - an unprecedented 76.1%. Conversely, the UK’s 3.9% unemployment rate is ostensibly the envy of Europe. Wages are finally growing faster than inflation.

This is, of course, good news. But the seemingly inexorable rise in employment does pose some questions for policymakers, particularly around the impact of near-full employment on national productivity. Equally, the type and nature of jobs being created require further study.

But what my colleagues and I at the Aston-based part of the Enterprise Research Centre wanted to understand was the underlying level of ‘turbulence’ in the private sector that sits behind this headline labour market picture. By looking at what types of firms are creating jobs in the economy, what can we deduce about overall business dynamism?

Our resulting Insight Paper, Job Creation and Destruction in the UK Economy 1998-2018, goes some way to providing an answer. And, while we’re still in positive territory on employment growth, it turns out there are also some troubling signs that suggest something of a ‘canary in the mine’.

The research analysed firm-level data from the Business Structure Database (BSD) compiled by the ONS. By totalling new jobs created by start-ups and existing companies as well as jobs lost by firms shedding staff or ceasing to employ workers at all, we established the reallocation rate or ‘churn’ among firms each year for the past two decades.

In 2018 alone this rate totalled just under five million jobs – equivalent to almost a quarter of all private sector employees changing jobs through hiring and firing. On its own, that shouldn’t give us cause for concern. In a healthy private-sector economy, we expect a certain amount of churn as more efficient firms grow market share and create new jobs at the expense of less efficient competitors.

But when we delve further, we notice some interesting developments. In fact, while existing companies created 1.65m jobs in that year, this was outweighed by the combined 2.25m job losses from established firms and companies that exited – the highest number since 2010. The net loss of 613,000 jobs from pre-existing firms was only compensated for by around 1m new jobs created by start-ups, giving a net positive figure of just under 400,000. Moreover, the total number of jobs lost in 2018 was 17% higher than the previous year, when 525,000 were shed.

So in fact, established firms are already recording a net loss of jobs. Even if our headline employment figures are being propped up by start-ups creating new jobs, it looks like we are already witnessing a severe slowdown in hiring by the established firms that are vital to the health of our economy.

This was brought home to me in a recent conversation with an entrepreneur, Greg McDonald, CEO of injection-moulding firm Goodfish Group and alumnus of one of the Aston Centre for Growth programmes. Since 2010, Greg has grown the firm’s headcount from around 30 to 125 through a string of acquisitions, with a turnover of £11.5m.

But in the past 24 months, despite taking on 56 new employees Greg told me the firm has seen a net reduction in staff numbers as 65 left the firm. Full-employment nationally, he says, is making it increasingly difficult to hire skilled, motivated workers. But he’s also in no doubt that Brexit has become a factor. Goodfish has established a subsidiary in Slovakia and is waiting on the outcome of the political deal around the UK’s departure from the EU before signing a lease on a new facility, which it hopes to be manufacturing from within six months.

While Goodfish may only be one firm, its experience encapsulates what the data is beginning to tell us. Full employment, coupled with a gathering exodus of skilled migrants from the EU, means firms in a position to grow are having the brakes put on by macroeconomic factors. Or, they’re thinking laterally about how that growth can be achieved - and have decided the UK is no longer the best place to do it. Replicated at scale, such decisions are clearly bad for our longer-term economic prospects. And if we also see firm ‘deaths’ (and the resulting job losses) overtaking new start-up ‘births’ - as seems likely on current trends - the strong employment figures we’ve become used to could quickly unravel.

Many firms right now are looking to government for practical guidance and assistance and finding precious little reassurance. So it’s especially vital at the present moment that firms take advantage of the support on offer from Local Enterprise Partnerships in England and the arms-length enterprise agencies in Scotland, Wales and Northern Ireland as well as their local Business Schools and other private sector initiatives such as the Goldman Sachs 10,000 Small Businesses Programme. What many of the best business owners I speak to also agree on is that, in periods of uncertainty, cash is king. While external support and debt finance can be instrumental in helping firms grow sustainably, riding out a storm tends to rely on a more old-fashioned approach.

As we reach the denouement of Brexit (or at least its first act), policymakers should also be looking to ensure that the rhetoric around the openness of ‘Global Britain’ matches the reality. Because the clear message I’m hearing on the ground is that firms won’t wait for politicians to make up their minds. Strong employment figures now must not lull us into a false sense of security.