Britain’s private sector jobs miracle

Allister Heath
WITH the money supply dipping in August, and a flurry of other downbeat indicators, it is clear that the economy won’t grow especially quickly in the next few months. But this doesn’t necessarily bode ill for jobs. One of the great surprises of the past two years has been the performance of the labour market, which didn’t deteriorate as much as expected. One minor reason was the government’s hiring spree, which was always unsustainable. The state sector took on an extra 209,000 people during the downturn (excluding the 241,500 staff of the now state-controlled banks).

The primary reason for the resilience, however, is that fewer private sector jobs were lost than during the last, much milder recession of the early 1990s. I don’t know of a single economist who predicted this. As Ian Stewart, Deloitte’s excellent chief economist, points out, 822,000 private sector jobs were lost in 2007-09, compared to 1.3m job losses in 1991-1993 (even though GDP fell by more this time around).

Even more remarkably, a similarly benign development wasn’t seen in other economies. UK employment is 1.2 per cent below its pre-recession peak – in the US, it remains 5.4 per cent below peak, in the Eurozone 2.7 per cent lower and in Spain a disastrous 10 per cent lower. Once again, Britain’s outperformance has been extraordinary. Because the reduction in jobs was much less than the drop in GDP, the UK’s performance has nothing to do with the government’s cyclical’s policies, such as quantitative easing; structural forces were at play.

It turned out that – despite a massive increase in regulation in recent years – the UK labour market remains surprisingly flexible. There has been a sharp reduction in overtime and hours worked, with an increase in part time and temporary work; by slashing costs, this helped keep private sector employment reasonably strong while spreading the pain. Even more importantly, wages have tumbled significantly after adjusting for inflation. This has cut the cost of labour and boosted employment.

So far this year 344,000 extra jobs have been created in the private sector; most were part time , but roughly a third were full time. Crucially, the private sector has created far more jobs than have been lost in the public sector – so far this year the public sector has shed 47,000 jobs out of the 600,000 cuts likely over the next five years or so.

The Office for Budget Responsibility thinks 80 per cent of the state sector cuts will take place from 2013; just 40,000 jobs will go in both 2011 and 2012, 0.1 per cent of total UK jobs. So employment will almost certainly keep on going up over the next two years, thanks to the private sector – and after that the economy will hopefully have strengthened.

As the Deloitte report points out, the recovery from the early 1990s recession was accompanied by heavy cuts in public sector jobs which did not derail the recovery. The public sector shed 72,000 jobs in 1994, 87,000 in 1995 and 107,000 in 1996. These job losses were dwarfed by rapid growth in private sector employment.

There was a difference with today’s conditions, however, and that was that the UK’s long-term sustainable rate of growth was much higher. Taxes were lower, as was red tape; the size of the state was much, much smaller.

So far the strong jobs market has surprised everybody; let us hope it continues to do so. There is no Plan B.