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Ian Brinkley
Economic Advisor
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Ian Brinkley

The budget and the labour market

Authors: Ian Brinkley

16 March 2016

Employment – still growing but we are at the peak
The OBR forecast tells us that employment growth will continue, but a reduced rate compared with the previous five years. The economy is expected to create about 900,000 jobs between 2015 and 2020, with most of the growth coming from employee employment. This is rather less than the 2 million jobs that were being suggested might be achievable before the last Election. Average earnings growth also picks up slowly, from around 2.3 per cent to 3.6 per cent over the same period.

However, on other indicators, we have already hit the peak – unemployment is expected to fall a little more in the short term but then returns to its 2015 average by 2020. The employment rate (the share of the population aged 16 or more in work) and the participation rate (the share of the population aged 16 or more either in work or actively looking for work) are both expected to fall slightly.

 
Labour market indicators
2015
 2020  Change
Employment (millions)
 31.2 32.1 +0.9
 Unemployment (millions)  1.8 1.8 -
Employment rate (%)  60.0 59.9 -0.1
Participation rate (%)  63.4 63.3 -0.1
Unemployment rate (%)  5.3 5.3 -
Average earnings growth (%) 2.3
3.6 +1.3

The OBR also makes a projection for public sector employment, but in the absence of effective manpower planning for the public sector as a whole all the OBR can do is produce a top down guess. Employment might fall by about 200,000 comparing 2015-16 with 2020-21, which is in line with the previous guess.

Productivity – an even bigger challenge than we thought
The OBR has consistently forecast that productivity growth will return to the long run historical average of 2.2 per cent. That assumption has now been dropped, and it is now assumed that productivity will eventually return to a rate of 2 per cent in 2019. In any one year the revision is not huge, but over the whole forecast period productivity growth is now expected to be significantly weaker than previously expected. Between 2016 and 2020 productivity growth is now assumed to be 1.8 per cent on average per annum.
Even this forecast is fraught with uncertainty. As the OBR points out, as we still do not have a full explanation of why productivity growth slumped after 2008 it is therefore hard to say when or even if a recovery will take place within the forecast period. Unless we see a pick up in productivity growth over the next year or so we can expect further downward revisions.
The productivity problem therefore remains a major and immediate challenge for policy makers, employers and employees. As we commented in an earlier blog, the Government’s Productivity Plan does not offer an entirely convincing response. The Budget commitments made to long term infrastructure investment are welcome, but are unlikely to have a material impact before 2020. The devolution deals are also welcome, but the evidence for a direct link between greater devolution and productivity growth is hardly overwhelming and the scale of resources being transferred is unlikely to have much impact on national performance.
As we have argued before, an important part of the response must be to influence what is happening in the workplace. The recent Acas initiative developing a set of productivity enhancing tools for use by business and workers is a useful first step. We may also gain some further insights from the business leaders report on productivity from Sir Charlie Mayfield later this year. Bringing these and other initiatives together in a Productivity Plan for the Workplace would help put more flesh on the bones of the Government’s overall Productivity Plan.
Brexit and the labour market
The OBR was instructed by the Government to assume unchanged policy on whether Britain remains part of the EU, so it makes no formal assessment of the economic impact. However, the OBR points to the widespread view that there would be a significant period of economic uncertainty which could impact adversely on investment and trade. They also point out that some studies suggest the full long term economic impacts – whether good or bad – are likely to take some time to show up and are also likely to be influenced by the trading arrangements negotiated if the UK were to exit the EU.
There is no consideration of what might happen to the labour market and the participation rate if exit were also accompanied by a rapid decline of net working age migrants. The OBR forecasts already assume some fall in net migration and this together with population ageing is assumed to reduce the participation rate somewhat as shown in the table above. A bigger than expected fall in working age migration could, all things being equal, therefore cause a bigger fall in the participation and employment rates and reduce growth forecasts even more.
The working age employment rate for nationals from the EU27 is just over 79 per cent, and 83 per cent among the EUA8 (which includes workers from Poland). The working age employment rate among UK nationals is just over 72 per cent. In principle, a fall in working age net migration from the EU could be offset by increased participation among the rest of the current population not already in the workforce. However, the participation rate is already at an historic high and unemployment in much of the country is very low and in many critical areas it is not obvious that there would be sufficient UK nationals currently outside the labour market with the right skills to fill the gaps.