Is the British jobs miracle fake news? The old rules of economics don't seem to apply any more

The old rules don’t apply any more. Not to economics. For a decade we’ve had low — sometimes negative — interest rates, without inflation. That’s not supposed to happen. In Britain, we’ve had years of sluggish growth, but rampant job creation. That’s not supposed to happen either. But it has.

The impossible economy we’re living in ought to be a matter of intense public debate; but, for reasons I explore here, our attention is focused elsewhere. Fortunately, not everyone’s forgotten the economy: a thought-provoking new report from the Resolution Foundation aims to explain the jobs ‘miracle’.

Let’s start with the facts. Employment levels didn’t just recover after the deepest recession in living memory: they’ve gone on to exceed the high point before the crash when we were supposedly at full employment. As the report sets out, there are three million more people in work now than in 2008 and the employment rate is three percentage points higher.

The authors (Torsten Bell and Laura Gardiner) point out that this has happened in the face of some pretty strong “headwinds” — not only slow growth, but also the demographic greying of the population. Then there was the impact of austerity, in which public sector employment fell (the jobs miracle is thus a private sector jobs miracle).

One might also add the growing ease with which employers can offshore production, not to mention the onward march of automation. Indeed, this is an era in which pundits breathlessly predict wholesale replacement of the human workforce with robots. They may be proved right — eventually; but thank goodness for authors like Bell and Gardiner, who attend to things that are happening on a relevant timescale.

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How, then, do they explain the great surge in (human) employment? Their argument can be summed up in two words — income shock:

“…real working-age incomes are today only 4 per cent above their pre-crisis levels, rather than the 28 per cent growth we might reasonably have expected.”

It is said this has been the worst decade for wage growth in over 200 years. That’s debatable, but undoubtedly it’s right up there with the 1910s and 1940s, when there were world wars on.

As the authors put it, “we’re a lot poorer than we expected to be” and to compensate for this, they argue, households are working more. If that’s the case, then we’d expect the employment surge to be especially strong in households that (a) have non-employed adults free to enter paid work and (b) a limited capacity to cut their spending. The report shows that this is exactly what’s happened in respect to single parents and “coupled women with children”.

Rival explanations are not such a good fit with the data. In particular, the UK labour market, while pretty flexible compared to a lot of other countries, did not become significantly more flexible over the course of this decade. In the early days of the Cameron premiership there was a move to weaken workers’ rights — but, thankfully, it was defeated. Indeed subsequent reforms have placed employers under heavier obligations — especially the National Living Wage and the Apprenticeship Levy.

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But what about welfare reform? Might that be a better explanation for the rise in employment than wage stagnation? The report shows that the phasing-in of Universal Credit comes too late in the decade to explain the bulk of the jobs boom. However, the authors do concede that other welfare changes — like the squeeze on benefits and the increasing use of sanctions — have done a lot to push people into work.

Meanwhile, increases in the minimum wage and National Living Wage have acted as a pull factor. The same could be said for the raising of the income tax personal allowance, which was £6,475 in 2009/10 and £12,500 in 2019/20 does provide reassurance that work pays and people won’t be penalised for coming off welfare.

Political rhetoric matters too. Both before and after the recession, governments have pushed pro-work, anti-welfare messages (not least because they’re consistently popular with the public). Tony Blair appealed to “hard working families”, Gordon Brown promised “British jobs for British workers” and the Coalition Government championed the cause of “alarm clock Britain” (i.e. that part of the population that gets up early in the morning to go to work, while their non-working neighbours are still in bed).

As the report itself makes clear, the employment surge is concentrated among lower income groups, who also saw stronger earnings growth than the rest of the population. So while the authors make a strong case for the income shock hypothesis, they under-emphasise the role of welfare-to-work policies.

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There’s something else that the report could have said more about — which is where all those extra jobs came from. Wage stagnation and welfare cuts may have created additional demand for work, but that doesn’t guarantee that employers will supply it.

Over this decade, we’ve seen some severe income shocks in other parts of Europe — but no jobs miracles. It’s not that the Greeks, for instance, lack the British desire to work. Indeed, the country has suffered a devastating drain of youth and talent, with almost half a million Greeks leaving the country in search of employment abroad.

If the mere demand for work created jobs we wouldn’t have had three million unemployed in this county during the 1980s, let alone the devastating joblessness of the Great Depression. An especially interesting feature of the jobs boom in this decade is just how widespread it is. It isn’t just limited to London and the South East — in fact, as Bell and Gardiner point out, the “least jobs rich subregions of the country (Merseyside, the West Midlands metro area and South Yorkshire) have all experienced growth during 2008-18 around twice as fast as the average.” Evidently, the “Northern Powerhouse” and “Midlands Engine” are more than just words.

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One thing is for sure, the British economy is capable of creating and filling jobs to an extent not previously thought possible. Which brings us to the report’s key recommendation, which is that our leaders need to wake up to the new economic realities.

Full employment — i.e. the point at which demand for labour starts outstripping supply — is structurally much higher than it used to be. The risk of the economy overheating through runaway wage inflation is correspondingly lower. Indeed, the greater risk is of the economy falling short of the point at which the labour market is just tight enough to encourage healthy wage growth — plus the investment in productivity that is the ultimate guarantee of our future prosperity.

If we’d woken up to the new realities earlier, then, as Bell and Gardiner say, this would have “supported running a looser macroeconomic policy in years gone by.” Macroeconomic policy has monetary and fiscal components, which if loosened would mean lower interest rates and more government borrowing (to fund spending and/or tax cuts). In theory, this would have stimulated the demand that could have meant more growth and higher wages over the last ten years.

In practice, though, it’s hard to imagine how monetary policy could have been any looser since the crash. Interest rates have stayed on the floor, banks have been bailed out and we’ve had repeated doses of quantitative easing. As for government spending, there’s an argument to be made that the restoration of fiscal discipline helped give businesses the confidence to start hiring again. On the other hand, cutting capital spending on infrastructure and other investments in productivity was an obvious own goal.

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Ultimately, the most important debate isn’t over how best to set the macroeconomic ‘temperature controls’ of the nation, but about what sort of an economy we want. Obviously, we want enough jobs for everybody who needs one. But quality matters as well as quantity. A good job offers more than subsistence. It must also hold out the prospect of a brighter future, as well as providing dignity and fulfilment in the present.

Instead of organising UK economic policy around access to a limitless supply of cheap labour, the priorities need to be reordered around investment in people and the communities they live in. Therefore we should be open to global talent, but not use immigration as a tool for suppressing wages; rather than weakening workers’ rights, we should strengthen their preparation for the world of work; and instead of funding transport links that facilitate outsourcing, we should concentrate on local infrastructure that boosts the competitiveness of domestic supply chains and thus the market power of British workers.

As we draw to the close of an extraordinary decade, it’s time to choose a better future. A bargain basement Britain of low wages, low skills and poor prospects is not a good enough – no matter how hard we work.

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