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News : UK Economy Last Updated: Sep 8, 2010 - 3:37:21 PM

UK faces a five year jobs deficit if economic growth slightly undershoots official forecasts
By Finfacts Team
Jul 14, 2010 - 8:00:15 AM

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The UK faces a five year jobs deficit if economic growth slightly undershoots official forecasts, a leading professional body warned on Tuesday.

The Chartered Institute of Personnel and Development (CIPD) said growth needed to be at least 2.5% between now and 2015 to maintain job numbers. The Office of Budget Responsibility (OBR) is forecasting growth of 1.3% this year, 2.6% in 2011 and 2.8% in 2012 and 2013.

The government’s reliance on private-sector growth to restore the jobs market is risky CIPD chief economic adviser John Philpott has warned. He says in a report that given that the OBR’s forecast of net total employment growth of 1.3 million to 2015 accounts for a net fall in public sector employment of 600,000, the forecast implies that the private sector will create 1.9 million jobs during the forecast period. This amounts to an average increase in private sector employment of 1.6% (roughly 380,000 jobs) per year. He says the effective private sector job creation requirement could be greater still. Unverified Treasury estimates leaked to the Guardian newspaper (30 June 2010) suggest that the coalition government’s deficit reduction measures will result in 600,000 to 700,000 job losses in private sector businesses dependent on public sector contracts. If so, the private sector as a whole will need to create at least 2.5 million jobs by 2015 if the OBR forecast is to prove correct.

The economist says private sector job creation of the magnitude forecast by the OBR would be a stretch, especially over such a relatively short timescale, but isn’t too far out of line with recent UK experience. The Thatcher jobs recovery in the 1980s, covering the period from the post-recession trough in employment through to the subsequent peak in employment in 1990, saw 2.97 million extra private sector jobs created at a rate of 2.1% per year (this CIPD calculation is based on available official figures for the time). Office for National Statistics data for more recent decades (which provide separate figures for public and private sector employment) show the Major jobs recovery following the early 1990s recession, which like now coincided with a period of mass public sector employment downsizing, saw 1.97 million extra private sector jobs created at a rate of 1.7% per year. The Blair-Brown era of job growth from 1997 and prior to the recession of 2008– 09 saw 1.9 million extra private sector jobs created, although, by comparison with the Thatcher/Major recovery periods, at a relatively slow rate of 1% per year.

However, what characterises the faster periods of private sector employment growth is a background of favourable macroeconomic conditions and, in particular, rates of economic growth conducive to healthy private sector job creation.

Philpott says the experience of the past 30 years suggests that the UK economy needs to grow by at least 2.5% per year in order to trigger 1% annual private sector employment growth.

The significance of this historical precedence is that it suggests that economic growth in the next few years has only to be slightly less strong than the OBR’s current central forecast for the jobs outlook to look a lot worse. Against the backdrop of massive public sector job downsizing it doesn’t require anything like a double-dip recession to result in a prolonged jobs deficit, merely economic growth in the range 2–2.5% per annum rather than the +2.5% per annum (above trend) growth rate the OBR expects.

CIPD estimates the rate of economic growth doesn’t hit 2.5% until 2013, prior to which, against a backdrop of public sector job cuts, private sector job creation is too weak to prevent a net loss of 300,000 jobs to the economy as a whole. Stronger growth from 2013 then enables the economy to start adding jobs again, with the level of employment by 2015 around 100,000 higher than in 2010 but far fewer than the 1.3 million extra jobs the coalition Government is hoping for. On this scenario the unemployment rate rises from 8.1% in 2010 to a peak of 9.5% (2.95 million) in 2012 before falling to 8% by 2015 (the CIPD estimate making no allowance for the impact of government welfare reform measures, which may result in more economically inactive benefit claimants starting to actively look for work and thus appearing on the headline unemployment counts). This would leave unemployment still close to 2.5 million by 2015 - -  meaning Britain faces at least half a decade of prolonged jobs deficit.

The economist says if the double-dippers are proved right and the economy suffers a severe reversal, the size and duration of the jobs deficit would of course worsen. And it is indeed possible that even if growth matches the OBR’s central forecast, this recovery will prove to be more jobs light than recoveries in previous decades.

John Philpott says one reason for this is that the percentage contraction in employment during the recent recession was only a third as large as the percentage contraction in economic output; many private sector firms hoarding labour through the bad times to minimise redundancies. This outcome - -  the exact opposite of the oversacking that characterised the Major recession in the early 1990s - - was good for jobs but resulted in a slump in labour productivity and a jump in unit wage costs. It’s probable that during the current economic recovery employers will want to make good the loss of productivity before they start hiring aggressively again. 

The economist says the jobs recovery may also be stymied by the fact that growth in the economy is set to rebalance, away from consumption and government spending and towards investment and exports. This will be very beneficial for the long-term health of the UK economy but, especially in the short term, will mainly serve to boost capital- rather than labour-intensive sectors, notably manufacturing. By contrast, as the government both cuts its spending big time and raises VAT to help reduce the fiscal deficit, private sector firms reliant on public sector contracts and/ or consumer spending face a tougher business environment. So even if the figures for GDP growth look better than expected in the next few years, don’t bank on a jobs rush any time soon.

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