Don't be fooled: record high employment is not all it seems

Employment may be at another record high, but with GDP growth flat, isn't there something seriously wrong with the labour market, asks Louisa Peacock .

I hate to spoil the party, but the continued rise in UK employment reaching another record high in the latest quarter is yet to translate into meaningful GDP growth. More of us are working, yes, but with less output overall. If that's the case, isn't there something seriously wrong with the labour market?

Naturally, Iain Duncan Smith, the work and pensions secretary, has spent the morning welcoming the fall in long-term unemployment and hailing the news that there are more people in work than ever before .

But the productivity elephant in the room is still lurking in the shadows and won't go anywhere fast.

As one economist pointed out this morning, the resilience of the labour market has been going on for so long now it's not a surprise anymore but it ought to be. "It remains hard to equate employment growth of 154,000 in the three months to December and 584,000 over the past year, with an economy that was only flat in 2012," said Howard Archer of IHS Global Insight.

Experts have begun referring to this ballooning dilemma as the "productivity puzzle"; arguing the rise in employment coupled with sluggish GDP figures is a consequence of a structural change in the UK jobs market.

Some of the key changes:

Employers are freezing pay or paying such low wage rises it enables them to hang onto staff. Research by the House of Commons Library, published by Labour this morning, shows that real wages are £1,226 lower a year (or £24/week lower) than they were in May 2010.

Companies are choosing to keep staff rather than let them go (a. they've learned the lessons of previous recessions where they made too many staff redundant only to be caught out when things picked up again, and b. there is less propensity to make people redundant these days, not least, because red tape and the fear of being taken to tribunal stops employers from dismissing underperforming staff).

More people are accepting part-time and temporary jobs. The number of people working part-time currently stands at over 8m almost a third of the workforce. This figure actually fell between October and December but is still way higher than pre-recession days and echoes a longer-term trend that Britain is turning into a part-time nation.

The number of people working two jobs to make up for loss of hours and pay rose by more than 40,000 in the latest quarter measured, to reach 1.1m.

The question is, are these changes here to stay? Is this the new normal for British jobs? Or will we return to the good old days of full-time jobs with pay rises above inflation?

My gut feeling tells me the latter is just a pipe dream. These changes are more than likely here to stay and it's up to workers and employers to get used to it.

Average earnings (exc. bonuses) and consumer prices annual growth rates

There are opportunities in this labour market shift . More and more people are working two or three jobs at once in a "freelance" type fashion, rather than being tied to one particular employer. The idea of a job for life seems mundane if not impossible to get, and there is now much more likelihood of workers selling their skills into different jobs/ companies as and when they want to. We've seen the huge rise in self-employment since the recession, which is partly to do with workers regaining control over their careers.

It feels as though this "shift" is still happening to us, however, rather than being solely in the hands of the worker. More than 1m workers are in part-time jobs because they cannot find full-time work. Tens of thousands of people don't want to work two or three jobs to pay the bills; they want one steady, permanent income.

If, indeed, we do see a return to pre-recession patterns of labour, we have a very long way to go before the UK jobs market looks anything like it did before the crash.

The more recent increases in full-time employment have not offset the falls that occurred through the 2008-09 recession.

For the most recent period in October to December 2012, full-time employment was 378,000 lower than in April to June 2008, the first quarter of the 2008-09 recession. Part-time employment was 572,000 higher compared with the same period.

Annual changes in the number of people in full-time and part-time employment, seasonally adjusted

Youth unemployment also crept up in the latest quarter. There were 974,000 16 to 24 year-olds out of work between October and December, up 11,000 from the previous three months.

As Martina Milburn, chief executive of The Prince’s Trust, points out: “It is alarming to see that youth unemployment is back on the rise. It’s now four years since the start of the recession and many young people have been left with nothing but a four-year gap on their CV.”

One other thought on the productivity puzzle is the reluctance of business to make capital investment, which leads to a lack of innovation and productivity.

Stephen Barter, director at KPMG management consulting, says: "Rising employment has yet to filter through to GDP growth, which remains stubbornly flat. One explanation is the reluctance of businesses to make capital investment. We need to see policymakers do as much as they can to give businesses the confidence to start investing again.”

It may be too late for the Government to reverse the structural changes that have been occurring in the labour market over the last decade or so. But policymakers could indeed look for ways to help Britons and companies ride the seismic shifts so that they come out on top, rather than be swept under.