Smart Education in UK : How has Britain created jobs while France and Italy have struggled?

While there have been concerns about sluggish productivity, our economy has become a very effective job-creating machine

One of the most impressive aspects of the UK economic recovery has been the growth of jobs. While there have been concerns about sluggish productivity, our economy has become a very effective job-creating machine. In five years of recovery, it has generated more than 2m extra jobs – despite cutbacks in the public sector. And the number of unfilled vacancies is nearly 750,000 – up by 250,000 on two years ago. The unemployment rate has fallen from above 8pc to 5.5pc. We are back to roughly the same jobless rate we experienced before the financial crisis.

There are a lot of myths around jobs growth. One is that all the increased employment is in part-time work and zero-hours contracts. This is not true. Full-time jobs account for more than three-quarters of increased employment since 2009. The latest official estimate is that fewer than 700,000 people are on zero-hours contracts out of a workforce of more than 31m (just over 2pc).

Another myth is that jobs growth has been concentrated in low-value-added sectors. In fact, the biggest job-creating sector over the past five years has been professional, scientific and technical services – firms like my employer, PwC. We have 500,000 more jobs in professional and related services compared with five years ago – a quarter of the total employment increase over the recovery. We have also seen strong jobs growth in other hi-tech sectors. In information and communications, 150,000 new jobs have been created in the past five years.

Jobs have been created across higher-value-added and lower-value-added areas. But employment growth has been concentrated in the services industries, which employ more than 80pc of the UK working population. Business support services, health, hotels and restaurants have also been big job growth areas. It is service industries, not factories and building sites, which have been responsible for Britain’s job growth miracle. Manufacturing employment has been virtually unchanged over the past five years and construction jobs are slightly down. At first sight, this does not seem to accord with George Osborne’s objective – expressed in his 2011 Budget speech – that the UK would see a “march of the makers”. But we need to recognise that we can be makers of services as well as physical products. The modern British economy is very services-oriented, and we are a very successful services exporter. Such exports account for 12pc of GDP – the highest ratio in the G7 by a long way. Our overseas sales of services are almost as big as our manufactured exports.

So how has the UK become such an impressive job-creating economy in this recovery? GDP growth has not been particularly strong - it has averaged about 1.8pc per annum since the middle of 2009. The comparable growth rate in the 1990s recovery was around 2.5pc, while in the 1980s it was above 3pc.

Within the G7, we are one of four economies – alongside the US, Canada and Germany – which has seen 6pc-7pc employment growth over the five years of recovery so far. The other three members – France, Italy and Japan – have seen employment increase by less than 1pc. In Italy – the worst performer – employment has fallen by 2.3pc.

Japan’s low employment growth can be put down to its falling population. Unemployment there is still very low by international standards – 3.4pc of the labour force. But the positive employment trends in North America and northern Europe provide a striking contrast to the poor labour market performance of France and Italy.

Three key factors have supported strong jobs growth in the UK, North America and Germany.

The first is a flexible labour market – as excessive regulation and high employment taxes can stifle job growth. In a flexible labour market, wages can adjust to changing economic conditions – and subdued wage growth has been an important factor encouraging employers to retain and recruit workers in the recovery. Workers are also free to move between jobs, as the structure of the economy changes. And a flexible labour market facilitates the growth of part-time jobs and self-employment, where that suits individual lifestyles and circumstances.

North American labour markets have always been flexible. Chuck Berry wrote a song about Route 66, the famous US highway which allowed workers from the Mid West to migrate to find new jobs in California. The UK reformed its labour markets in the 1980s and 1990s, and Germany followed suit in the early 2000s under Chancellor Gerhard Schroeder. But France and Italy have not embraced the same programme of labour market reform and flexibility.

A second ingredient is having business-friendly economic policies, aimed at encouraging enterprise and investment. Investment in the UK has grown by more than 4pc a year across the recovery – more than twice the rate of GDP growth. Under the Coalition, the corporation tax rate levied on business profits was brought down from 28pc to 20pc. The UK has a strong reputation as a business-friendly economy open to trade and investment, and this has been a consistent theme of government policy since the 1980s.

The third factor supporting employment growth in the UK, Germany and North America has been political stability. Angela Merkel has been chancellor of Germany for nearly 10 years, and Stephen Harper has been in power in Canada since 2006. Barack Obama was elected in 2008 and David Cameron has been Prime Minister since 2010. Over the course of the recovery, the four leading economies have had the most stable governments. By contrast, France has had three prime ministers since 2010 and Italy four.

Flexible labour markets, business-friendly economic policies and political stability are a powerful recipe for employment growth. The good news for the UK is that this recipe should be in place for the next five years. But the EU renegotiation and the prospect of a referendum on membership could be a fly in the ointment. A Britain which is semi-detached from Europe would not have the same growth and job creation potential we have seen in recent years – and this needs to be recognised when we get to a referendum on EU membership in 2016 or 2017.

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