Labour's employment miracle rolls on - but for how long?

News Analysis: Record numbers are in work but the Government wants to do even better

TWO YEARS on from its landslide election victory and the Government can boast a labour market that a Tory administration should die for. More people are in work than at any time in recorded history. The number claiming benefit, at 4.3 per cent, is the lowest since May 1980 while even the more prudent Labour Force Survey shows a drop to 6 per cent - the lowest since records began in 1984.

But can it continue? Can it cope with the implementation of a whole series of reforms to the labour market aimed at bringing new workers into the market and ensuring their rights are protected once they find a job?

Tomorrow sees the official launch of the Working Families Tax Credit, which replaces Family Credit and is aimed at guaranteeing a minimum income of pounds 10,000 a year for families or lone parents. It follows hard on the heels of the National Minimum Wage and the New Deal, while a host of measures are in the pipeline, spearheaded by the Employment Relations Act which will bring in maternity leave, parental leave and trade union recognition.

The Government's New Deal programme - a thoroughly Old Labour idea of taxing rich companies to fund a subsidised jobs scheme - has put more than 100,000 long-term unemployed into work.

More importantly, this influx of new people into the jobs market has not been accompanied by spiralling wage inflation. A tight labour market should lead to employers hiking wages to find and retain staff, while unit costs rise productivity falls correspondingly.

Productivity and unit costs have held up and the Bank of England is not too concerned, according to its latest inflation report. Wages are falling according to all surveys except the official one, which recorded a 5.2 per cent rise for June and which some economists things was erratic. In fact the Bank has lowered its forecasts for earnings growth saying that, on balance, unemployment may be able to fall further than previously thought without triggering inflation.

The Minimum Wage has also been absorbed by the economy, at least according to the latest report by Incomes Data Services that found little marked increase in earnings growth because of the Minimum Wage. According to David Hillier, an economist with Barclays Capital, New Deal is reducing the claimant count by 6,000 a month, implying that demand for labour is "higher than anyone could have dared to have hoped for at this stage. Part of the reason for that is the improved flexibility of the labour market. The structural changes mean the slowdown in activity over the last year may not be followed by a noticeable crease in unemployment."

Or in the words of DeAnne Julius, the leading "dove" on the Monetary Policy Committee, the UK has moved away from the model "where pressures of the labour market would allow wage increases which would in turn develop into price pressures."

This is music to the Treasury, which believes the old argument that there was only a fixed number of jobs in the economy has been shown to be a fallacy. Officials concede the current economic climate has been ideal to launch these initiatives. But they insist the moves would be successful in any case because they are targeted at a specific group of people - those who would work but were discouraged by the pitifully small extra income from working as opposed to claiming benefits.

The WFTC is the cornerstone of Chancellor Gordon Brown's root-and-branch reform of the tax benefit system and the latest weapon in his self-proclaimed mission to modernise the British economy.

When it comes into operation on 5 October, it aims to take 500,000 working families out of the tax and benefit system entirely. Significantly, it will aggregate top-up income support and child-care costs into the pay packet rather than forcing claimants to queue for hours at the Post Office or dole office. The removal of this stigma should improve the current take-up rate of 70 per cent for Family Credit.

The Treasury has pointedly refused to say how many new jobs WFTC would create but independent estimates vary from 40,000 to 100,000, which on recent figures is the equivalent to just seven or eight months worth of claimant count falls.

While the labour market should be able to absorb this, there are two key hazards. The first - and also the main reason for opposition from business organisations - is that the regulatory burden will discourage them taking on more people.

In the words of Mark Sharman, principal policy adviser at the British Chambers of Commerce: "It is employers' perception that they will be confronted with a library full of paperwork that would push them over the edge that prevents them taking on people."

John Cridland, director of human resource policy at the Confederation of British Industry, said: "Our members do not criticise what the Government is trying to achieve, but the result is that they will have a considerably greater administrative burden. They will have to employ an additional person to deal with the administration."

He said that the extra holiday entitlement from the Working Time Directive, for instance, raised the question whether employers would be able to afford to take on extra staff to cover the extra leave.

According to the Institute of Directors, for a small business with between one and four employees the marginal pay roll costs of an extra employee are pounds 280, while for large companies with a human resources department they are just pounds 5.

The other concern is that as more and more workers are brought into the workforce - often with minimal training and workplace experience - overall productivity rates are likely to fall. Barclays' David Hillier said there was a danger of the labour market sucking in increasingly less efficient workers. But he said productivity overall was a success story for the UK economy and its greater use of part-time employment made its labour market more flexible.

Stephen Bell, chief economist at Deutsche Bank, added: "The fact that they are young, inexperienced, low productivity people in low wage jobs means that it does not feature in the big picture - apart, of course, from helping public expenditure."