U.K. unemployment falls, but longer-term jobs picture looks gloomy

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July 14, 2010 1:59 PM EDT

Unemployment in the U.K. fell by 34,000 to about 2.47-million people during the three-month period ending in May, according to data from the Office for National Statistics (ONS), pushing the jobless rate to 7.8 percent, below forecasts of 7.9 percent.

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By comparison, joblessness in the euro zone amounts to 10 percent, in Japan, 5.2 percent are unemployed, while the U.S. is at 9.5 percent.

In addition, Britons claiming Jobseeker's Allowance – i.e., unemployment benefits – dropped in June by 20,800 to about 1.46-million.

The number of employed people climbed by 160,000 in the three months to May (the largest such increase since August 2006); however, this was primarily due to the record 148,000 jump in the number of part-time and self-employed workers, while full-time workers rose by only 12,000. Overall, ONS said, 27% of workers are now engaged in part-tome jobs, the highest percentage ever recorded.

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Andrew Sentance, a member of the Bank of England's Monetary Policy Committee and the only member who has called for an interest rate hike, said he believes the labor market had “stabilized” and that
“labor demand in the private sector may have already started to pick up."

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However, other observers believe the falling jobless rate will be a short-term phenomenon, given how the government plans to slash a massive number of public sector jobs under terms of the new austerity budget, raise taxes and drastically cut spending.

“The UK labor market is starting to benefit from the recovery in the wider economy,” said Vicky Redwood, senior U.K. economist at Capital Economics in London. “But we still doubt that private sector hiring will be able to offset the sheer scale of the looming public sector job cuts.”

New figures from the Office for Budget Responsibility (OBR) indicate that that measures in the government’s emergency budget will reduce public sector employment by 2014/2015 by an extra 160,000.
And while the OBR expects a total of 600,000 or so public sector job cuts by 2015/2016, Redwood expects more like 750,000 losses.

The large number of part-time and self-employed workers, she adds, suggests that companies remain cautious about the economic outlook.

“What’s more, the high rate of unemployment seems to be putting renewed downward pressure on pay growth, with annual growth of average earnings (excluding bonuses) falling from 1.7% to 1.4% in May, the lowest rate since the end of last year,” she noted. “We still think that household incomes face a severe squeeze from the looming public sector job cuts, tax rises and weak pay growth.”

Howard Archer, chief UK/European Economist at IHS Global Insight, also has grave concerns about the jobs outlook.

“Unemployment may very well continue to fall in the near term, but there is a very real danger that it will start to head back up later this year and then increase in 2011,” he said.
“Major job losses are on the way in the public sector as the government slashes spending, and we doubt that the private sector will be able to fully compensate for this. Indeed, it may well be that the private sector becomes increasingly cautious in their employment plans due to concerns that the intensified fiscal squeeze will hold back growth.”

Given Archer's expectations of moderate GDP growth in the second half of this year and then to be limited to 1.7% in 2011, he suspects that unemployment will reach 2.75 million in 2011 “and there is a very real risk that it could rise further still thereafter as public sector jobs continue to decline.”

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