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Ian Brinkley
Economic Advisor
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Ian Brinkley

The Chancellor's full employment challenge

Authors: Ian Brinkley

31 March 2014

The Chancellor made an important announcement today committing the government to 'Full Employment to Britain'. He said that there was no reason why the UK could not have the highest employment rate of the world’s leading economies and to have more people working than the G7 economies. This is a very welcome ambition.

Historical comparisons with the 1950s, 1960s, and 1970s suggest an ILO unemployment rate of around 4 per cent would be close to full employment. The closest we came since the 1970s was just before the financial crash, when unemployment was just over 5 per cent. 
The previous Labour government defined full employment as the highest number of people in work possible and the Chancellor also focuses on employment and makes a specific comparison against the G7 economies.

There is some progress to be made to meet the Chancellor’s target. The ONS monthly press release shows employment rates published for the EU countries by Eurostat and by national statistical offices for other G7 economies. These show that the UK’s employment rate is lower than in Canada, Japan, and Germany but higher than in the United States, France and Italy. 

The OBR is forecasting the economy will generate another 1.5 million jobs between now and 2018 with unemployment falling to 5.4 per cent. However, we can also expect the high employment economies of the G7 to grow as well, so the UK will have to go even faster in order to catch up.
However, the Chancellor is quite right to say that there is no inherent reason why the UK cannot move towards higher employment rates. The big worry in the past was always that low unemployment would create inflationary pressures. The experience over the decade before the crash has been encouraging, with little or no inflation coming out of the labour market despite unemployment falling to low levels. We are in far more danger of a house price boom or an oil price shock setting off inflation than excessive wage demands.

Having made the commitment, it is of course important that the Chancellor is held to account. Will the existing policy mix deliver these commendable ambitions?
We, first of all, need a sustained recovery and that means combining the good employment record with faster productivity growth. Making a reality of the Government’s innovation and growth strategy will be crucial for the longer term. But equally importantly are the policies which act on those parts of the labour market than will otherwise see little benefit from the general expansion.

The first area of challenge is around two groups – the young who disproportionately make up the unemployed and the “economically inactive” of working age who say they would like a job. Youth unemployment rates are falling as the recovery takes hold, but we know from previous experience that there is a structural problem that will keep youth unemployment above the adult rate. Many of the inactive who would like to work have long term medical conditions or caring responsibilities that limit participation.

The second challenge is people who either do not have the right skills for the jobs that are available – and the recovery, so far, has been heavily skewed towards higher skills jobs – or who lack basic skills such as numeracy, literacy and problem solving. The recent OECD skills report shows the UK is better than the United States, France, and Italy; roughly the same as Canada; and worse than Germany and Japan. However, significant improvements need to be made in both increasing the demand for skills and ensuring high quality opportunities are provided for those who can benefit the most from them – typically the disadvantaged and those with low skills.

The third challenge is geographical – many areas of the economy have still to see a recovery. The danger is that growth and employment will pile up in the Greater South East and other economic hotspots in the Midlands and the North. Strong regional and housing policies that help local economies make the best of what they have, attract new industries, and make it easier for people to move to where the jobs are will all be required.

The Chancellor deserves praise for making such a firm public commitment to such a key policy objective. The jury is however still out on whether the mix of policies he outlined in his speech will together deliver both sustained growth and tackle the structural challenges outlined above. Only by doing both will he succeed in moving the UK to the G7 top spot for employment.