The Queen's Speech: full employment and productivity - do the numbers add up?

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29 May 2015

NigelMeagerNigel Meager

As confirmed in Wednesday’s Queen’s Speech, the new government’s plans include a move to ‘full employment’ during the five years of the next parliament. There has long been a debate about how full employment should be defined: should it be an economy in which there’s a job for everyone who wants one, and is prepared to look for one? Or should it be linked to other economic measures – commonly inflation is mentioned here (many economists suggest that full employment is the lowest rate of unemployment compatible with non-accelerating inflation, for example)? The new Full Employment and Welfare Benefits Bill sidesteps these arcane discussions by the clever wheeze of defining full-employment as two million extra jobs, a number apparently plucked from the air. In another part of the briefing documents on the Bill, full employment seems to be defined as the ‘highest employment rate in the G7’ (but what if all the other G7 countries are nowhere near full employment?).

Putting these quibbles aside, and taking the two million extra jobs on its own terms, it’s worth asking how this target squares with another worthy objective attached to the Queen’s speech – that of doing something about the dire productivity performance of the UK economy. As the Treasury’s briefing document correctly notes ‘Improving the productivity of our country is the route to raising standards of living for everyone in this country. Fixing the UK’s long-running productivity weakness is one of the government’s biggest challenges over the next five years.’

However, as we pointed out a couple of weeks ago when commenting on the positive employment figures from ONS, addressing this productivity weakness won’t be an easy task. And more importantly there’s a serious question as to whether driving up labour productivity is even remotely compatible with the two million extra jobs target. We need to remember that the Office of Budget Responsibility (OBR) is currently forecasting an average rate of GDP growth of around 2.4 per cent a year over the next five years. Let’s assume that the OBR is right and that GDP does grow at around this rate. Let’s also assume that the government is successful in creating two million extra jobs. And if those new jobs are broadly similar to those of the existing workforce (ie they’re not mainly part-time jobs, or not mainly very long-hours jobs), then any recovery in labour productivity (GDP per hour worked) over the next five years will be negligible. Indeed, under these assumptions labour productivity would be 25 per cent lower than if the economy had remained on the productivity trend that we experienced in the years before the recession in 2008. The productivity gap with our major competitors would have widened, not narrowed.

Under some plausible scenarios, the story is even worse. For example, if the continuing economic recovery is associated with a growth in long working hours, overtime and the like (as a result of skills shortages, already being reported in some sectors), then getting to two million extra jobs implies an even worse productivity trend, with dire implications for living standards.

How we should close the productivity gap is a matter for some debate and depends on how far it reflects long-standing supply-side weaknesses (in skills and industrial investment), and how far it’s also a demand-side phenomenon, which will at least partly right itself as economic growth continues.  The underlying point remains from the basic arithmetic however. These two targets from the Queen’s Speech – much faster productivity growth and two million more jobs - are both highly desirable in their own right (even if the latter doesn’t really justify the epithet ‘full employment’). It’s not at all clear that the government can have it both ways, though. Whatever the source of the productivity gap, if we are to close it, we will either need much faster GDP growth than any forecasters are currently predicting, or we will have to accept an increase in employment well below the government target of two million.