Employment does job for economy

A key measure of the success of the UK economy in recent years has been the astonishing turn around in the labour market. Unemployment, which stood at three million as recently as 1993, fell to less than 815,000 last year. And the million jobs lost in manufacturing since New Labour came into office were more than offset by employment growth in services and construction.

Employment growth has contributed to high levels of consumer confidence, and the willingness of households to spend and borrow. This has underpinned economic growth in the UK, which has been consistently faster than in the major eurozone countries. However, there are signs that the jobs market is turning. The deteriorating employment situation will highlight some of the weaknesses of the UK economy that a focus on the high-level numbers tends to mask.

Aside from the short-term macroeconomic implications of these numbers, they raise important longer-term questions about the strength of the economy, as well as the timing of some government policy initiatives. A closer look suggests that we are probably not in quite as healthy a position as we would like to think.

The first point is that the growth in jobs has relied heavily on the public sector. Employment by central and local government has increased by 637,000 since Gordon Brown accelerated spending on public-sector services. This comes at a time when private-sector job creation has been cut by roughly 50 per cent. It is not just the rising cost of the public sector that is important. The consequences for pensions, productivity and labour mobility also have to be taken into account.

There have long been suspicions that the unemployment numbers are artificially low, with the real jobless count masked by the sharp rise in people classified as sick and disabled. The government wants to reduce the 2.67 million claiming disability benefit, now renamed Employment and Support Allowance, by getting them back to work. Since nearly half of the current claimants are over 50 years-old, the total will shrink, over the next 10 years anyway. But the assumption underlying the proposed benefit reform is that the current system has been abused, and many of the ‘sick and disabled’ could work.

If this is true, the claimants really belong on the unemployment register. And while the changes may be worthwhile in principle, the timing is questionable. In the past, a tight labour market would have led to upward pressure on wages. Earnings growth has stayed within the Monetary Policy Comittee’s comfort zone of around 4.5 per cent, despite above-trend Gross Domestic Product growth. Now that employment growth is slowing, what will happen to them? Will they move on elsewhere, will they be eligible for benefits or will it be the UK workers who lose their jobs?

For all the carping, this has nevertheless been the UK’s most buoyant labour market for a generation. Whether it has been the most productive is another question. In terms of output per worker, the UK does not look too bad against our major competitors. But in terms of output per hour worked we compare much less favourably, which suggests we are working longer rather than smarter.

With an ageing population, the issues going forward will be what we do and how we do it, rather than how many people are working.