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20 April 2016

Following the unemployment figures, has George Osborne’s recovery run out of steam?

Record employment is not a position to be sniffed at, but we shouldn’t be satisfied that this is as good as it gets.

By laura Gardiner

Despite the noise, the news in today’s labour market data is not the slight increase in unemployment. This hasn’t stopped people linking the unemployment increase to Brexit fears, or suggesting that it’s actually a good thing. No, in fact the real story – which for obvious reasons the headline writers failed to get excited about – is that all the main indicators have stayed the same.

‘No change’ is far more interesting than it sounds though – it suggests that we may have reached the limits of our labour market recovery. This prompts some important questions – have we reached a plateau? Are we happy on it? And if not, how do we move off?

On the question of whether the recovery is falling flat, the chart below suggests that on three key measures – employment, unemployment and pay – the past four months potentially signal a new phase following the rapid changes of recent years. Of course four months isn’t definitive evidence of a trend. But there’s enough to suggest that our recovery is running out of steam.  

Second, are we happy to stay here? Record employment is not a position to be sniffed at, and few would have predicted such a positive outcome even a year ago. The unemployment rate is also now below where it was on the eve of the downturn. And after an unprecedented pay squeeze, a return to real wage growth is long overdue, even if it is largely down to historically low inflation.

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But we shouldn’t be satisfied that this is as good as it gets. And indeed the Chancellor has set an ambition of securing full employment for the UK, targeting an employment increase of two million over the parliament. As our recent investigation into achieving full employment detailed, this won’t be easy and definitely won’t occur automatically, but the ambition is absolutely the right one if we want to see shared income growth in coming years.

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So we’re not happy staying put, but how do we continue on up? Our full employment investigation delved deeply into answering this question, including many policy recommendations. Rather than recite all the arguments and policy choices, here are a few directions to get us moving onwards and upwards on jobs and pay.

On employment, we need to raise participation and reduce exits from the labour market. With unemployment close to its equilibrium rate, new participants will be the major source of further jobs growth. This means attracting people into the workforce that aren’t actively looking for a job. And as well as getting more people into work, we need to stem the flow of people leaving it. This is particularly crucial for driving up employment among older and disabled workers.

On pay, we need to focus on increasing confidence and mobility. As our quarterly Earnings Outlook published earlier this week highlighted, moving from one job to another usually means a big pay rise for the individual, especially when they’re young and at the start of their careers. But job-to-job moves have been in decline for some time, even before the recession hit. Getting mobility back on track – driven by increasing confidence among both young people and employers – will be key to preventing long-term damage to the earnings potential of current and future young cohorts.

And of course, we need to focus on the hardest challenge of all – driving productivity up. This is the principal driver of pay in the long-term. As we learned to in the last Budget, stagnating productivity growth reduces our earnings, living standards and the size of our economy.

None of this is easy and the mechanisms for change are often unclear. But with early signs of stalling in the jobs market now is the right time to be addressing these questions. The hope is that we’re pausing for breath and planning our next route, not making camp.

Laura Gardiner is a senior policy analyst at the Resolution Foundation