Sunday, July 18, 2010
Cranking up the private sector jobs machine
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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This is an excerpt from today's Sunday Times piece, available to subscribers on www.thesundaytimes.co.uk.

Can we, despite the gloom on public-sector job cuts, look forward to a strong rise in employment? Can Britain's private sector more than make up for the drop in public-sector employment?

It has proved to be the most controversial area for the new Office for Budget Responsibility (OBR) under its temporary chairman, Sir Alan Budd. He has packed more excitement into his short tenure than many manage in a career.

The OBR's budget forecast, seized on by the government, was for a significant rise in the number of people in work in this parliament despite more than 600,000 public-sector job losses.

The disconnect between official figures for the recession and those for employment has been stark. Revised gross domestic product figures, released last week, now show the economy's peak-to-trough decline was 6.4%, rather than 6.2%, making it the worst post-war recession (pending further revisions).

Despite this, the decline in employment to its low this January was only 2.5%. Employment has dropped a lot less than would have been expected. As noted here before, this reflects a combination of genuine job-market flexibility and government measures.

The contrast with previous recessions is striking. In the early 1980s, the economy contracted by 6% and employment by 6.5%, with jobs continuing to be lost two years into the recovery. The early 1990s was even more extreme, a modest 2.5% slide in GDP leading to a 6.1% fall in employment.

This takes us back to the OBR. It predicts a rise in the overall number of jobs in the economy from 28.89m at the end of the current financial year, 2010-11, to 30.23m by the end of 2015-16, an increase of 1.34m.

That does not sound too testing, assuming the recovery continues. Except that over the same period, the OBR predicts a drop of 601,000 in "general government" employment, from 5.53m to 4.92m from the end of 2010-11 to the end of 2015-16. Add in a few thousand public-sector workers not in this definition, but vulnerable to losing their jobs, and the challenge is laid bare. The private sector needs to create 2m new jobs over the next five to six years.

Is it possible? Contrary to the general impression, Britain's private sector is a formidable job-creation machine. Between 1991-92 and the eve of the recession in early 2008, employment rose from 25.3m to 29.5m, an increase of 4.2m. Over that same period, perhaps surprisingly, public-sector employment fell from 6m to 5.76m. In net terms, then, all the jobs created in Britain, almost 4.5m, were in the private sector.

It was a game of two halves. From 1991 until about 1998 public-sector employment dropped sharply, from 6m to below 5.2m, before its subsequent rise under Gordon Brown which with the inclusion of nationalised bank staff has seen it back above 6m. Even while the public sector was in a hiring frenzy, there was still plenty of private-sector jobs growth 2.3m between 1997 and early 2008.

We should look at the 1990s recovery, when the public sector was cutting back sharply. How many private-sector jobs were created then? The answer may surprise. Over the first six years, once the job market turned in 1993, private-sector jobs grew by 2m, exactly what the OBR is predicting for the next few years.

That not only suggests the private sector can more than compensate for direct public-sector job losses but also for losses in private firms with public-sector contracts.

So should we relax about the outlook for jobs, knowing the private sector will take care of it? There are a couple of caveats. Geoffrey Dicks, Budd's colleague on the budget responsibility committee, told the Treasury committee that the recovery the OBR is forecasting is a "pale shadow" of the 1990s. If he is right, achieving a similar rate of job creation will be difficult.

The other point is that although employment fell much less than feared in the recession this does not necessarily mean it will be easier for it to grow during the upturn. If firms have been hoarding labour, with people on reduced hours, this slack will need to be taken up before employment rises meaningfully.

It is not remotely implausible to predict a rise in employment and a fall in unemployment in the coming years, despite public-sector cutbacks. Whether it will happen quite as strongly as the government's new forecaster hopes is more doubtful.