thinking: BRIEFING 06 Public Sector Employment in Greater Manchester: Overview and Implications March 2010 RELEASE DATE: April 16, 2010

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1 thinking: BRIEFING 06 Public Sector Employment in Greater Manchester: Overview and Implications March 2010 RELEASE DATE: April 16, 2010 Please direct any questions or comments regarding this paper to: Commission for the New Economy Economic Strategy Team Tel:

2 THINKING NEW ECONOMY: BRIEFING 05 SOURCE: Public Sector Employment in Greater Manchester: Overview and Implications ONS, Annual Population Survey, Audit Commission, Centre for Research in Socio-Cultural Change. RELEASE DATE: April 16, 2010 SUMMARY Employment in the public sector is likely to become a key issue in the coming years as the need to control the government deficit puts pressure on public expenditure. In this respect, Greater Manchester is better placed than any city region outside of London, to cope with this contraction due to its high percentage of jobs in the private sector indicative of a strong business base. Nonetheless, job growth over the last 10 years has had a significant public sector component. This suggests that public sector fiscal contraction could still be an issue for the city region, given the public sector has helped, along with private-sector growth in sectors like business services and ICT, to fill the gap left by the decline of manufacturing. These issues raise several important policy questions for Greater Manchester. Foremost, among them is the need to stimulate private sector led economic development, whilst at the same time mitigating the effects of public sector fiscal contraction where possible. Greater Manchester and Public Sector employment Data provided by the ONS points out the number and percentage of people working in the public sector (i.e., public administration, education and health) for all the Local Authorities in Greater Manchester. This is data for residents. Greater Manchester, exhibits some variation between the different local authorities. As shown in Figure 1 below, Trafford has the highest percentage of its residents employed in the public sector, at 30%, while the lowest is found in Tameside (26.6%). Figure 1: Public Sector Employment of residents in Greater Manchester s Local Authorities Source: Annual Population Survey Tameside Oldham Manchester Rochdale Salford Wigan Stockport Bury Bolton Trafford Public Sector Employment in GM and across the UK 2

3 Greater Manchester is less reliant on government employment when compared to the rest of the UK s core cities. Figure 2 illustrates that Greater Manchester has the lowest level of public sector employment outside of London, with 28.5% of the working age population of its residents employed in this sector. Greater Manchester is also below the UK average of 29.4%, indicating that the sub-region has an above average level of private sector employment. Figure 2: Public Sector employment (% of working age population) in the UK s core city regions and Greater London Source: Annual Population Survey Liverpool New castle Sheffield Birmingham Nottingham Bristol City Region Leeds City Region Manchester Greater London Figure 3: Public Sector employment (% of working age population) in the UK s core cities (local authority only) Source: Annual Population Survey Liverpool Birmingham New castle upon Tyne Sheffield Bristol Nottingham Leeds Manchester Figure 3 shows that Manchester City Council also has a significantly lower proportion of public sector employment than the rest of the UK s core cities. Overall the data shows that Manchester is the best performer outside of London in terms of low levels of public sector employment. This suggests that the City region also has a more robust private sector which can provide employment for a large section of the population. 3

4 Fiscal and Labour Market Context There is little doubt about the scale of fiscal challenges confronting the UK in the wake of the recession and bank bailouts. Government budget forecasts see net public sector debt reaching 75% of GDP in 2014/15. Putting this into perspective, in 2007 the UK national debt-to-gdp ratio was just 38%. Likewise, the era of balanced budgets and surpluses is over for the foreseeable future. Current projections suggest that under the most optimistic of scenarios the deficit will be halved from 11.8% of GDP to 5.2% over the next four years. Not surprisingly, there is a general consensus about the need to reduce both the UK s debt burden and the size of deficit. The debate then, is not about the why but the how what should be the pace and speed of fiscal contraction, tax increases versus spending reductions and which areas of government expenditure to target for efficiency savings. The knock-on effects of fiscal contraction will be very real for city-regions like Manchester. Some 75 percent of local authority income is derived from Central Government grants with the rest coming from local taxes and fees for services such as leisure facilities. At the same time, local governments must cope with the lingering effects of the recession. This means less cash from sources such as parking and an increased demand for entitlements like housing benefit. Add to this, a poor rate of return on local authority investments and you have a local fiscal situation markedly different from the earlier part of the decade. In view of the current fiscal climate, it is safe to assume we will not experience the growth in government spending of the past ten years. Hence, local governments are likely to have little room to increase overall expenditures. This will have important implications, particularly in labour market terms. As the Centre for Cities pointed out in 2009, one of the "key drivers" of economic growth since 1998 has been the expansion in public sector employment. More than two thirds of the 1.2m extra jobs created in UK cities from1998 to 2007, were in public administration, education and health. 1 Similarly, a recent paper from the Centre for Research in Socio-Cultural Change (Cresc) at the University of Manchester notes, despite a decade long economic boom, private-sector jobs were not generated in sufficient numbers to fill the gap left by traditional manufacturing (more than 1.3 million jobs were lost in manufacturing between 1990 and 2007). Instead, public-sector jobs and employment supported by the state comprised more than half of all job creation nationally and much more in formerly industrial regions like the Northwest. Indeed, in Greater Manchester the public sector accounted for 60% 2 of new jobs created since 1998 and with the onset of the recession, these jobs have in effect become an economic stabiliser helping ward off the worst effects of the downturn. In its report, Surviving the Credit Crunch: Local Finances in the Recession and Beyond, the Audit Commission sheds further light on the implications of local finances on labour markets: So far the public sector has avoided many of the adverse effects of the recession, and public sector employment has actually increased between 2007 and In Greater Manchester the Future Jobs Fund Programme has already created 1,216 jobs since October 2009, of which the majority went to the public sector. The increased demand for public services, particularly in terms of benefits, has required extra funding and necessitated an increase in staff; Public service contraction is likely to have a larger effect on women and short term workers. A disproportionately large number of public sector employees are women. According to the Audit Commission, areas with a high percentage of public sector employment tend to have a less dynamic private sector, which could exacerbate the effects of job losses; While in the private sector businesses have used pay freezes or pay cuts to preserve jobs, this is less likely at a local level in local authorities. A large amount of public sector pay is negotiated at a national level, which gives councils and other locally controlled services less flexibility. However, it is worth noting that the government has plans to freeze public sector pay, as 1 Centre for Cities, Public Sector Cities: Trouble Ahead, 2 Greater Manchester Forecasting Model

5 part of the planned measures to reduce the deficit. Figure 4 below, shows total public sector employment as the percentage of all employment in an area according to the work done by the Audit Commission. It clearly illustrates that there is a significant amount of public sector employment in the North East, Merseyside, Yorkshire, areas of London and other scattered areas. Within a Greater Manchester context, this situation poses some unique policy challenges. For example, how do you to best encourage private sector job creation in order to lessen reliance on the public sector? What are the potential impacts of public sector contraction on the local economy and what are the best ways of mitigating them? How can the city-region best achieve efficiencies in labour intensive sectors such as care and social services without impacting front-line delivery to the public? Figure 4: Total Public Sector employment by percentage of total workforce Source: Audit Commission 2010 Analysis and Policy Implications 5

6 Outside of London, Greater Manchester is less dependent on government employment than any other UK city-region. However, it is important to stress that job growth over the past 10 years has had an important public sector component. 3 In view of the short to medium term fiscal climate, it is simply unrealistic to expect such growth to continue over the next decade. Consequently, sub-regional and local partners need to think about how to create the conditions for the private sector take a more prominent role in job creation. As the MIER illustrated, Greater Manchester is better placed than most of its comparators to achieve this. Unlike other UK jurisdictions, Greater Manchester has not relied on state subsidies to attract private inward investment, but rather on the strength of its local assets such as a skilled labour force, top universities and a world class airport. Of course, this does not negate the fact the public sector will remain a key employer in Greater Manchester. The economic significance of public sector employment, such as its multiplier effects in the City-Region, cannot be underestimated. A large section of the private sector relies on public sector contracts and outsourcing, making employment in these businesses as dependent on government funding as public sector employment. The September 2009 BIS SME survey showed that 27% of small businesses worked for public sector clients, while a further 22% had worked for the public sector in the last 6 months. These rates had increased steadily since December 2008, suggesting that small businesses may be becoming more dependent on public sector contracts. Moreover, there is the purchasing power of public servants who spend money in their communities supporting and creating jobs in local businesses and the broader economic benefits of public institutions like schools, universities and hospitals which help create a skilled and healthy workforce that contributes to economic growth. The MIER report Understanding Labour Markets, Talent and Skills, shows that a significant amount of knowledge intensive business employment comes from the public sector. However, it concurs that public sector employment is linked to government investment, and that as public finances become increasingly strained the public sector will play a less important role in the sub-regional economy. As a result, the city region will need to support and encourage the growth of knowledge intensive businesses in the private sector in order to offset the lack of employment opportunities in the public sector. The Greater Manchester Strategy also recognises the need for the public sector to react to the changes that have taken place in the economy by fostering innovation in service delivery. In formulating economic and budgetary strategies, local and sub-regional partners need to take a careful look at how to best sustain employment with a healthy and sustainable balance of public and private sector employment. The following then are some important considerations in this regard: Creating the right conditions for private sector led economic and employment growth. In GM a key vehicle for this is the Greater Manchester Strategy. Its growth oriented priorities of increasing internationalisation of Manchester firms, expanding the city-region s business base and improving our skills and talent profile need to be fully realised through the optimisation of inward investment, business support and spatial planning activities to name a few. As well, through its Statutory and Combined Authority status, GM needs to use these new powers to gain new flexibilities that can engender further private development (e.g., implementing Accelerated Development). Supporting growth of innovative businesses, especially in science and technology. Emphasis is increasingly shifting away from a reliance on Financial and Professional Services towards innovative businesses and R&D in order to create a more sustainable basis for the British economy. Stimulating the knowledge economy and supporting new business start-ups in this sector will be crucial in building a sustainable Greater Manchester that is successful in the new economy. Mitigating employment impacts of fiscal contraction through measures like pay freezes, flexible working arrangements, unpaid leave, shortening work weeks etc. which reduce salary-related costs. 3 GMFM

7 Making informed decisions about public sector spending means gaining a more comprehensive understanding of the role of the public sector in the economy. This includes: o Breakdown of Public Sector Employment: Getting a more granular understanding of employment within the public sector (e.g., education, health and local government). This would provide a better indication of which areas are most vulnerable to public sector contraction and where employment is more stable. o Public Sector Supply Chains: Analysis of the economic, social and environmental impacts of the Greater Manchester councils and other government bodies, with particular emphasis on procurement and supply chains and looking at ways of how to best encourage innovation and productivity gains by firms o Mapping of public sector employment in order to get an indication of the likely impact of fiscal contraction on say deprived areas as well giving an insight into possible issues around the accessibility of public sector employment to certain areas of the sub-region. 7