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HUGHES Steve

Steve Hughes is the Head of Economic and Social Policy at Policy Exchange.

The flexibility of the UK labour market dampened the shock to the economy of the financial crisis. As this Parliament approaches its end, and the recovery continues, the employment rate is the highest ever recorded, and the unemployment rate is falling towards pre-financial crisis levels.

To be in this position is a boon for the Coalition’s economic record ahead of the election, but would have been regarded as something of a pipe dream until relatively recently. Only 18 months ago the Bank of England’s best estimate was that the jobless rate would still be as high as 7 per cent at the turn of this year. The latest official numbers put the actual figure at 5.7 per cent. Not only this, but the UK has outperformed the record of most other developed economies.

Despite the concentration of the UK’s economic power in the London and the South East, the jobs recovery has been felt across Britain. The Midlands, and North of England generally, had stronger employment rate growth than the South over the last year, and the North West grew its employed total faster than any other region, increasing the number of people with a job by 105,000.

Comparisons of the UK and other European nations also read positively. Out of the 28 countries that make up the European Union, the UK sits behind only Sweden, Germany, the Netherlands, Denmark, and Austria when employment rates are ranked, and it has a lower unemployment rate than all but Austria and Germany.

Of course, there is always the potential for the headline numbers to mask underlying problems or weaknesses. But even the breakdown of the statistics points towards a labour market that is getting healthier, and that will continue to do so. The percentage of people working in a temporary job because they could not find a permanent job has been steadily falling, from just over 40 per cent at the beginning of 2013 to just over 34 per cent now (see Figure 1).

In the last two years the percentage of part-time workers who want a full-time job fell from above 18 per cent to around 16 per cent [1]. There is still some way to go before these numbers drop to levels seen before the recession, but they are undoubtedly moving in the right direction.

Screen shot 2015-03-27 at 14.56.48

Critics of the government’s record have argued that the labour market’s renaissance has been built upon low-wages and insecurity. It is true that temporary work can be a problem if somebody is cycling between employment and welfare dependency, but the statistics present a more nuanced picture of those without a permanent position.

Almost a third of the UK’s 1.7 million temporary employees either did not want a permanent contract, or had a contract with a period of training (roughly another third could not find a permanent job, and the other third provided some other reason).

The UK also has one of the lowest proportions of employees in temporary work in the OECD (defined as those on fixed term contracts or those undertaking work that will last less than a year, such as a seasonal job). In 2013 – the latest statistics available – around six per cent of the UK’s employment was temporary, in comparison to 13 per cent in Canada and 17 per cent in Sweden.

The use of zero-hours contracts, which to some epitomise the growth in insecure, low-paying work, and which has become a contentious political topic, is also not a clear cut issue. The Office for National Statistics’ best guess is that just over 2 per cent of all people in employment are on a zero hours contract, but it is not known how much this number has grown through increased usage, or through survey respondents better recognising the term (which has only recently come into common usage) and, therefore, their circumstance.

What we do know is that those on zero hours contracts are more likely to be younger or older, female, in full-time education, or working part-time, and that two thirds of zero hours employees do not want more hours.

For those that are on temporary or zero-hours contracts but that want more work, strong economic growth should be the best method of giving them more opportunity within the workplace. Indeed, there is some evidence that improved prospects are feeding through to employee behaviour.

Following the financial crisis, there was a big drop-off in the number of people resigning to move to a different workplace, suggesting that as economic conditions worsened there was a tendency to stick rather than twist in the jobs market [2]. This trend is now reversing, and as more people have looked to switch employer, the number of job vacancies within the economy has grown (see Figure 2).

Screen shot 2015-03-27 at 14.57.53Some patterns of labour market change from before the financial crisis have continued afterwards. One example is the self-employed, who are taking up an increasing share of overall employment. Around one in ten part-timers were self-employed at the turn of the century, compared with one in five now.

Other examples are the continued growth in the rate of employment for those aged 65 and over, which has doubled since the year 2000, and the economic activity rate for women, which has been on an upward trend for the last four decades [3].

Other labour market change has occurred as a direct consequence of government policy, and the need to repair the public finances has meant that public sector workers now make up 17.1 per cent of the workforce, down from 19.4 per cent when the Coalition entered office [4].

More broadly, some believe that the limits on the benefit payment increases have increased the supply of labour[5], and broader pro-business reforms, such as corporation tax reductions, could have also had a direct impact on the how firms approach hiring [6].

Of course, that is not to say that the labour market has not got any problems at all. It has some very big ones that require solutions.

Firstly, at the beginning of 2007, 23 per cent of unemployed working age people (16-64 year olds) had been without a job for over twelve months. Eight years later, and after the effects of the recession, this figure is 34 per cent, although it has been declining since the middle of 2014 (see Figure 3).

This should be of concern, as the effects of prolonged unemployment, particularly for the young, have long-lasting effects [7].

Secondly, the poor productivity performance of the UK has been repeatedly highlighted by economists, and is particularly dire when compared to the world’s other advanced economies[8]. No one really knows why this is happening, if it will change, or what the solutions are.

Thirdly, and related to the second point, while it might be argued that it was a price worth paying, relatively high levels of employment during the recession and recovery has seen wages stagnate.

Screen shot 2015-03-27 at 14.58.42While the labour market has a long way to go before the negative effects of the downturn are reversed, the British jobs performance has been impressive. The big question is “what happens next?” – what can the next Government do to help drive unemployment lower and get more people into work?

[1] Labour Market Statistics, March 2015, Table 3

[2] FT, 25/03/15, “I quit! Job resignations and the UK labour puzzle”

[3] Labour Market Time Series, LFK6 and LFK23

[4] Labour Market Time Series, MFY9

[5] Mark Carney speech to the TUC, 9 September 2014

[6] HMRC/HMT, 05/12/13, “Analysis of the dynamic effects of Corporation Tax reductions”

[7] Ronald McQuaid, “Youth unemployment produces multiple scarring effects”

[8] Commons Library

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