Unemployment: How Britain compares internationally: Jobs: a nasty surprise that's here to stay

The British government has been boasting about the fall in unemployment . But, as Paul Wallace explains, it is all turning sour; The behaviour of the labour market in this recovery has taken everyone by surprise; The unpalatable truth may be that many unskilled people will never work again

Not so long ago, the Government was crowing over the steep fall in the jobless total. Here was concrete proof not only of the recovery but also of the labour market reforms of the Eighties. Unemployment was set on a downward path for some time to come.

Armed with this performance, the Government was preparing to go on the offensive in the international arena. Last month's decision by the Group of Seven leaders to hold a second jobs summit next year in France was welcomed by Treasury ministers. Gone was the embarrassment felt for most of the Eighties when Britain stood out as the sick man of Europe as far as unemployment was concerned. Now they could proudly brandish a rate well below the European Union average.

But the latest jobless figures have taken the gloss off this picture. In June only 4,000 came off the claimant total. Over the past three months it has been coming down at around 10,000 a month - a quarter of the big declines seen at the end of last year.

What this seemed to herald was a quite different and much more depressing outlook. Unemployment appears to be bottoming out for the time being. If this is the case, the effect will be to create a much higher base than in the past for subsequent increases when the economy turns sour again.

One thing is already clear: the behaviour of the labour market in the current recovery has taken virtually everyone by surprise. In the Eighties, unemployment continued to rise for some years after the onset of recovery. A similar pattern was generally expected as the economy started to clamber out of the pit in the Nineties. Instead, the jobless count started to come down after only 12 months.

The Government seized on the good news but found it was cheerleader to an empty auditorium. The big game was being played elsewhere as ugly euphemisms such as rightsizing entered the language and a sense of job insecurity gripped the country.

But then this is hardly surprising when you look at the employment figures. For while unemployment has apparently been behaving more benignly, a different picture emerges when you look at the number of jobs being created. Based on surveys of employers, the total workforce in employment was 25.6 million at the last count, barely up from the low point a year earlier and well down from the last peak of 27.2 million four years ago.

Estimates drawn from the Labour Force Survey, which is based on interviews with a sample of 60,000 households, show more growth in the past year. Yet even on this measure fewer than half a million more people are working than two years ago.

Britain is not alone in finding that the present recovery is proving to be a disappointment as far as the creation of jobs is concerned. In its annual Employment Outlook, the OECD said that employment growth had been weaker in the current upswing than in the recovery of the Eighties. This held true not only for Britain, but for the United States, Canada and Australia.

What this suggests is that the big problem identified by the OECD Jobs Study last year continues to plague Western economies. Sweeping technological change is undermining traditional sources of jobs, with the impact falling most heavily on the unskilled. While the OECD downplays the threat of competition from Third World countries, some economists believe it is also cutting jobs - and again hitting those without skills the most.

Faced with this whirlwind of change, the US appears to have done much better than the EU. In the past 15 years, there has been a cumulative increase of 24 million jobs in the US. By contrast, the EU only managed to increase those in work by 3 million. Over the same period there has been virtually no increase in the UK.

This startling gap in performance seems to suggest that the American way is the best means of running a labour market nowadays. Push down wages, cut unemployment benefit entitlement - and the period for which you can claim it - to the bone and the labour market will deliver.

The downside is falling real wages, chronic job insecurity and a startling rise in income inequality. No wonder the European approach, with high levels of job protection, looks much more promising for the majority of those who have a job. No wonder the Government has bottled out from going the whole hog and importing wholesale the American way of work.

But while the European labour market may deliver a comfortable lifestyle for those lucky enough to be in work, it is not so good for those outside the charmed circle. And with European employers groaning at the cost of social security contributions, the problem is that there are now more and more people being pushed out of that magic circle. Unemployment rose to 11.5 per cent in 1994 and is projected to be at 10.6 per cent in 1996 by the OECD.

In spite of the much touted labour market reforms of the Eighties, Britain remains closer to the European model than the American one. That is reflected not only in the unemployment rate but also in the incidence of long-term unemployment. In the UK, as in many European countries, about half those out of work have not had a job for over 12 months.

What that means is that Britain, like other European countries, has to find solutions to labour market problems that are intermeshed with the operation of the welfare system. Yet the freeing up of the labour market in the past years has in some ways made things more difficult.

Take, for example, the increasing importance of part-time work in the labour market - something that has given much more discretion to employers to run flexible service-based operations. With 23 per cent of employment part-time, Britain has one of the highest shares of part-time workers in the OECD.

However, this has contributed to an increasing polarisation of employment into "work-rich" and "work-poor" households. If your partner is already working, there is no penalty in coming off benefit, so a second job is attractive even if it is relatively low-paid and part-time. But if there is no first income, it is a different story. With part-time work offering both shorter hours and lower pay, it does not provide a big enough income to spring the benefit trap.

Policy is now shifting in the UK to focus on ways of escaping the welfare trap. There is cross-party consensus that this has to be done, but no agreement on how. In particular the Government will be seeking to brand Labour's commitment to a minimum wage as a recipe for job destruction, in spite of increasing evidence that a rate set at a moderate level would not necessarily be damaging.

Yet the irony is that the Government's preferred solution of extending in-work benefits may need some form of floor wage to prevent widespread abuse by employers.

Even if the welfare traps that currently lock many out of the labour market could be sprung, there would still remain an intractable hard core of unemployment.

The technological changes sweeping through the world have affected the UK particularly strongly because of our poor record in skilling the workforce. Training has long been the panacea, but the OECD takes a notably sceptical line on its effectiveness. The unpalatable truth may be that many unskilled people will never work again.