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If the UK is in Recession, How Come Employment is Increasing So Rapidly?

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The latest employment figures, published today, do little to resolve the conundrum over the UK's unusual combination of strong employment growth and no economic growth.

Over the last year, real GDP has fallen by 0.5%, while employment has increased by 510,000 (and private sector employment by 824,000).

The conundrum is not quite as great as the raw data suggest. For a start, GDP in the latest quarter was affected by the extra bank holiday for the Queen's jubilee. Without that, real GDP would probably have been roughly unchanged over the last year. And private sector employment growth was boosted by 196,000 thanks to the reclassification of FE and 6th form colleges; underlying private sector jobs growth was 'only' 628,000.

The puzzle diminishes further when we dig into the details of the employment data. Over half the increase in employment over the last year is accounted for by the self-employed, unpaid family members and people on government work schemes. The number of employees over this period has increased by 241,000. Furthermore, while the number of part-time employees increased by 195,000, the number of full-time employees was up by just 46,000.

Many of the newly self-employed may be earning very little: perhaps they have despaired of finding employment as an employee and so are trying self-employment as a last resort. Part-time workers obviously earn less than full-time workers. And for those in full-time employment, average earnings increased by just 1.7% over the last year - below the rate of inflation. The buoyant employment numbers may mask a much gloomier picture for household incomes; and it is incomes not employment that drive demand and growth in the economy.

Strong employment growth has been accompanied by falls in unemployment in recent months. These are welcome, though the total is still over 2.5 million - down 50,000 on a year ago but up 73,000 over the last two years. There is also a lot of 'hidden unemployment' in the UK: over 1.4 million part-time workers who say that are willing to work full-time; 649,000 temporary workers who would prefer full-time work; and probably a significant number of self-employed people who would prefer to be in employment.

The labour market is therefore far less buoyant than implied by the overall figures for private sector employment.