“Fiscal pain equals private-sector jobs gain”. This could be the coalition government’s policy-positive mantra for the age of austerity.

Despite now acknowledging that the big fiscal squeeze will cause massive public-sector job cuts, ministers expect the deficit reduction medicine to revive private-sector job creation so much that unemployment starts to fall almost immediately. Is this a realistic prospect, or naive optimism?

Optimists can point to employment forecasts from the recently established independent Office for Budget Responsibility (OBR). According to the OBR, the total number of people in work starts to rise next year (2011) and continues to rise through to 2015, resulting in a net gain in employment of 1.3 million between 2010 and 2015. Unemployment meanwhile peaks at 8.1 per cent in 2010 – just over 2.5 million – and then declines to 6.1 per cent (around 2 million) by 2015.

Given that the OBR’s forecast of net total employment growth of 1.3 million accounts for a net fall of 600,000 in public-sector employment, the forecast implies that the private sector will create 1.9 million jobs during the forecast period. This amounts to an average increase in private-sector employment of 1.6 per cent (roughly 380,000 jobs) per year.

Private-sector job creation of this magnitude would be a stretch but isn’t too far out of line with recent UK experience. The Thatcher jobs recovery in the 1980s, covering the period from the post-recession trough in employment through to the subsequent peak in employment in 1990, saw 2.97 million extra private-sector jobs created at an average rate of 2.1 per cent per year. The Major jobs recovery, following the early 1990s recession that, similar to now, coincided with a period of mass public-sector employment downsizing, saw 1.97 million extra private-sector jobs created at a rate of 1.7 per cent per year. The Blair-Brown era of job growth from 1997 and prior to the recession of 2008-9 saw 1.9 million extra private-sector jobs created, although at a relatively slow rate of 1 per cent per year.

Significantly, the faster periods of private-sector employment growth are associated with rapid rates of economic growth. What made the Thatcher jobs recovery so “jobs-rich” for the private sector was the impact of the inflationary Lawson boom in the late 1980s, which witnessed several years of unsustainably fast economic growth of above 4 per cent per annum. The pace of economic growth during the Major jobs recovery was slightly less frenetic but sadly equally unsustainable. The Blair-Brown years prior to the recession were by contrast somewhat quieter, with annual economic growth rates usually close to the 2.5 per cent consistent with mostly stable inflation. This was good for economic stability but meant a slower rate of private-sector job creation.

The key lesson to be drawn from this experience is that the UK economy needs to grow by at least 2.5 per cent per year in order to stimulate 1 per cent annual private-sector job growth. The OBR is forecasting faster growth than this in the next few years, so sees reasons to be cheerful. But the historical precedence suggests that economic growth in the next few years has only to be slightly weaker than the OBR’s forecast for the jobs outlook to appear a lot worse. Against the backdrop of massive public-sector job downsizing, it doesn’t require anything like a double-dip recession to result in a prolonged serious jobs deficit – merely economic growth in the range 2-2.5 per cent per annum rather than the above-trend growth rates the OBR expects.

Such a slightly weaker growth outcome – which many would actually consider a decent recovery given the various strong headwinds at present facing the UK economy – is easily as imaginable as the OBR’s central forecast.

The CIPD estimates that the rate of economic growth doesn’t hit 2.5 per cent until 2013, prior to which, against a backdrop of public-sector job cuts, private-sector job creation is too weak to prevent a net loss of 300,000 jobs to the economy as a whole. Stronger growth from 2013 then enables the economy to start adding jobs again with the level of employment by 2015 around 100,000 higher than in 2010. A welcome increase, but far less than the 1.3 million extra jobs the coalition government is hoping for.

In the CIPD scenario the unemployment rate rises from 8.1 per cent in 2010 to a peak of 9.5 per cent (2.95 million) in 2012, before falling to 8 per cent by 2015. This would leave unemployment still close to 2.5 million by 2015; meaning Britain faces at least half a decade of a prolonged serious jobs deficit. So will fiscal pain mean private-sector jobs gain? Yes, but probably not very much and certainly not any time soon.

Article contributed by John Philpott, Chief Economic Adviser, CIPD

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