From the TUC

How much good news in the “jobs without growth” conundrum?

20 Jun 2011, by in Labour market

The latest official figures showing that the number of people working in the UK private sector jumped by more than half a million in the year to March is clearly welcome. Admittedly the good news is tempered by the loss of well over 100,000 public sector jobs during the same period. But the overall rise in employment is nonetheless remarkable for an economy experiencing a fragile recovery from a harrowing recession and starting to feel the impact of unprecedented fiscal austerity.

This poses something of a conundrum. We’re familiar with the phenomenon of jobless growth – as characterised by the ongoing recovery in the United States – but the UK economy is at present demonstrating the polar opposite by creating jobs without growth. How can this be?

Assuming the most recent Office for National Statistics estimates of GDP are correct and that total output has been broadly flat since last autumn, more people in work implies a slump in labour productivity and upward pressure on unit labour costs. Employers are presumably willing to tolerate this because price inflation is far outstripping pay rises. Regular pay (i.e. excluding bonuses) is rising at an underlying annual average rate of around 2% against a corresponding 5% rise in the average cost of living. The downside of this gets a lot of attention. Downward pressure on workers’ real pay means less is spent in the shopping malls, thereby depressing demand and growth in the economy. But muted real pay at least has the effect of reducing the temptation for hard pressed businesses to seek to cut labour costs by shedding jobs.

Just as pay freezes and pay cuts protected jobs in the recession against a backdrop of falling living costs, which helped preserve workers’ real incomes, the current real pay squeeze is helping our stagnant economy support employment.  Consequently there has to date been no pick-up in redundancies in the private sector with the result that even relatively modest rates of hiring have been able to boost job levels.

If this pattern continues the pain of muted economic growth is likely to be observed as a widespread and ongoing squeeze on real living standards rather than a further sharp rise in unemployment, though with the full impact of cuts in public spending and tax hikes still to be felt it seems likely that the jobless rate will start to rise again later this year, especially if as I suspect the loss of public sector jobs proves to be considerably larger than the Office for Budget Responsibility is forecasting.

While ‘jobs without growth’ is welcome, it does not therefore represent unqualified good news. Most trade unionists will doubtless have mixed feelings about the justice of having to accept an implicit trade-off between jobs and real living standards resulting from an economic crisis caused by the failure of the global financial system. In this respect one must hope the coalition government will not stick rigidly to its existing tax and spending plans were further weakness in the economy to make the trade-off facing the UK workforce even more severe.

GUEST POST: John Philpott is Chief Economic Adviser at the Chartered Institute of Personnel and Development (CIPD). Between 1987 and prior to joining the CIPD in 2000 he was Director of the Employment Policy Institute (EPI) an independent think tank.