Economy not rebalancing fast enough

Allister Heath
IT is not good news on the jobs front. Unemployment jumped by 80,000 over the past three months; employment is up by just 24,000 over the past year. The post-recession jobs rebound has ground to a halt. The economy is rebalancing towards the private sector but no longer quickly enough.

Private sector employment peaked at 23.542m during the first quarter of 2008. Interestingly, private jobs started to fall long before Northern Rock. The trough came in the final quarter of 2009, when private sector employment fell to 22.515m, down 1.027m from the boom-time peak, a devastating blow but still less than expected after a recession of such severity. One reason was that public spending, including in construction, propped up technically “private” but in fact state-funded jobs (a major trend during the Labour years, when hundreds of thousands of “private” jobs dependent on government contracts were created).

Firms started to add to their staffing levels at the start of 2010. Private sector employment has grown during each of the past six quarters, with a net 617,000 jobs added, taking the total back to 23.132m. But the strong growth of previous quarters is now running out of steam. One reason for this is the loss of state-supported jobs; but the main factor is that the economy grew by just 0.2 per cent in the second quarter, which is just too weak to create enough jobs.

What was more surprising was the acceleration in the rate of public sector jobs losses. Public sector employment reached its peak as a share of total jobs in late 2009, hitting 21.9 per cent on the official measure; payrolls reached 6.327m at the end of 2009. They then started to fall when Labour was still in power – a decline that has since accelerated – and dropped to 6.037m in the second quarter, 20.7 per cent of the total. So far, therefore, total state sector jobs are down by 290,000, through a combination of non-replacement and redundancies – but even then we are still only just back to levels last seen in 2008. The most recent three months were unusual in that total public sector job losses (111,000) swamped private sector growth (41,000).

The rate of job losses in the public sector appears to be running 3-4 times faster than predicted by the Office for Budget Responsibility. Either George Osborne is getting the painful news out of the way – or the overall reductions will end up being higher than planned. One reason to suspect the latter is that the supposed pay freeze in the public sector is not happening: even excluding the nationalised banks, total pay in the public sector rose by 1.6 per cent on a year earlier (against 3.1 per cent in the private sector). Because the public sector is failing to keep wage costs down, far more people will have to lose their jobs.

All of which put the onus back on the private sector. It is a miracle, given that national insurance (aka the jobs tax) has been hiked, that the coalition has utterly failed to deregulate the economy in any meaningful way, the job cuts in the City, and that vast numbers more rules have actually hit employers in recent months, that the situation isn’t worse.

With the Eurozone in crisis and UK inflation hitting real incomes, growth will remain depressed. The only way the coalition can possibly incentivise UK Plc to create more jobs under such conditions is to transform the business climate by introducing radical deregulatory measures. It is the only hope; Osborne must act urgently.
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