Leading article: The worst could be yet to come

Beware the incomplete picture. The latest official figures from the Office for National Statistics show that unemployment fell to 2.47 million in the three months to May and the numbers in work rose by 160,000. We need to be mindful of what these headline statistics hide. The three months saw a rise of 148,000 in the number of people in part-time employment. The numbers in full-time jobs fell by 22,000. Some 27 per cent of workers are now in part-time jobs, the highest proportion since records began in 1992. And more people are not working short hours because they wanted to improve their work-life balance, but because this is all the employment they can get.

There are other malign patterns below the surface. The number of people in long-term unemployment (more than a year) has now breached three-quarters of a million. And youth unemployment is still devastatingly high: 707,000 18- to 24-year-olds are out of work. While this recession has been relatively mild for many, the social pain for those unfortunate enough to lack job security should not be underestimated.

But it is important to recognise, too, that the employment situation could have been worse. Even part-time work is better than no job at all. One of the main reasons unemployment has not hit the highs of previous recessions is that firms have taken a more enlightened approach in this downturn. Employers have made considerable efforts to retain workers though the hard times.

This has been helped by the decline in unionisation. In the past, it would probably have been impossible for employers and workers to reach the sort of compromises on short-working and wages that we have seen in recent years. Average pay rose by just 1.8 per cent year-on-year in May. That wage restraint might be painful for workers, especially as inflation remains stubbornly high, but it is helping to keep people in jobs.

It is instructive to compare Britain to the Eurozone, where labour markets are less flexible. Unemployment there has hit 10 per cent, compared with 7.8 per cent in Britain. And the British problems of youth unemployment and casual work are still more acute across the Channel.

Yet the outlook for UK unemployment is, nevertheless, grim. Large public sector redundancies are expected as the Government sets about cutting departmental budgets by between 25 and 40 per cent by the end of the Parliament. The Office for Budget responsibility has estimated that this fiscal squeeze is going to cost around 490,000 public sector jobs.

Public sector employers and unions should learn from the experience of the private sector in managing reduced budgets. Flexible working, reduced hours and, of course, wage restraint will help cushion the blow. But realism is necessary. A significant rise in jobless is still inevitable, even if the Government and the public service unions work together in complete harmony in the coming months and years.

And the hoarding of labour by firms in the recession could crimp job creation in the recovery. As orders return, firms will not need to hire to meet demand. So what was benign on the way down could prove malign on the way up. Economists are already fretting about a "jobless recovery".

What makes the situation still more ominous is that the Government has taken a gamble on heroic levels of job creation by the private sector over the coming years. The OBR has forecast that more private sector jobs will be created in the coming years, as confidence returns, than were created in the boom years of the past decade. The cuts to public spending will be unprecedented. But so too, we are told, will be the private sector recovery. We need to hope that this optimistic forecast is correct because otherwise Britain's unemployment nightmare could be only beginning.