Hamish McRae: How can we give Britons the right skills to compete for jobs in Britain?

Economic View

There was a curious juxtaposition last week of two stories.

One was about population growth. In the middle of 2010 this was estimated at 62,262,000 people, up 470,000 from the previous year, the largest increase since 1962. Of that increase, roughly half came from "natural change", the difference between the numbers of births and deaths, with the rest coming from net inward migration.

The other story came from Iain Duncan Smith, the Work and Pensions Secretary, who called on British companies to give priority to British workers rather than foreign ones. The actual wording was more nuanced than generally reported – he said, for example: "We also need an immigration system that gives the unemployed a level playing field" – but what gave the IDS message particular bite was the statistic unearthed by Frank Field, the Labour MP, that 87 per cent of the 400,000 net jobs created since the coalition came to power a year ago have gone to workers from abroad.

The message, in a nutshell, is that the UK remains a reasonably vibrant economy, at least by European standards, with a generally rising population and a remarkably strong job market, but that many people in the indigenous workforce seem unable to take advantage of the new job opportunities.

There have been a number of predictable responses to all this, which fall into two groups. One starts with the idea that we have to try and restrict inward migration. Tricky, since much of that comes from the EU; and damaging, since employers want to recruit as widely as possible. Far better, they would argue, to have foreign workers come here than to ship the whole business offshore to where the workers are.

The other line of debate starts with the proposition that we must look into why foreign workers seem able to out-gun locals in the job market. You would imagine someone living in a country, speaking the language and understanding the customs would have a better chance of getting a job than someone from another country. If this is not the case, we need to figure out why: what is the mixture of soft and hard skills that the locals lack? After doing that, we will be in a position to see what might be done.

That is where the debates are, and I think most of us would be happier if the emphasis were more on the second group than the first. But there are other even bigger socio-economic issues here that have hardly been discussed, and are worth flagging up.

One is what is likely to happen to the size of the UK economy over the next 30 or so years. Obviously the larger the economy, the better able we will be to cope with the debts that we have recently allowed to build up. If the population goes on growing, the size of the workforce is more likely to go on growing too.

The small graph on the right shows some projections done before this recent assessment of the size of the population last year, and thus now probably understates the likely growth. But even on these, the UK population is expected to rise to 70 million by 2028 and the latest estimates suggest we might hit that somewhat earlier. Looking slightly further ahead, it is quite possible that the UK will become the most populous European country some time around 2040.

That is a long way off and a lot can happen meanwhile. But just as the political dynamics of China passing the US in terms of the size of its economy precede the event, if the UK were clearly on the path to having the largest European population – and conceivable becoming the largest economy – that would change Europe's political scene. Imagine the largest European economy not using the euro, assuming the latter still existed.

The second thought is about job creation and unemployment. The large chart shows what has happened to unemployment levels in the US, UK, France, Germany, and the eurozone as a whole. As you can see, the UK managed to get down to US levels of unemployment during the 1990s and held those levels through to 2008.

Unlike the US and the eurozone, Britain has managed to level off at around 8 per cent and is now below that. Only Germany among the large economies has done better.

You can understand how the UK was a magnet for inward migration during that long period when unemployment was coming down, as indeed was the US. You can understand that Germany is now attracting foreign labour as the excellence of its exporters is driving down unemployment there. And you can see the wider eurozone as a whole is not and has not been a strong job market even in the boom years. At its very best, eurozone unemployment only dipped a little below that of the UK at its worst.

So you have to ask: why has so much of the Continent been bad at creating jobs for a long time and why is the US bad at creating jobs now? On the face of it, the two labour markets would seem to be quite different, with much greater social protection on the Continent and quite different policy responses to the recession.

Two different systems deliver equally poor results. I think we know why Europe does not find it easy to reduce unemployment: if it is expensive to shed labour you try not to take on people if at all possible. But why is US unemployment so persistently high and might this trim the flow of inward migrants into the States?

The final thought worth flagging up is the puzzle of the UK experience. Why do people chose to come to the UK from the rest of Europe and elsewhere? Why does the UK seem to be able to create jobs? Or does that last question really apply to just part of the UK, London and the South-east? If so, what must we do to keep that region an attractive place to live and work? I saw a statistic the other day that suggested London was the third largest retail market in the world, after New York and Tokyo. Is that right?

I have no pat answers to these questions, but I know that in the answers will lie clues to the nature of competitive advantage in the modern world; and that is hugely important.

It's been disappointing, the first half of the year. Will the second be any better?

A year of two halves? There can be little doubt that the first six months have been disappointing. They have certainly been so for the UK, with the principal high point being the decent growth in employment despite slow growth.

But they have not been uplifting in much of Europe, with Ireland and Portugal still on life support and Greece – well, we will have to see how that pans out but we are not through this at all.

And growth has been disappointing elsewhere, with Germany the only bright spot, and France, Spain and Italy all bringing in austerity programmes. Oh, yes: and the ECB will increase interest rates again this week.

News from the US has been discouraging too: not just the slowish growth and the stagnant housing market (important, as a huge wodge of mortgage debt is below the value of the homes) but also the seeming inability of the Administration and Congress to agree on fiscal policy. It is not impossible there will be a technical default by the US in the next six weeks if an increase in the debt ceiling is not lifted. Not good.

As for the emerging world, well, growth has continued strongly in China and India, while China seems to be orchestrating successfully a needed slowdown. But that does not really help the developed world, for, Germany apart, most countries' exports to the emerging world are not large enough to sustain overall growth.

So you then have to ask whether the second half of the year will be better. My instinct is that it will eventually be so but we will not know until the big imponderables – the Greek default or non-default and the US budget – are settled.

But given the stuff thrown at share markets, they have been remarkably resilient. So they are signalling a continuing recovery: maybe an early-cycle pause, but nothing worse. Keep your fingers crossed they are right.