Work and worklessness commentary - analysis of the trends

The employment rate in the UK reached its highest level on record, 73.5 per cent, for those aged 16–64 by the first quarter of 2015, although it is still below previous peaks when accounting for changing state pension ages.

Introduction: reaching full employment

Last year, the government also declared its commitment to full employment, and although it has not committed formally to a definition, it has suggested that the highest employment rate in the G7 might be an appropriate yardstick. In 2014, this was Germany with a 74 per cent employment rate. Full employment is essentially the idea that everyone who wants a job can get one, but there is no one way to measure this.

Employment rate

The graph above looks at the UK’s labour market performance on that basis by looking at the increase in employment that would be necessary to reach the highest rate in the G7 over time, along with several other measures of full employment. For the UK to have had the highest employment rate in the G7 in 2014, it would have needed another 780,000 people to be in employment, compared with the additional 1.4 million necessary in 2011. However, this is an unconventional measure of full employment – it could be achieved in theory by other countries doing badly rather than the UK doing well, and is not generally used by economists.

There are several other measures that could be used. One used by economists is the ‘NAIRU’, or ‘non-accelerating inflation rate of unemployment’ – the lowest the unemployment rate can go without generating increasing rates of inflation. On this measure, in 2014 the UK needed only 310,000 more people in employment to reach full employment. The NAIRU is hypothetical and cannot be estimated particularly accurately, however, and it also changes over time. The UK is also signed up to the Europe 2020 targets, which call for 75 per cent of 20–64-year-olds to be employed. The UK had already hit this target in 2014.

The final measure – the 80 per cent target – requires by far the most additional employment at 2.9 million more jobs. This has never been an official target but was considered an ‘ambition’ under the last Labour government.

It is clear that the UK has been moving back towards full employment in the last few years, regardless of definition. This chapter looks at the nature of employment in the UK and at some of the groups who have had different experiences of the recovery so far.

Choice of indicators

From a poverty perspective, there are three dimensions to work that are particularly important: the number of hours worked; the pay rate for those hours; and the distribution of work among households. This chapter contains indicators on these dimensions as well as others relating to disadvantage and the characteristics of those in work and out of work.

The first indicator looks at all of those who do not work as much as they would like – underemployment. This includes the unemployed, people who are economically inactive but would like to work, and those who are working part-time because they could not find full-time work.

The second indicator looks at insecure employment, which is work that is not guaranteed over time. This can be week to week, such as zero-hours contracts, or over a longer time such as temporary contracts. Another potentially insecure form of work is self-employment.

One important factor determining experience of the labour market is age, so this chapter looks at unemployment for different age groups. The effects of disadvantage can accumulate, so the chapter also looks at long-term unemployment. One group that faces substantial labour market disadvantage, is disabled people.

As they are both important for determining in-work poverty, there are also indicators on earnings and household work status. It is important to remember that those in and out of work are not two unchanging categories, so there is also an indicator on movement into and out of the labour market.

The map at the end of the chapter looks at how unemployment has changed across local authority areas in Great Britain compared with the period before the recession.

Commentary

The overarching story sketched out by this chapter is that the labour market, seven years on from the start of the recession, is recovering but is not quite as strong as it was in the mid-2000s. Although the headline employment rate is better, many broader indicators remain worse. The overall underemployment numbers and rate, the number of people taking temporary work because they cannot get permanent jobs, income from self-employment and real earnings, and the proportion of people entering work as low paid are all still worse than before the recession.

The government’s commitment to full employment is therefore welcome; full employment means better pay is easier to negotiate and temporary contracts can be refused. But strong labour demand is not enough on its own to combat low pay and precarious work.

Some of these problems reflect structural changes, and so will not disappear just because of a stronger labour market. For example, if there has been a structural shift towards lower-paid sectors or a shift towards self-employment, this will not necessarily change with a stronger labour market. Both require a government policy response: in the former case to ensure there are routes for pay progression (as indeed the government is investigating) and in the latter to ensure the self-employed have access to social security when needed and are providing for their retirement.

Another issue is that some problems are engrained in the labour market. There are groups such as young adults and disabled people who have fared worse than others for a long time. For example, the unemployment ratio for under-25s is three times higher than for older adults, and a large proportion of disabled people would like to work but do not. Increasing the conditionality for benefit receipt has been seen by the government as a solution but has diminishing marginal returns. More supportive active labour market policies should now be considered, and more fundamental changes to the pathways from education and training to work and the adjustments employers make are necessary.

There has so far been a strong recovery in employment numbers, which may be transforming into a recovery in earnings and productivity. But the possibility of another downturn both in the labour market and economy more widely has to be considered. If this happens, what will the government do differently to maintain full employment? This question needs an answer; there is no point committing to full employment only in the good times.

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