Unemployment could be heading down to levels last seen in the 1950s, according to a new analysis of Britain’s jobs market.
The jobless rate has plunged since the financial crisis to a four-decade low of 4.2%. A study by Oxford Economics suggests it could have a lot further to fall, potentially recreating the golden era of the postwar boom.
Martin Beck, a senior economist at the consultancy, said there were “striking parallels” between today and the period when unemployment was less than 3% for two decades. The rate touched an all-time low of 1% in mid-1955, shortly after Anthony Eden succeeded Winston Churchill as prime minister.
Then, as now, pay rose more slowly than productivity, reducing the cost of hiring workers and ensuring a low “equilibrium” rate of unemployment — the level at which there are so few people looking for work that wages begin to rise.
Second World War servicemen were promised jobs when the hostilities ended, and successive governments made full employment a priority. Trade unions were persuaded to exercise pay restraint to ensure everyone who wanted work could find it.
Beck detects a similar dynamic in the lost decade of pay growth since the financial crisis. This time, however, the cause is the decline of unions and the threat of jobs being moved overseas or replaced by robots, he said.
“With globalisation and automation, workers just don’t have as much power to bargain for higher wages,” Beck explained. “If the factors holding back pay were to persist, alongside a catch-up in UK productivity, a return to a 1950s and 1960s-style jobless rate is possible.” With unemployment at its lowest since the mid-1970s, many economists — including members of the Bank of England’s monetary policy committee (MPC) — expect wages to pick up. Average pay growth accelerated to 2.8% in February, the first time wages have outstripped inflation in a year.
Beck, however, thinks the similarities with the postwar era suggest the return of pay growth is not a done deal. His findings echo a recent paper co-written by former MPC member David Blanchflower, arguing that the UK is far from full employment. Blanchflower, who left the MPC in 2009, said workers were “frightened” to ask for higher pay.