Our jobs market is finally afloat – but low productivity threatens to sink it

If we can increase productivity, there is a decent hope that the next generation will have a better standard of living. If not, we'll have more than an economic problem to solve

Nearly three quarters of all people aged 16 to 24 are in work. However, productivity remains low by developed world standards (Getty)

The great job machine is running OK for the moment, more or less. When the Queen’s Speech fades into memory and the Brexit debate is settled one way or the other, there will still be the economy: jobs, work, investment, taxes and all that.

How that performs will determine our living standards and those of our children. Particularly our children, for the great question facing the entire developed world is whether the next generation will have higher living standards than the present one.

Today we had a snapshot of what is happening here in the labour market numbers. They show that the economy is reaching an inflexion point, in that we have used up most of the spare capacity left by the great recession.

Employment was at a record high, which is encouraging, and unemployment steady at 5.1 per cent. But the great burst of job growth of the past three or four years seems to be over. Employment is still creeping up, but it is not racing ahead as it was a year ago.

It may turn out this is a pause, with hiring slowing because of the introduction of the living wage and/or fears about Brexit. Uncertainty is always bad for business. Or it may, on the other hand, be an early warning of a more serious slowing in the economy. We don’t know.

Unemployment and employment data are backward-looking but, either way, they highlight the fact that from now on growth will come from two sources. One will be to increase the number at work, partly by persuading more people who are able to do some sort of work to do so, and partly by attracting more workers from abroad. The other is to increase the productivity of those in work. The slack is gone.

Nearly three-quarters – 74.2 per cent – of all people between the ages of 16 and 64 are in work, mostly in full-time jobs but many part-time and/or working for themselves. That is 30.4 million people.

Another 1.2 million people aged 65 or over are working as well. That is our highest-ever, higher than at the peak of the boom of 2002-2007.

But while it is towards the top of the global league table, it is not at the top of it. For example, Sweden and Norway are higher. So one question is whether we become more of a Scandinavian society, which encourages a greater proportion of women to be in paid work. But there are practical limits.

Most teens and early-20s are going to be in some form of education or training. And many people – men as well as women – will want to put more time into their families rather than their jobs.

Another source of additional workers is people beyond retirement age. That has been climbing over the past decade and will inevitably climb further as the state retirement age is nudged up. That most people in the private sector are not saving enough for their retirement should ensure a ready supply of older workers – from an economic view a rare silver lining in a looming storm cloud. But again there are limits. No one should wish for a society where people who desperately want to retire should be compelled to struggle on working.

Then there is inward migration. This is not the place to plunge into the Brexit debate. I would simply say that successful economies are magnets for people seeking jobs. Roughly half the additional jobs created since the recovery took hold have gone to non-nationals. Further, since there are many UK citizens born abroad, if you go by place of birth rather than nationality, the surge in employment by people born abroad is even more remarkable.

Over the past year employment by UK-born people rose by 94,000 to 26.25 million. Employment by non-UK-born people rose by 330,000 to 5.24 million.

The other source of additional growth is productivity. We have relatively low productivity by developed world standards, and it is climbing only slowly. A huge amount of work has been done to try to explain this, yet it remains a puzzle.

Part of the answer may be that the country made some sort of collective choice to share out the work available when the recession hit. Another is that the fall in output of financial services and the loss of the industry’s high-productivity jobs depressed the overall productivity of the country as a whole. Still another could be that the ready availability of labour from the rest of the EU reduced pressure on companies to get more out of the existing workforce. One particular industry where we have low productivity, construction, pulls down overall numbers too.

Finally, low unemployment is likely to result in lower productivity, because a strong job market sucks in people who would otherwise be without jobs. Having older people in work may depress the productivity numbers too.

But there is still a puzzle – and it won’t be resolved until the labour market tightens. That now may be happening, but if so, it has yet to show in the earnings numbers. The answer to the puzzle is of seismic importance.

If we can increase productivity, then there is a decent hope that the next generation will have a better standard of living than the present one. If not, well, there will not be just an economic problem, but a social and political one too.