Jobless rate divides expert opinion

Unemployment can fall further from its current 17-year low without re-igniting inflation, according to some optimists about improvements in the jobs market. Not so, says a new report which claims the jobless rate has got as low as it can. Diane Coyle, Economics Editor, reports on the controversy.

Unemployment below the current rate of 7.1 per cent would be unsustainable, even though the threshold below which falls in joblessness trigger inflation has fallen in the past decade. The evidence for this claim, in a report published today by the Employment Policy Institute, will disappoint those who have argued that deregulation and flexibility in the jobs market have significantly reduced the "structural" unemployment rate.

With figures due today likely to show both the headline rate and the more reliable survey-based measure of unemployment still falling, the optimists will point to the fact that pay rises have remained low despite the tight jobs market. Economists expect average earnings growth to have picked up slightly, but it will remain at around 4.5 per cent despite the fact that unemployment has fallen to its lowest for 17 years.

The authors of the new report, Ray Barrell and Rebecca Riley of the National Institute of Economic and Social Research, say this is due mainly to the effect of the strong pound in keeping pay and price rises low. This, rather than a fundamental change in the structure of the jobs market, accounts for the surprisingly subdued wage growth, they say.

This is not to say that the sustainable unemployment rate has not fallen at all. Looking at long-term flows into and out of unemployment, the paper puts it at around 7 per cent now compared to 8-9 per cent during the 1980s.

The improvement is due mainly to an increase in the size of the skilled workforce since the late 1980s. The effort to get more young people into higher education has significantly increased the number of graduates entering the workforce - a conclusion that will cheer the present Government, which is also emphasising the importance of education and training.