The spectre of large-scale unemployment is now haunting Britain. Since July 2024, the Office for National Statistics (ONS) has found that the number of unemployed people aged 16-64 has increased by 309,000. The unemployment rate, which now stands at 5.1%, has increased by a fifth since the last election, with one in 20 working age people now unemployed.

Looking under the bonnet, there are several factors that should be keeping Chancellor Rachel Reeves up at night.

Firstly, youth unemployment is rising. Since this time last year, it has gone up by 53,000, with one in seven young people not in work. We know historically that youth unemployment has significant negative long-term impacts. Research from the Learning and Work Institute during the pandemic found that being out of work can reduce employment potential and earning for young people for up to seven years. So if the UK does not get on top of this, the scarring effect of youth unemployment will be with us for some time.

Secondly, Britain is creating the wrong sort of jobs. Since June last year, over 115,000 jobs in public administration, health, care and education have been created. At the same time, 70,000 jobs in higher productivity sectors such as finance and professional services have disappeared. This is more than the 12,000 jobs lost in hospitality, which has dominated media coverage since the Budget. There is the risk, then, of having too many consumers and not enough producers.

A third factor is the rise of redundancies. There is always churn in the jobs market, but the number of workers being made redundant has nearly doubled since last year’s general election. Excluding the pandemic, redundancies are at their highest level since 2013. Some would say that a measure of creative destruction is necessary, but that only works if there is a clear plan to create new jobs.

It is hard to see what the current plan is. The House of Lords Communications and Digital Committee found that tech businesses, which the Government appears to be banking on, are struggling to scale up. This week it was announced that the US-UK Tech Prosperity Deal is being put on pause, which is hardly going to help. Sky-high energy costs are crippling British industry and over 40,000 manufacturing jobs have been lost since June last year. Where are the jobs of the future coming from?

The high structural unemployment of the Eighties was only solved through the mass creation of public-sector and low-paid work, with the number of national minimum wage jobs doubling since it was introduced in 1999. Britain simply cannot afford to repeat these tricks again.

There is an obvious solution, though. The Government needs to shift spending from subsidising consumption towards long-term public- and private-sector investment. The Chancellor appears to agree with this, and has said a great deal about record levels of capital investment; but looking at the figures, the shift is actually negligible. According to the Office for Budget Responsibility (OBR), Government capital investment is due to increase from 3.2% of GDP in 2023-24 to 3.3% by 2029-30. The private sector is not stepping up either, with business investment predicted to fall from 9.8% of GDP to 9.6% by the end of the parliament.

Avoiding structural unemployment, particularly for young people, will require difficult choices. Despite the focus in the run-up to the Budget on the two-child cap, more welfare spending will not make much difference to poverty if hundreds of thousands of people find themselves out of work. Spending needs to be reprioritised to help those areas most in need and where services can boost investment and employment. Regional development programmes, such as the UK Shared Prosperity Fund, will need to be restarted. Wage subsidies for those working in disadvantaged areas, particularly the young, need to be brought on stream.

The lesson from the Great Depression and the Eighties is that mass unemployment is a policy choice, not an inevitability. The longer we leave it, the more damaging that choice will become.

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Andrew O’Brien is the former Director of Policy at the think tank Demos and currently Head of Secretariat of the Independent Commission on Neighbourhoods. He writes in a personal capacity.

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