Outlook: Job gains could easily be undone

THE THINGS that matter to people, as opposed to economists, are jobs and purchasing power. For much of the past 20 years, they have had a raw deal on both in the UK. It is only in the past three or four years that a return to low inflation has seemed within our grasp, while until just recently, the unemployment rate has been above 5 per cent since mid- 1980.

Initial attempts to squeeze inflation out of the economy turned out to carry a high cost in terms of jobs. In any case, to the extent that inflation was tamed by the damaging recession of the early 1980s, it was all thrown away again in the late 1980s boom. Policy mistakes allowed inflationary pressures to rebuild. These errors are not so long ago that they have yet faded in the memory, and for the time being, policy makers are determined not to repeat them. Inflation has not returned since the early 1990s recession. The experiment of inflation targeting has so far been an impressive success.

That hasn't stopped critics claiming that the policy obsession with beating inflation comes at too high a cost to jobs. Labour came to power staking an enormous amount of political capital on the New Deal as a means of reducing unemployment while keeping inflation low.

The combination of these active measures to get hard-to-employ people into jobs with the legacy from the Tories of a flexible jobs market now looks as though it might at last be doing the trick. Just as in the US, the unemployment rate has fallen below the figure most experts thought would trigger wage inflation, yet there is scant sign of inflationary pressure. The mix of inflation and unemployment - the misery index - is the most favourable in nearly 20 years because that trade-off seems to have improved.

Even so, successful management of the economy requires eternal vigilance. The Bank of England has been doing its bit by cutting interest rates pretty fast. The Government must continue its good work on the structure of the jobs market. This means not only pressing on with the New Deal, but also safeguarding the flexibility of the labour market. Policies like the minimum wage, working time directive and Working Families Tax Credit have started to nibble away at that. There is a difficult balance between safeguarding employees and over-regulating employers, and the Government must tread carefully if it wants the good news on the jobs front to continue.