David Blanchflower: Job creation? The numbers don't add up

Both the Prime Minister and the Chancellor in their conference speeches last week claimed the private sector had been a job-creating machine under the Coalition. Indeed , Mr Cameron went as far as to say: "Since this Government took office, over one million new jobs have been created in the private sector." Mr Osborne claimed: "We made a promise to the British people that we would repair our badly broken economy. That promise is being fulfilled… There are one million more private-sector jobs. The economy is healing."

What a load of baloney. The country is in double-dip recession and is smaller now than it was when the Coalition took office; four of the last six quarters have seen falls in GDP.

Let's focus on the claim that more than one million private-sector jobs have been created under the Coalition. First, according to the Office for National Statistics (ONS), in June 2010 – which is actually the rolling, three-month average of May to July – private-sector employment was 22,826,000, whereas in June 2012 it was 23,896,000, up 1,070,000. What both Messrs Cameron and Osborne failed to tell the Tory tribe was that 196,000 of this increase came about this month because of a statistical change that had nothing to do with job creation, rather box-ticking. Further education corporations and sixth-form college corporations in England were classified to the public sector up to March 2012 and to the private sector from June 2012. These educational bodies employed 196,000 people in March 2012 and the reclassification therefore results in a large fall in public-sector employment and a corresponding large increase in private-sector employment between March and June 2012. They were just making it up. The Coalition has not created one million private-sector jobs since it took office. In fact, 200,000 of the jobs they were claiming already existed in the public sector and they just relabelled them. They should be ashamed of themselves for trying to mislead the public.

Just to be clear on this, apparently the Chancellor and PM believe it is a good thing to shrink the size of the state; for most ordinary plebs it matters that in comparison with June 2010, in June 2012 – the latest date for which we have data – declines in public-sector employment have resulted in cuts in front-line services. The number of public-sector workers has declined in a variety of sectors; the armed forces are down 10,000, the police 28,000, the civil service 63,000, the NHS 42,000. So the number of people guarding the country has fallen as has the number of police, teachers, doctors and nurses.

How exactly does that make the country better off? It is hard to see that the country is "healing'" when the unemployment rate is higher today than it was when the Government took office. Over the same period, employment of those aged 16-24 is down by 110,000. The number of people who are in temporary work but want permanent jobs is up 90,000 and the number of part-timers who want full-time jobs is up 314,000. So far, not so good.

In addition, self-employment is up by 257,000, but given that two-thirds of these are part-time (+172,000), the jobs are unlikely to be high-paying. The literature suggests that there is no sense in which this increase in self-employment should be considered an increase in entrepreneurship. A higher self-employment rate does not appear to produce better macro-economic outcomes*. The problem is that there are good things about being self-employed – flexibility, being your own boss etc – but there are considerable risks also. The failure rate is high and there is a danger that pooling of assets into a single activity is fraught with danger – failure could involve losing one's job, one's savings and pension perhaps, and even one's marriage or health.

The self-employed are not even guaranteed positive earnings as employees are as they can make losses as many do, so the low-side risk is especially high. It is certainly unclear from the literature what the optimal self-employment rate is, more indeed may not be better, which makes it hard to know what government policy should be toward the level of self-employment in the economy. It is likely a good thing that an economy becomes more entrepreneurial but that may or may not have anything to do with how many self-employed there are. One additional, incredibly entrepreneurial individual like Sir Richard Branson would probably suffice to bring all sorts of good things to the economy such as high-paying jobs. Reclassifying workers who were fired from the public sector as self-employed is not going to improve the performance of the UK economy. A higher GDP is perfectly consistent with a lower self-employment rate.

Then to another daft idea proposed by this out-of-touch Chancellor. His ill-thought-out plan is to give employees shares in the business in return for giving up their rights of unfair dismissal and redundancy – basically implementing Adrian Beecroft's recent punitive report by the back door. It even looks likely that such a proposal would be in conflict with European law. Interestingly, Mr Osborne provided no evidence that the Treasury had tested such a scheme to demonstrate it would work or evidence from the academic literature, because there isn't any.

Indeed, out of 40 countries, the Organisation for Economic Co-operation and Development data classifies the UK as having the third most lightly regulated labour market after the US and Canada. Immediately, Justin King, the boss of Sainsbury's, came out in opposition to the idea with a blistering critique.

"The population at large don't trust business," he said. "What do you think the population at large will think of businesses that want to trade employment rights for money?" Take-up is likely to be small. And still no growth plan.

David Blanchflower, "Self-Employment: More May Not Be Better," Swedish Economic Policy Review vol 11(2), Fall 2004, pp. 15-74

http://www.dartmouth.edu/~blnchflr/papers/finalsweden2.pdf