Hamish McRae: It's a relief the jobs market is still strong. But tax rises mean it's crunch time in April

The great job machine continues to hum.

The great job machine continues to hum.

One of the astounding features of the current downturn in the world economy is the way in which, almost alone, the UK job market has continued to grow. True, the slowdown has been less marked in Britain than in most other developed countries and true too, there has been a surge in public sector hiring. But even allowing for these features, the resilience is surprising. Can it carry on? And what does this say about the changing nature of work?

The starting point is yesterday's labour market figures, which showed a small fall in unemployment. On the old claimant count measure it is now 3.1 per cent, while on the wider labour force survey it is 5.2 per cent. While serious pockets of unemployment remain in large parts of the country, in particular the South-east (the highest unemployment is in London), there is effectively no unemployment. For example, in much of the Thames valley unemployment is below 1 per cent.

Looking at the other side of the picture, at employment, you can see why. We have added nearly a quarter of a million jobs during the past year. Add in the self-employed and there were, in the August/
September period, 27,843,000 people in employment in Britain. That is the highest number ever. As you can see from the left-hand graph the growth in jobs has hardly slowed since the world economic downturn began towards the end of 2000.

Remember, too, that these are the official statistics for the number of people in work. Add in the people in the cash economy and the total would surely be higher.

One of the great social advances that has come from this strong job market has been the decline in the ranks of the long-term unemployed. The big change over the past decade has been the fall in the size of this group (middle graph). This pattern seems almost independent of political change; while the present government has sought to tackle this problem, the downward trend was well established beforehand. Without trying to downplay the efforts of the Government, strong overall job growth will, it seems, suck in the long-term jobless as well as workers in transition from one type of employment to another.

To anyone reading the reports of factory closures and job losses this huge growth in employment will seem a bit odd. That is partly the result of the way the media, particularly the broadcast media, report job losses as some kind of disaster, whereas they are a necessary and inevitable part of a vibrant economy. (If there were no job losses it would not be possible to staff the expanding industries.)

It is also partly the result of the unions, which can still command headlines by warning of redundancies. And it is partly the result of the continued downsizing of the manufacturing workforce.

Manufacturing employment is now down to 3.8 million against 5.7 million in finance and business services. Ten years ago the balance was more or less even: 4.5 million against 4.7 million.

To be sure, this shift is partly a result of outsourcing. One of the huge increases in employment has been in call centres. Ten years ago a large manufacturing company might have had its own call centre sorting out queries about its products; now it would probably outsource that. The function is the same but now the job is reclassified as a service industry job, not a manufacturing one.

But the shift is also a function of increases in productivity in manufacturing. For reasons that still are not really clear, it is easier to get increased productivity when you are making things than when you are offering services. The more productivity you get for any given level of output, the fewer people you need. The present pattern of jobs in Britain by category is shown in the pie chart on the right.

Now to those two questions about job growth noted above: can we keep it up and what does it say about the future pattern of employment?

The last few months show a continuing fall in employment in manufacturing (which you would expect as part of the long-term trend) and in finance and business services (which runs against the long-term trend). Job growth has come from the public sector and from the wide category of "distribution, hotels and catering", which means shops, pubs, hotels and the like.

Looking ahead, manufacturing jobs are going to go on falling. There is no question about that. Finance and business services will, I suspect, remain quite soft for a while. Anecdotally, while there has been some shedding of staff, a lot of financial service companies seem to have been postponing layoffs in the hope of an upturn. Now they are having to bite the bullet. But in other areas there will be growth ­ the upward trend will reassert itself eventually, but there may not be much growth until it is clear the recovery is secure.

Other sources of job growth? The public sector will carry on hiring because huge amounts of money are being thrown at an effort to improve its services. While the taps stay open the jobs will carry on. So until Gordon Brown suddenly discovers that he cannot tax or borrow more, or that he is throwing money into a black hole, the public sector will carry on hiring.

And the shops, pubs, etc? That will be a function of the retail boom. While consumption continues to grow at more than 4 per cent a year, expect the organisations that cope with that consumption to continue to increase their staffing levels. If it comes down to, say, 2 per cent, expect them to pause for breath. As the present growth in consumption is very dependent on equity take out ­ people borrowing against the security of their homes ­ to maintain their lifestyles, expect a slowdown. The rise in taxation in April will hit employment too.

My guess, for what it is worth, is that job growth overall will pause and that total employment will end up the year lower than it was when 2003 began.
As for the pattern of employment, in the private sector at least, expect more fragmentation. Large employers will carry on shedding labour while smaller ones will increase. Self-employment, on the official figures at least, has not changed much over the past decade ­ it has hovered between 3.0 and 3.3 million and is about 3.2 million now. But I would expect it to rise in the years ahead. It is plausible that in another decade there will be more people self-employed than there are in manufacturing.

Part-time working will continue to climb too ­ part of the general trend towards more flexible working conditions, but also part of the trend towards employing people near or past normal retirement age. For the moment the size of our workforce is still increasing but it won't go on once the post-war baby-boomers hit retirement age. Then part-time working will become even more necessary than it is now to sustain economic growth.

But that is in the future. For the moment, we should be relieved that the job market is still so strong ­ and keep our fingers crossed that it will remain when the tax rises hit in April. Things are fine now but that will be crunch time.