The inside story: Waving or drowning?

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Considering the state of the UK economy, the figures for employment appear to present a paradox. While GDP has fallen by around 4 percent since the start of the slump in early 2008, employment is down by less than 1 percent over the same timescale. And the latest official figures show that employment has actually increased over recent months. What is going on? How can the economy have flat-lined, while employment seems to be holding up?

If we look behind the headline figures, we'll see that a number of factors are involved. Together they point to the conclusion that the labour market is nowhere near as healthy as it seems.

The latest headline figures for employment show that it increased in the three months to June by 0.4 percent to just below 29.5 million, or 71 percent of the workforce. The same figures show unemployment falling to over 2.5 million, or 8 percent. Economic inactivity, or the proportion of people remaining out of the workforce because they are sick, studying or looking after relatives, is also down.

So far so good, it would seem. But the increase in employment is almost entirely due to a rise in the proportion of people working part-time on the one hand, and the numbers reporting that they are "self-employed" on the other. Significantly, most of the growth in part-time work is among people who say they would prefer to be working full-time hours, and are only part-time out of necessity. In fact, the latest figures on this, from the Labour Force Survey, show that the numbers working part-time who would prefer full-time employment have reached a new high, especially among men.

Meanwhile, long-term and youth unemployment continues to rise. And the main factor behind falling economic inactivity appears to be women returning to the workforce in order to try and make ends meet, or staying in it longer, due to the rise in the statutory pension age for women. But they are not necessarily finding work, and if they do, it is more likely to be part-time or temporary, at least for the moment.

But given the slump in economic output, why hasn't unemployment increased by more? When the recession hit, the number of full-time jobs fell rapidly from around 22 million to just over 21 million. And the figure has more or less remained there. But some of the slack has been taken up by a rapid rise in the (much smaller) number of part-time jobs, which went from 7.5 to 8 million.

The timing of the latest employment figures means they almost certainly reflect the impact of the Olympics on London and the south east, with many of the resulting jobs part-time or temporary. Indeed, the figures for the same period show unemployment increasing in other areas, particularly the Midlands and Yorkshire.

However, a debate is taking place among economists over what might be going on overall. Some point to so-called "labour hoarding", or the retention by firms of staff during a recession. The argument here is that this has been made possible by weak earnings growth, making it cheaper for employers to retain skilled staff. Perhaps, though the same situation might have resulted even if real-terms earnings growth was stronger. But there is no doubt that many employers are controlling costs by attacking pay and conditions, and not just in the public sector.

The other string to this argument is that the piles of cash that many large firms are sitting on have put them in a better position to retain staff. Again this might be right, but a reluctance to invest has also meant that few full-time, permanent jobs are being advertised.

Many new jobs are part-time or temporary, via agencies, with loopholes in the regulations governing agency work giving many employers a chance to circumvent the provisions for "equality of treatment" of agency staff.

One big question is whether the current picture might persist. If the recession worsens, large-scale redundancies are more likely and unemployment will almost certainly rise. But the remote prospect of recovery poses another question: will "irregular" forms of employment like part-time and temporary work continue to flourish at the expense of full-time, permanent employment?

During the early 1990s recession, this looked like what was happening. But once the economy recovered, the situation was reversed. That's still the most likely outcome this time, but the circumstances for it seem like a long way off.