Sunday, February 19, 2017
Our Goldilocks job market and its three lurking bears
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

There is some news we should make a point of celebrating. The announcement a few days ago that Britainís employment rate hit a record high of 74.6% in the final three months of last year was a good example.

What the figure meant was that in records dating back to 1971, there has never been a higher proportion of 16-64 year-olds in work. Though the records go back only 46 years, I doubt there has been a time in Britainís history when the employment rate has been higher.

Britainís employment rate is not only the highest on record but is around five percentage points higher than that of America and some seven percentage points above the European Union average. Among advanced economies, only Denmark, Sweden, Germany and Japan have higher employment rates. At the other end of the scale, Italy has an employment rate of 57.6%, Greece just 53%.

Think about that record for a second. Over the period since 1971 very many more young people stay in full-time education beyond the age of 16, which in normal circumstances ought to mean a decline in the 16-64 employment rate, even allowing for the fact that many students have part-time jobs.

Until recently, there was also a significant erosion of employment among older age groups. Many is the piece I have written over the years about declining employment in the 50-64 age group. The employment rate in that age group in currently just below 71%, up from 69% two years ago. And these days a different phenomenon is at work. On top of 16-64 employment, there are 1.2m people aged 65 and over in work. That may not be an all-time record but it is close to recent highs and underscores the labour marketís success.

The record employment rate is, first and foremost, a reflection of the welcome flexibility of Britainís labour market, a flexibility which is reflected in the fact that what is now the Cinderella measure of unemployment, the claimant count, is at 745,000 in January, lower than the number of officially-record vacancies, 751,000. If that has ever happened before, it has not done so for a very long time.

Record employment is, secondly, a tribute to the rise of women in the workforce, and the huge social changes of the past half century. The employment rate among men has followed the pattern one might expect; it is lower than it was. The employment rate among 16-64 year-old men, which is now 79.3%, was a very high 92.1% in early 1971.

The employment rate among 16-64 women, in sharp contrast, has risen from 52.8% in early 1971 to 70% now. It will converge further on the male employment rate as the male and female state pension ages are equalised.

The record employment rate also reflects the fact that, under David Cameron and George Osborne, Britain had a particularly job-rich recovery, with a 2.75m rise in employment from early 2010 to the middle of this year. There was a time, you may remember, when some predicted that we were due an employment and unemployment disaster, as a result of public sector job cuts and the more general austerity squeeze on the economy. Precisely the opposite happened.

Whenever I have written before about the miracle of the post-2010 job market, people have always reminded me about falling real wages, insecure self-employment and employment, including zero-hours contracts, the shift from high-quality public sector jobs to some lower-quality private sector ones, and the weakness of productivity growth. These days such observations are supplemented by overwrought, easily wound up oddballs blathering on about Project Fear.

It is fair to say that in the background of Britainís Goldilocks job market Ė not too hot to force a wage explosion, not too cold to push unemployment up Ė there have always been a few bears lurking. Today, behind the good headlines, there are least three of those bears.

Though the employment rate is at a record, the rise in employment has plainly slowed. Not so long ago, Britain was adding half a million or more jobs a year. No longer, the rise over the latest 12 months was 302,000. Moreover, the rate of employment growth slowed sharply in the second half of last year. Of the 302,000 growth in employment, 216,000 or 72% came between the final quarter of 2015 and the second quarter of last year.

There were, in addition, real signs of fatigue as the job market made it over the finishing line to that record 74.6% employment rate. The 37,000 net rise in employment in the final three months of last year was a rather motley collection. None of it came from a net increase in the number of employees in businesses. All of it came from a rise in self-employment (13,000), an increase in numbers on government-backed training and employment schemes (21,000), with the rest unpaid family workers.

Self-employment, which has been responsible for a significant proportion, roughly 40%, of overall employment growth during this job-rich recovery, is controversial. While much of it is what self-employment has always been, an increasing proportion reflects insecure ďgig economyĒ work, which Theresa Mayís government has commissioned an investigation into.

The Institute for Fiscal Studies this month highlighted the tax headache for the chancellor in the rise of the self-employed and owner-managers, which will mean £3.5bn less tax at the end of the decade (an Office for Budget Responsibility calculation) than if these people had been employees. It remains to be seen whether Philip Hammond will respond to this in his March 8 Budget.

There are other job market issues. One, highlighted by many firms, is that skill shortages are biting and set to do so harder in coming years. Another is that when it comes to pay, the labour market is a bit too Goldilocks for its own good. The growth in average earnings slipped back from 2.8% to 2.6% in the latest figures, and looks set to drop further at a time of rising inflation. The squeeze on real wages will be one of the stories of this year. Perhaps in anticipation, retail sales volumes have fallen for the past three months.

Finally, there is productivity, a very significant bear. Official estimates last week suggest it rose by a mere 0.3% in the final quarter of 2016, its smallest quarterly increase during the year. We are approaching an interesting test for productivity. It is unlikely that the employment rate can rise much further from here, and workforce growth is set to slow. Prosperity will depend on faster growth in productivity. Can it be achieved? That is something we will all be keeping a very close eye on.