Britain's employment and productivity puzzle

My column in last week's Times was on the rise in employment, reforms to welfare and the productivity puzzle in Britain:

Successful innovations are sometimes low-tech: corrugated iron, for example, or the word “OK”. In this vein, as Iain Duncan Smith will say in a speech today in South London, a single piece of paper seems to be making quite a difference to Britain’s unemployment problem. It’s called the “claimant commitment” and it has been rolling out to job centres since October last year; by the end of this month it will be universal.

The claimant commitment is really a contract between an unemployed person and his or her “work coach” at Jobcentre Plus, though government lawyers refused to let it be called a “contract”. It turns out that requiring people to sign a paper that commits them to certain actions — such as producing a CV, or checking regularly for jobs — has had an instant effect.

Some people walk out, not wanting to perjure themselves about cash-in-hand jobs they already have. Others get serious about looking for work: evidence suggests that the introduction of the claimant commitment has doubled the number of job searches people do.

Work coaches also take their responsibilities more seriously after signing the paper. And when they “sanction” a delinquent client by withholding benefits, they can point to the commitment: “You agreed to do these things and you haven’t.” Usually such sanctions have to happen only once and the lesson is learnt. Mr Duncan Smith’s hope is that unemployed people should think they have a job like anybody else — the job being to find work — and an employer like anybody else: the boss being the work coach.

It’s too soon to credit the claimant contract for much impact, but Britain’s employment statistics grow ever more startling. Considering the length and depth of the recession, the rise in unemployment was smaller and the subsequent fall faster than almost every expert expected. After years of economic pain, economic inactivity and the number of workless households should be at stubbornly high levels. In fact, they are at record low levels. Total employment is at record high levels.

This is all the more surprising when seen in an international context. Not only are most eurozone countries, outside Germany, stuck with high unemployment, the United States, usually such a fast generator of jobs, seems to be experiencing a disappointingly jobless recovery, with labour-force participation at a level not seen since Jimmy Carter was president. In the past year Britain’s employment rate has grown faster than those of Germany, France, Canada, Italy, the United States and the G7 as a whole. Some of the American pioneers of “workfare” reforms that began in Wisconsin in the 1990s are beginning to say that Britain is ahead of them.

Seen from a local angle, too, Britain’s employment picture is surprising. The North East of England, where I live, depends heavily on public sector employment, a shrinking category. Yet unemployment in the North East, while still much higher than in the South East, is falling. The region is a long way from booming, but it has surprised everybody by not busting. The country as a whole has added 1.7 million private sector jobs and lost 382,000 public sector jobs since the election.

However, if employment has been more buoyant than economic growth suggests then productivity must be stagnant or falling, which in the long run is bad news for prosperity. There are plenty of explanations floating around for this “productivity puzzle”, among them that in the uncertain years of 2011-2013, the private sector was reluctant to invest its growing cash pile in new machinery. Another possibility, popular in the Treasury, is that output is being systematically underestimated because so much of it is now online.

My preferred explanation is that 2 per cent growth while the public sector is shrinking is a heck of a lot faster than 2 per cent growth while the public sector was growing, as it was in the mid-2000s: some of that growth was actually increased public spending.

I remember complaining to a Bank of England grandee in the Noughties that the growth of the public sector in the North East was starving the private sector of talent; employers were complaining that people would not apply for jobs in private companies, preferring to wait for better paid, better pensioned ones within Leviathan. She said the Bank had the opposite problem — unable to hire good people because they all wanted to work for Goldman Sachs. (We were, of course, both right, in different regions.)

There does seem to be something peculiarly job-ful about our current recovery and maybe it does reflect the welfare reforms. It is getting harder to ignore the argument that this Government is a great deal better than the last one at getting people off welfare and into work. Mr Duncan Smith likes to point out that under Blair-Brown, in times of boom, 1.4 million people spent most of the last decade on out-of-work benefits. They cannot all have been unable to find work.

The Labour Party is running out of ways to see the employment glass as half empty. It can no longer claim that the work being created is all part-time jobs: full-time employment is up 430,000 in a year. It can no longer emphasise long-term unemployment and youth unemployment, which are both falling.

It can say that there’s a long way to go before Britain’s unemployment rate is anything like as low as Germany’s, and it can say that many people are on low wages. Better that, says IDS, than out of the habit of work altogether; and most people do not stay long on low wages, but progress relatively fast to better pay. Universal Credit, while much delayed by computer snafus, is starting to roll out and promises to help people over the benefits chasm where the rewards for working slightly longer hours are virtually nil.

Labour also points to the growth of food banks as evidence that welfare reform is hitting poor families. But the OECD’s recent “social indicators” survey found that the percentage of families saying they cannot afford food is lower today in Britain than it was in 2007 and is the lowest in all 24 countries of the OECD survey.

No Labour government has ever left office with unemployment lower than when it started, despite the name of the party. The coalition, for all its faults, will almost certainly avoid this ignominious fate.