Published on 6 Apr 2012 Sections

Job creation alone ‘will not solve unemployment’

The UK creates over five million jobs every year, but only boosting demand for labour will get the unemployed into jobs, economist Jonathan Portes tells the Channel 4 Jobs Report.

There are about 2.7 million unemployed people in the UK. But there are only about 480,000 job vacancies. So we’re missing more than two million jobs, right? If we could only create those two million more jobs, the problem would be solved.

Wrong. In fact, in an average year – even in a recession – more than three million people who previously didn’t have a job get one. Almost as many change jobs. So although the number of job vacancies at any one time may be less than half a million, over the year probably five to six million people start a “new” job. The UK labour market is very dynamic – people are moving in and out of jobs all the time, even in the middle of a recession. Almost 300,000 people left Jobseekers’ Allowance last month, most of them to start a job; of course, at the same time, slightly more than that signed on.

Reducing unemployment by a million is not so much about “creating” an extra million jobs; it is about ensuring that an extra million people are in jobs that they are qualified to do and that employers want to pay them to do.

So what the problem? Why is unemployment more than a million higher than it was four years ago?

The best way to think about this is in terms of demand and supply. The number of people in jobs – and hence the number of unemployed people – is determined by both labour supply (the skills, qualifications, and motivation of workers and potential workers, and the operation of the benefit system) and labour demand (whether employers need workers with particular skills, qualifications, and motivation at the market wage).

Read more: What the latest jobs figures mean for the UK

Skills fail to meet employer’s demand

The UK’s current unemployment problem is a combination of both of supply and demand side factors. The supply side of the UK labour market had been steadily improving for decades, with a much more skilled workforce, and considerable improvements in the way the benefit system helped people into jobs.

In 2004, the unemployment rate fell to the lowest level in 30 years. However, beginning then – and well before the recession – we saw a small but steady rise in youth unemployment. We don’t know exactly why, but it seems likely that – for young people who were not going on to university – their skills matched less and less what employers wanted.

Shortfall of labour demand

So youth unemployment was a problem even before the recession. But now, in addition to this problem on the supply side, we are also experiencing a severe shortfall of labour demand. Employers are not creating jobs at the rate needed to reduce the overall level of unemployment. And this, in turn, is because employers don’t think that there will be demand from other businesses and households for their goods and services.

So this has nothing much to do with the unemployed or indeed the labour market at all; it is simply a shortage of aggregate demand.

The challenge is not to “create jobs” per se; it is mostly to get the economy growing again at a sufficient pace to reduce unemployment.
Nor is the problem mostly the direct impact of public sector job losses. Lots of jobs are being lost in the public sector; but if the overall economy was healthy enough, this would not in itself be a problem. Normal turnover rates, as we have seen above, are more than enough to soak up a few hundred thousand former public sector workers over the course of a year or two.

The fundamental problem on the demand side is the lack of growth.

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Government is ‘not going far enough’

What should the government do? Reducing unemployment by a million is not so much about “creating” an extra million jobs; it is about ensuring that an extra million people are in jobs that they are qualified to do and that employers want to pay them to do. And there is plenty that could be done.

In the short term, most of the problem is employers’ unwillingness to hire; that is, on the demand side. This in turn is the consequence of the government’s decision to cut the deficit much faster than is necessary or economically sensible.

It is not too late to change course to recognise these realities: the government should take action to boost demand in ways which would create jobs: three things that it could do quickly and easily are to cut National Insurance contributions for the low-paid, invest in infrastructure, and subsidise house-building.

Reducing unemployment by a million is not so much about “creating” an extra million jobs; it is about ensuring that an extra million people are in jobs that they are qualified to do and that employers want to pay them to do.

At the same time, action is also needed to address the youth unemployment problem, both now and for the longer term. The independent commission on youth unemployment made a number of recommendations, centring around better preparation and motivation for work; high quality options for progression; and clear accountability for outcomes.

Both the government’s Youth Contract and Labour’s ‘Real Jobs Guarantee’ offer subsidised jobs for young people, which is a step in the right direction; although I argue here that even Labour’s somewhat more ambitious proposal doesn’t go nearly far enough.

The damage done by persistent high unemployment is huge. In 1925, Winston Churchill expressed his dismay that policymakers seemed to be “perfectly happy with the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed”.

There is no need for us to make the same mistake.

Jonathan Portes is director of the National Institute of Economic and Social Research (NIESR).