UK closes its six year ‘jobs gap’ – wage gap widens to eight per cent and could take another seven years to recover

The latest rise in the employment rate means that the proportion of working age people in work across the UK is the same as its pre-downturn rate, ending the country’s six year ‘jobs gap’, the Resolution Foundation said today (Wednesday) in response to the latest ONS labour market statistics.

However, continuing employment growth is running alongside further falls in real wages, with the gap between current earnings and their pre-downturn level widening to 7.8 per cent.

Regular pay of £452 per week in August 2014 is 7.8 per cent lower than the pre-crisis (August 2007) rate of £490 per week (measured against CPI inflation). To give a sense of the scale of the recovery required just to return to this point the Resolution Foundation has considered two hypothetical scenarios. Even if wages were to start growing on an year-on-year basis at one per cent in real terms from next month (rather than falling by 0.4 per cent as is currently the case), average regular pay wouldn’t get back to its pre-crisis peak until late 2021 – a 14 year gap.

Under an even more optimistic scenario, in which growth immediately reached two per cent in real terms (a strong level of wage growth by historic standards), the point of recovery would arrive sometime in 2018.

The UK employment rate for 16-64 year olds is currently 73.0 per cent – the same as it was on the eve of the downturn in May 2008 (73.0 per cent), signalling that the UK’s six year jobs gap has finally closed. However, the job markets in six regions across the UK still have ground to make up to return to their pre-downturn position.

While the employment rate in London is now 2.3 per cent higher than May 2008, the employment rate in the South East is still 2.0 per cent below its pre-downturn level, and the employment rate in the West Midlands is still 1.9 per cent below its pre-downturn level.   Wales, Northern Ireland, Scotland and the South West still have ‘jobs gaps’ to close too.

With employment rates increasing throughout the UK over the last two years, the Resolution Foundation expects most of these regions and nations to close their remaining ‘jobs gaps’ in the coming months.

The Resolution Foundation points out that with people living and working longer, it is also important to consider the employment rates of everyone aged 16 and above (as well as the 16-64 year old measure that is typically used).  At 59.5 per cent, the 16+ employment rate is still short of its pre-downturn level of 60.4 per cent. An additional 430,000 jobs are needed to close the ‘jobs gap’ for the UK’s expanding and ageing workforce.

However, today’s weak wage figures serve as a reminder that whilst the economy is very good at creating jobs, it is struggling to create the high-quality, high-wage ones that are needed to raise people’s incomes and improve productivity.

Regular pay (excluding bonuses) grew by only 0.9 per cent year-on-year in the three months to August while total pay (including bonuses) grew by 0.7 per cent. CPI inflation for the corresponding period was 1.5 per cent.

The latest fall in inflation announced yesterday (CPI fell to 1.2 per cent in September) should ease the squeeze on earnings in next month’s figures but we shouldn’t rely on falling inflation alone to get wages rising in real terms again, says the Resolution Foundation.

Matthew Whittaker, Chief Economist at the Resolution Foundation, said:

“After six years it’s very good news that the UK’s ‘jobs gap’ has closed, with the proportion of people in work today beating its pre-recession level. This isn’t just about London as areas like the North East have also performed very well. But employment rates in some other parts of the UK like the West Midlands look less strong.

“This year was supposed to be the year of the pay rise – so far all we’ve seen are further declines.  Lower inflation may ease the squeeze on workers but anaemic wage growth together with below target inflation is not the kind of recovery that people want, and is not what the economy needs either.

“With the OBR warning this week that rising employment is failing to raise the tax take as much as hoped, it’s clear both quantity and quality are needed when it comes to creating new jobs. More high-quality jobs paying decent wages would obviously benefit working people, but it will boost growth, raise productivity and help tackle the deficit too.”

1. The Resolution Foundation has tracked the ‘jobs gap’ – the difference between the current employment rate and its level in May 2008 – over the last six years. You can track progress in recovering pre-downturn employment rates in each region and nation of the UK with an interactive graphic available at http://www.resolutionfoundation.org/regional-employment-gap
2. While the 16-64 employment rate has now returned to its pre-downturn level when measuring to one decimal point (73.0 per cent), as is common practice, it still lags slightly when measured at a greater level of detail: the employment rate in March-May 2008 was 73.02 per cent, while the latest employment rate for Jun-Aug 2014 is 72.98 per cent. This means that there technically still remains a very small ‘jobs gap’, with 20,000 additional people in work are required for the gap to close fully.
3. While the ‘jobs gap’ – the ground lost during the recession – is closed, the 16-64 employment rate is still short of its all-time peak of 73.2 per cent, achieved back in December-February 2005.
4. The Resolution Foundation’s jobs gap for all workers aged 16 and over has been revised due to the 2011 census. It has fallen from a higher peak (60.4 per cent rather than 60.3 per cent) in May 2008, creating a bigger jobs gap of 430,000.
5. Next Tuesday (21 October) the Resolution Foundation is launching a new project looking at the future of the labour market. It will be launched with new analysis and an event featuring a keynote presentation from Professor John Van Reenen, Director of the Centre for Economic Performance at the London School of Economics. Further information about the event is available at http://www.resolutionfoundation.org/events/bigger-stronger-riskier-poorer-understanding-the-new-post-crisis-labour-market

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For more information contact:

Rob Holdsworth (Director of Communications) on 020 3372 2959 or 07921 236 972

Natalie Cox (Communications Officer) on 020 3372 2955 or 07983 550 337