What are the prospects for replacing jobs lost in the public sector? Despite government claims, it's hard to see how the private sector can fill the gap
The labour market has been weakening since the beginning of 2011, driven at first by a rise in public sector job losses and then by a more broad-based weakness in the private sector job market. These trends look set to continue into 2012.
The government’s independent forecaster, the Office of Budget Responsibility, believes that 710,000 jobs will be lost in the public sector between 2011 and 2017. The key question is whether the private sector will create enough jobs to absorb those made redundant in the public sector.
The most recent data does not give much reason for optimism. In the third quarter of 2011 (the most recent figures) private sector job net creation was essentially flat. It either rose by a very small amount or fell by a small amount depending on whether one classifies the state owned banks as being in the private or public sectors. This is a worrying development. We know from the government’s spending plans that public sector employment is set to fall; the key driver of the labour market over the coming years has to be the private sector.
It is currently hard to see where the private sector job creation is going to come from – business confidence is weak and many firms are reporting overcapacity; it is difficult to imagine why they will go on a hiring drive given these conditions.
This dynamic of public sector job losses and hoped-for private sector job creation will have important regional effects on the UK, which are already apparent in the data. Public sector job losses will disproportionately affect the North, the devolved nations and areas where public sector employment is concentrated, whilst any private sector job growth is more likely to appear in London and the South.
Even if the private sector jobs emerge we may see a picture of higher unemployment in poorer regions of the UK and healthier labour markets in the already better off regions.
This general picture of labour market weakness is feeding through into poor earnings growth. The pay freeze in the public sector is widely known about, but private sector wage growth is only around 2 per cent, well below inflation despite recent falls.
The key factors to watch in the coming months will be the strength of private sector job creation, the changing regional picture and growth of underlying pay, especially in the private sector.
Duncan Weldon is senior economist at the Trades Union Congress
