No Mystery in Britain's Job Growth

The rise in British employment is one of the statistical mysteries of our time: in the 3m to August, the number of jobs rose by 212k qoq, with 162k new employees and a further 35k newly self-employed.  Moreover, the number of those economically inactive also fell by 138k during the same period. As the chart shows, this means that the number of British jobs is now 84k now than at the pre-crisis peak of early 2008.

Quite often, surprise improvements in unemployment rates can be traced to strange movements in the denominator. Not in this case: the improvement looks quite genuine. But the improvement is in stark contrast to two things: first, GDP data which tells us the British economy is currently 3.8% smaller than it was at its pre-crisis peak. Second, it is also a great contrast to what is happening in the Eurozone, where in 2Q employment levels had fallen by 4m, or 2.7% from early 1Q2008 levels, with no sign of recovery.

In fact, the divergence between GDP and employment may be less surprising than it immediately seems. Certainly, if all the data is correct, it implies an erosion in labour productivity. However, once real output per worker is discounted by changes in capital per worker, it becomes clear that declining real labour productivity  has been the norm since at least 1998, and that, after steep cyclical productivity declines in 2008/09, current productivity levels have simply recovered to the (falling) 1998-2008 trendline.  The sharp rise in employment since 2010 ran alongside the recovery back to that (falling) trendline. From here on in, we should expect 'normal' employment patterns to be resumed.