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New Deal is working, but not for everyone

The moral is - there is no such thing as complete success in jobs market policies
THE DEPARTURE of more than a quarter of a million people from the unemployment total since mid-1997, a decline that has continued steadily despite the pause in economic growth earlier this year, is without doubt one of the big success stories of government economic policy. The European Commission is the latest in a long line of authorities to have praised the New Deal and other jobs market measures.

However, 1.7 million people remain unemployed, on the international definition that they are looking for work and are available to work. And a further 17 million are "economically inactive" for reasons ranging from family responsibilities to sheer discouragement. The jobs market picture is more complicated than the headline jobless figures suggest.

The two aspects that are of greatest interest for policy purposes are the pace of job creation and the margin between unemployment and inactivity. Employment growth is a direct measure of the health of the jobs market, and shifts between formal unemployment and inactivity an indication of its pathologies.

The UK's recent performance on jobs growth has been impressive. Employment has reached the record level of 27.5 million, an increase of more than half a million in two years. Over a longer period, however, the UK has only been about half way up the international league table. A working paper from the International Monetary Fund* puts the British rate of jobs growth, 0.42 per cent a year on average over the years 1980-1997, at number 13 out of 21 OECD countries.

There are various possible explanations for differences in performance between countries. Some countries have seen rapid job creation because their working age population has grown fast, others because the pace of output growth has been high.

Taking account of these, however, leaves two interesting observations. One is that a group of non-European economies, especially the US, has completely outclassed Europe on the jobs front. The other is that within Europe, the Netherlands has done unexpectedly well in creating jobs.

Addressing the first of these points, the authors find a statistically important link between a high tax burden and strong job protection laws on the one hand and low jobs growth on the other, which is suggestive for economic policy.

As for the Netherlands, it finds that half the job creation can be accounted for by part-time jobs taken by women. No other European country has seem the same growth in part-time work. Most part-timers like it that way, so this growth is a plus for the economy.

But a new book** co-edited by one of the Treasury's economic advisers points out that the shift from unemployment to work is only one aspect of the performance of the jobs market. The other is the shift between unemployment and inactivity. A chapter by Paul Gregg and Jonathan Wadsworth shows that an increase in non-participation has flattered the decline in unemployment since 1993.

Not only has the number of inactive working-age people risen, the composition has changed dramatically. Women's participation rates have climbed sharply, while men's have declined. This decline has been more pronounced among the over-50s and is certainly concentrated amongst the unskilled. But no section of the male population has escaped increased inactivity. Meanwhile, most of the rise of 900,000 in female employment since 1993 has drawn previously inactive women into the workforce.

The reasons people give for quitting the jobs market altogether vary widely too. For women, it is overwhelmingly because they are caring for home and family, although older women are more likely to blame sickness. For men in all age groups sickness is blamed - suggesting claiming sickness benefit is indeed, as controversially alleged, a cover story for long- term unemployment. There is more support for this in the fact that the higher a region's unemployment rate, the higher its male inactivity rate too.

Further evidence for the different types of "inactivity" is that people who are classed as "seeking work, unable to start" actually do often find work within three months. There is clearly a hierarchy of ease with which the unemployed and inactive can make the transition into work, with those unemployed for more than a year and the "discouraged" component of the "inactive" at the bottom.

The moral is that there is no such thing as a complete success in jobs market policies. Except, perhaps, in the US, which has sucked into the jobs market the increase in the US-born working age population, its immigrants, many of its formerly inactive workers and still has unemployment at just a little over 4 per cent. The IMF's verdict is: "The United States experience is confirmed as an employment miracle." The UK still has some way to go.


* Deconstructing Job Creation by Pietro Garibaldi and Paolo Mauro, August 1999. Available at http://www.imf.org/

** The State of Working Britain, ed Paul Gregg and Jonathan Wadsworth, Manchester University Press, pounds 14.99.