We've no right to gloat over jobless figures

Economics

THE CONTRAST between falling unemployment in Britain and the rising jobless count in Europe has unsurprisingly been seized upon by a Tory government in trouble. Indeed, Gillian Shephard, Secretary of State for Education and Employment, trumpeted Britain's relative success in a speech only last week.

Rest assured, this is just the opening shot. Ministers are gearing up to exploit the April jobs summit of the Group of Seven leading industrial countries for all its worth. They will do their utmost to turn the conference in Lille into a platform for their electoral battle cry: Britain as the enterprise centre of Europe. Whatever their motives, Ms Shephard and Chancellor Kenneth Clarke will be able to present a strong case when they meet their G7 counterparts in France.

The controversial reforms that have put employers in the driving seat, bringing a US-style flexibility to the labour market, are enabling Britain to do better on the jobs front than the rest of Europe. The tide is turning against the more rigid employment structures there, which have been sustained by continuing union power and a political commitment to social partnership.

But if the Tories' message of success on unemployment rings hollow, it won't just be because of the unpalatable social consequences, like a drastic increase in income inequality. There's another reason: the UK's achievement on jobs isn't all it's cracked up to be. Britain may now be doing better than its European neighbours, but it still isn't doing that well.

On the face of it, the divergence is certainly striking. An unexpectedly large fall of almost 30,000 in UK unemployment in January came hard on a 59,000 rise in Germany that took unemployment to levels not seen since the dying days of the Weimar Republic. The UK decline was the 29th month running the jobless count had fallen. By contrast, Germany saw its sixth consecutive monthly increase.

Using internationally comparable figures, the emerging gap between UK and European performance is still starker. As the chart shows, Britain's unemployment rate used to be higher than the European average. Now it is some two-and-a-half percentage points less than the 11 per cent rate prevailing in the European Union.

The pay-off from the flexible labour market has been most apparent in the economy's response to the fall in the pound in the 1990s.

In the past, depreciation never paid off. Initial competitive gains for exporters and home producers were quickly dissipated as unions pushed up wages to compensate for rising prices. This was a principal reason why hard currency countries like Germany found they could live with rising exchange rates. Time and again, depreciating neighbours threw away their initial advantage.

But this self-defeating wage-price spiral in the UK has been conspicuous by its absence in the past three years. No less a figure than the director general of the Confederation of British Industry has even dared to read its obituary. Yet Adair Turner's judgement last month, for which he received unwarranted flak, was essentially correct.

Last year, for example, a 6 per cent fall in the pound and a 10 per cent rise in import prices did not provoke the sleeping dragon of wage inflation. The growth in the wage and salary bill last year of just over 3 per cent was less than retail price inflation. So in real terms earnings fell.

In stark contrast, Germany's system of wage determination through industry- wide collective bargaining has caught employers in a vice. This model used to be thought superior to the Anglo-Saxon decentralised system because it allowed for a co-ordinated response to changes in economic conditions. If, for example, the Bundesbank raised interest rates, German unions tended to moderate wage demands. The system, however, has not served Germany well in the 1990s. High wages in high productivity western Germany have now been thrust upon low productivity eastern Germany, destroying jobs in the process.

And pay negotiators failed to take into account the 5 per cent appreciation of the Deutschmark in 1995, even though it brought inflation down to well under 2 per cent. Following a high pay settlement in the engineering industry, wages generally grew some 5 per cent in 1995.

No nonsense about falling real wages in Germany, so no wonder there's now a jobs crisis in the Fatherland. Employers are no longer hiring German workers; instead they're hiring abroad. Companies are shifting production overseas like there's no tomorrow: there was a record outflow of direct investment in the first eleven months of DM43bn (pounds 19bn), over double that for 1994.

The surge in unemployment that took the jobless count over 4 million in January brought panic to the German tripartite establishment of government, employers and unions.

As a result, policies that were once anathema are now seeing the light of day. A 50-point reform package unveiled at the end of January included more flexible working hours, the use of temporary jobs and the expansion of part-time jobs.

Across Europe, there is a grudging acceptance that the Anglo-Saxon model may offer solutions both to ruinously high unemployment and the slowdown in growth. At the G7 meeting in Paris last month, Theo Waigel, the German finance minister, said that the rigidity of EU labour markets was causing sluggish growth. European countries that rejected the Anglo-Saxon approach at the 1994 jobs summit in Detroit are now moving in the UK's direction. Although cutting the role of the unions is firmly out, there is an increasing tendency towards more flexibility.

But in Lille, the UK government will not find everything going its way. For the flaws in the apparent success of the UK's model are there to see for anyone who chooses to look below the surface.

The Government's favoured indicator at present is the fall in the headline rate of unemployment. This has certainly shown a remarkable decline of over 750,000 since unemployment peaked at the end of 1992. Furthermore the drop started much earlier in the economic recovery than previously. The jobless count started falling within a year of rebounding economic activity: in the 1980s, unemployment responded much more slowly.

However, look at the employment figures and a less attractive picture emerges. The fall in unemployment has not translated into what most people would call "real jobs" - full-time work. According to the quarterly Labour Force Survey, 550,000 new jobs were created for employees between spring 1993, when employment picked up, and autumn 1995. Of these no less than 60 per cent were part-time.

There is nothing inherently wrong with part-time work. For many women, it offers the only practical way of combining work and bringing up a family. As a result, women comprise 85 per cent of all part-timers. But almost half the new part-time jobs created in the past three years have gone to men. This suggests that they were taking on the work for want of better, full-time job offers.

The sharp fall in unemployment has flattered to deceive in another way. Usually when the economy recovers and demand for labour picks up, more people - usually married women - decide to join the workforce. The so- called "activity rate", the proportion of the adult population who are working or want to work, increases. The unemployed have to compete for jobs with these new entrants. In the 1980s, a big rise in the activity rate was one of the principal brakes on the fall in unemployment. However, there has been no such increase in participation in the 1990s.

Yet despite these reservations, the tide is flowing the UK way. Flexibility is the way of the future as we adapt to much fiercer international competition, the more varied demands of service sector employment and the drastic fall in demand for unskilled labour. The G7's task will be to come up with solutions to the adverse social consequences of the flexible labour market.

q Hamish McRae is away.