A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/

The UK is running out of workers. At 4.0% the unemployment rate is at the lowest level since the early 1970s. This is below the rate in historically low-unemployment countries including Sweden, Denmark and Canada.  A record 832,000 jobs are unfilled in the UK (two of them in the economics team at Deloitte). The attrition rate, the rate at which people change jobs, has shot up to its highest level since records began in 2001.

Wage pressures are rising. Employers are reporting recruitment difficulties and shortages of skilled staff. The Bank of England’s chief economist, Andy Haldane, recently said there is “compelling evidence of a new dawn breaking for pay growth”. Average earnings are growing at an annual rate of over 3%, the fastest pace since the financial crisis.

Employment growth has been driven by older workers, those born overseas, the self-employed and women. Total UK employment has risen by 10% in the last ten years, a remarkable achievement in the teeth of a deep financial crisis. Over the same period employment among the over-65s has risen 88%, for people born outside the UK by 54%, for the self-employed by 24% and for women by 12%. But after more than ten years of rapid growth the UK’s overseas workforce has shrunk in the last year. Brexit is having an effect.

Worries about the quality of work are rising, but the picture is nuanced. Alternative forms of work have boomed in recent years, with sharp increases in the numbers of people on ‘zero hours’ contracts and working for agencies. (Agency workers are contracting via an agency to provide temporary labour to employers).

Self-employment is the main category of alternative work, accounting for 5 million jobs, roughly one in six of the workforce. Terms including ‘precariat’ and the ‘gig economy’ have been used to describe a world of unstable, lower skilled and lower paid work with little chance of progression. This is a real phenomenon, one which partly reflects growth in lower productivity sectors such as hospitality.

Yet alternative forms of working suit many people, especially those wanting to combine work with study or family commitments. Some two thirds of zero hours workers are content with the number of hours they work. (Although about a third, around 300,000 people, want to work longer). The typical self-employed person earns less than someone in employment but is also happier and more engaged with their work. And the great majority of people working in temporary or part-time roles, around 95%, do so out of choice, not because they are unable to find a full-time job. A flexible labour market has given the UK an enviable record of job creation, high levels of employment and high female workforce participation. Curbing alternative forms of work would involve trade-offs, most of all the risk of reducing job creation.

The flip side of the UK’s stellar record on job creation is a stagnation in productivity growth. In the decades before the financial crisis labour productivity, the efficiency with which labour is used, rose by over 2.0% a year. In the last 10 years productivity has virtually stagnated. This partly reflects a shift from high to low-productivity industries. For instance, employment in high-productivity manufacturing has fallen 10% since 2006 while the number of jobs in accommodation and food sector, where productivity is far lower, has risen by 35%. If wages pressures continue to build businesses will come under growing pressure to boost productivity, perhaps through changing the organisation of work, investment or improving training. Labour shortages and higher wages are also likely to constrain the employment growth in lower productivity sectors.

PS – Last week The City UK released a report on the UK’s role as an international financial centre. The report contains some amazing statistics, including that the UK’s trade surplus in financial and related professional services is estimated to be £83bn in 2017, more than the next three largest surpluses (the US, Switzerland and Luxembourg) combined. The report also states that twice as many dollars are traded in the UK as in the US and twice as many Euros are traded in the UK as in the Euro area.