Resolution Foundation: UK Economy Will Celebrate New High of Employment

When the latest set of labour market statistics come out this morning, we will almost certainly be celebrating a new high for UK employment.

The number of people in work passed its pre-recession peak of 29.6 million in the summer of 2012; since then records have tumbled on a regular basis, with the total standing some 600,000 higher in the three months ending November 2013. Yet, beneath this incontrovertibly good news there is much to make us pause for reflection.

First, while the absolute number in work is up, so too is the size of the adult population. As such, the employment rate among those aged 16 and over remains some way below its pre-recession level, leaving a 'jobs gap' of around 650,000. The gap has narrowed over the past 24 months and the OBR's projections suggest the picture will continue to improve in the coming years, yet full recovery is expected to remain some way off even by the end of its forecast horizon in 2019.

Secondly, self-employment is accounting for an ever larger share of the growth in employment. Of the record increase in jobs recorded in the three months to November 2013, the self-employed accounted for just over half. Indeed, the self-employment share of all work has been rising steadily since the early-2000s and now stands at 14.4%, a series high. But as this share has risen, so too have earnings crashed among the self-employed. The implication is that we are not experiencing a new wave of entrepreneurialism, but rather the growth of odd-jobbing and insecure working.

The suspicion persists that prospective workers are coming under pressure to enter into 'false' self-employment both from employers – who might wish to cut their tax liabilities and circumnavigate certain employment entitlements such as holiday pay – and from job centre advisers – who might promote a shift into self-employment as a means of securing eligibility for tax credits while saving on the paperwork associated with churn into and out of temporary jobs.

Thirdly, the level of under-employment remains elevated. While the average number of hours being worked each week has increased fairly steadily since 2010, so too has the average number of desired hours. While this is likely to be due in part to an attempt to compensate for the wider cost of living squeeze, the Bank of England judges that the equilibrium level of desired hours will remain raised for some time to come.

Taken together, these factors point to continued slack in the labour market – equivalent to somewhere between 1% and 1.5% of GDP according to Bank of England estimates. Yet perhaps the real kicker in today's statistics will once again be found in the wage growth data. After accounting for inflation, the average weekly earnings measure has fallen in 21 of the last 22 quarters, leaving pay 8.4% below its pre-recession peak. Employers' surveys suggest that pay settlements will improve only marginally in 2014; wages might stop falling, but they are not expected to recover especially quickly. And outcomes will of course vary across workers. Indeed, the Resolution Foundation has projected that median pay among full-time male employees will remain 5% below its pre-recession level even by 2018, perhaps only recovering its previous level by 2022: a pause of 14 years.

All of this matters not just for individual workers, but for the shape of the economic recovery itself. While the pace of GDP growth over the past year has been impressive, it has rested overwhelmingly on household consumption, underpinned not by income growth in the here and now but by anticipation of improvements to come. This has the inevitable and hopefully short-term implication that households are funding spending by lowering their savings rate, a scenario that cannot continue indefinitely. Business investment is expected to rebound, but consumption will remain central to the pace of growth in the coming months. The short-to medium-term prospects for wages and, by association, household incomes are therefore central to the sustainability of the recovery.

There will be much to applaud in today's statistics and it is clear that the UK economy is moving in the right direction once again. But the path back to the pre-recession norm is set to be a long one. Without sustained improvement in wages, the recovery may yet run out of road.

Matthew Whittaker is senior economist at the think tank the Resolution Foundation