Economics

The UK has had a jobs boom – now it needs a productivity boom

BY Ian Stewart   /  20 May 2019

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’

Last week saw UK unemployment fall to the lowest level since 1974. Against a backdrop of a sluggish GDP growth this is quite an achievement. But the success of labour market policies should be judged on wider criteria. The quality of work, the flexibility of the jobs market and how inclusive and productive it is also matter.

For most of the last hundred years a principle feature of economic policy has been the pursuit of low unemployment. Today policymakers tend to worry at least as much about the quality of work as its quantity. There has certainly been much discussion of the so-called gig economy and of the growth of unskilled and insecure work in the UK. But in terms of the quality of work the UK seems to compare quite favourably by international standards.

Temporary, part-time and agency jobs along with self-employment are sometimes, and unfairly, characterised as being inferior to full-time work. Most people do these sorts of jobs because they choose to, not because full-time work is unavailable. Thus high levels of part-time work in the UK, and also in the Netherlands, Denmark, Germany and Switzerland, reflect high levels of female workforce participation. Conversely countries, such as Spain, where women are less likely to work, offer fewer opportunities to work part-time.

Self-employment has grown over the years in the UK, but to levels that are in line with the OECD average. Levels of temporary work, a key measure of insecurity, are lower than in any other major industrialised country and the gap is especially marked for young people. In France, Italy, Spain and Germany rates of temporary work for under-24-year-olds exceed 50%. In the UK it is around 14%.

Nor does the OECD’s broad ‘job strain’ indicator supports the idea of a crisis in the quality of work. The indicator gauges the mental and physical toll taken by work and covers everything from the intensity of work, to autonomy, flexibility of working time and scope for progression. The UK ranks as having the fourth lowest level of job strain, behind Norway, Finland and Denmark in a field of 32 rich nations.

The second of our four criteria is labour market flexibility – the capacity of the jobs market to match labour supply and demand and, thereby, to maintain low unemployment. Flexible labour markets are marked by efficient, transparent regulation that make it easy for employers to hire – and fire – staff. The UK rates as having a highly flexible labour market, ranking in 8th place out of 140 countries in the World Economic Forum’s measure of flexibility. The UK is in the company of Canada, Switzerland, Germany and Denmark at the top end of the league, something which demonstrates that labour flexibility does not spell low levels of social protection.

What of our third criteria, inclusiveness, the ability of people who want work to get a job? The UK employment rate, so the proportion of the working age population who are in work, is 76.1%, the highest on record and higher than in America’s famously job-rich economy. Unemployment, at 3.8%, is half the average rate for the euro area. Female workforce participation is among the highest in Europe while youth unemployment is well below the EU average.

Unfortunately the UK falls down, and badly, on our fourth criteria, productivity. Since the recovery started UK productivity has grown at roughly one-third the rate it did in the run up to the recession. Other countries have seen productivity growth slow, but the UK’s performance has been especially poor. There are a myriad of competing explanations for what has gone wrong. Skills and basic education have been an area of longstanding weakness. In terms of vocational education and training and adult literacy the UK ranks well below many of the Northern European nations with which the UK keeps company on labour market flexibility and job growth.

The good news, then, is that the UK has a flexible labour market, one where people have incentives and opportunities to work, and where it is easy for businesses to hire. The bad news is on productivity. Weakness here has suppressed wage growth and exacerbated public sector austerity.

The UK has had a jobs boom. Now it needs a productivity boom.

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