Don't be fooled – it's no phantom recession

With jobless figures falling, some might question whether the country really is in such an economic mess, but Julian Knight has no doubt

So the UK is technically in recession but unemployment is falling, 7,000 in the three months to July. These two facts seem mutually exclusive. In fact, ever since the UK economy – according to the Office for National Statistics (ONS) – really started to go off the rails at the back end of last year, the percentage of people employed in the economy has gone up rather than down, and that trend is accelerating.

In the three months to July, for instance, 71.2 per cent of people of working age had a job, up 0.5 per cent on the quarter. That may not sound like much, but it represents 236,000 extra people in work.

On the face of it, as far as jobs are concerned this could be called a phantom recession. But that, of course, is far too simplistic, if not downright wrong. Tell the people of Yorkshire, where the unemployment rate leapt by 23,000 to 10 per cent of the workforce, for instance, that this a phantom recession, and you will no doubt get a typically forthright Yorkshire response. Or tell the people of Margate, where 38 per cent of shops are shut, that this recession isn't so bad because the jobless figures say so.

So what on earth is going on? The answer to this has been perplexing many observers for months – even prompting some to doubt the validity of the ONS UK growth figures. We can be fairly sure of the jobless figures, but the ONS growth figures are estimates and prone to revision. Ergo, believe only the employment data, so the argument seems to go. But a year since the return to work started, a clearer picture is emerging of what is actually going on, and in many ways it's at least as pernicious and damaging as the usual story of economy goes into recession and jobs are lost.

Of the 431,000 jobs created by the UK economy in the past year, a whopping 318,000 are part-time. This has pluses and minuses. Firstly, part-time work tends to favour the inclusion of women in the workforce, which will help to offset some of the damage done by the shrinkage in public-sector employment, which disproportionately hits women. Unemployment among women actually fell 16,000 in the three months to the end of July, despite the dire warnings heard pre-austerity. But undoubtedly full and part-time, higher-paid, public-sector jobs are being replaced in large part by part-time, lower-paid, private-sector employment. A fair trade-off if you believe the public sector chokes economic growth in the private, but not from a simple which-job-pays-best perspective.

Self-employment, it seems, is becoming de rigueur in our economy: with only 86,000 new jobs created being actually employed, this reflects people moving from employment with a legal safety net to no safety net whatsoever. Risk is being shifted from employers to the "employee", through the recruitment of people as self-employed contractors, to be dispensed with if necessary in a nanosecond. And not forgetting, as ever with the UK economy, there is a hefty North/South divide, with the South benefiting from the Olympics and the sheer economic pull of London, whereas in parts of the North and West of the UK the slow haemorrhage of full-time jobs, which started decades ago, continues.

This "race to the bottom" in the job market is highly damaging, according to Heiner Flassbeck, a former German deputy finance minister who is now chief economist at the United Nations Conference on Trade and Development (UNCTAD): "The UK and other Western economies are actually suffering due to flexible labour markets rather than benefiting. Wages are not rising and the shift in work from full to part-time means many consumers don't have the same disposable income. Our economies depend on consumption, and this isn't coming about because of the suppression of wages by the working of the labour market."

Currently wages are rising at 1.5 per cent, about half as fast as prices, so those lucky enough to get a raise are probably still poorer in real terms.

The UK is, according to Mr Flassbeck and UNCTAD, in a catch-22 situation: low wages, combined with growth of part-time rather than full-time work is keeping income growth down, and with it economic expansion. Just keeping your head above water or muddling through is no way to grow the economy, and the buoyant employment figures are a symptom rather than a counterbalance of this general economic malaise.

But this view loses sight of a fundamental truth, according to Philip Shaw, an economist at Investec: "If we didn't have a flexible labour market, then we wouldn't be producing any jobs. What's worse: people being economically inactive and a drain on the state, or people in work even if it is part-time and temporary?"

Whether the jobs being produced are the "right" sort of jobs matters little. What matters is that jobs are being produced at all.

"Companies are also not shedding staff as they have done in previous recessions, partly because they believe that better times will come, and they know that sacking too many people could mean expensive rehiring down the road. In return for this forbearance, since 2008 employees have been accepting zero or small pay increases. This will be a familiar tale to most workers," Mr Shaw added.

It means older workers are keeping their jobs in higher numbers than during previous recessions, which saw the private and particularly the public sector lose more experienced staff. But youth unemployment – the scourge of many Western economies – remains stubbornly high, as over a million 18 to 24-year-olds out are of work.

"This is where the danger lies. If you don't bring younger staff into the workplace then it erodes the skill base and productivity over the long term."

But it's not as simple, as some have suggested, that older workers are in effect bed-blocking the younger generation: "Younger and older workers occupy different places in the labour market, and you can't simply replace one with another and solve youth unemployment," Mr Shaw said.

And the recent rise in self-employed, part-time roles is itself temporary. For one, the end of the Olympics will bring thousands of lay-offs – this is no phantom recession, just a little more difficult to pin down.