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And so the ‘productivity puzzle’ continues. Earlier this week the ONS published new figures showing that employment rose by 154,000 in the last quarter of 2012, taking up the total increase over the year as a whole to half a million. This is despite growing expectations that Britain will slide back into recession for the third time since the economic downturn. Indeed, the size of the economy in the last quarter was the same as it was a year beforehand. So what’s going on?

Up until fairly recently, most commentators have put the low growth-high employment phenomenon down to the increasing number of part-time positions made available, at the expense of full-time ones. The argument runs that the number of people in work may not have fell so sharply as expected, but the number of hours worked certainly will have done. This may have been true at the outset of the recession, but the latest tranche of ONS figures now seems to contradict this claim. The number of full-time workers increased by 197,000 in the last quarter, whereas the number of part-time ones fell by 43,000.

The real reason why employment rates have remained so buoyant is rather down to a squeeze on wages, particularly for those in lower skilled jobs. Average earnings have risen by only 1.3 per cent since a year ago, whereas inflation is more than double this. Nor is this a recent phenomenon. The Institute for Fiscal Studies, for instance, reported that in the 3 years leading up to 2010-11, average household income (pre-tax and benefit) fell by 7 per cent in real terms. Wages now only represent 53 per cent of GDP, down from 65 per cent in the mid-1970s.

This begs the question of whether low wages are a price worth paying for low unemployment. Or to put it a different way, can we live with inequality, if it means having more people in work? Speaking yesterday at the RSA, the economist and author Stuart Lansley reported that this is exactly the trade-off that Bill Clinton and Tony Blair contemplated during their time in office in the late 90s. Either they were to create high-skilled economies and societies based on efficiency, or they deregulate, pare back the state and settle for a highly competitive market economy grounded in flexible labour (with inevitable by-product of inequality). The rest is history.

While some may view this as a necessary deal with the devil, in reality it is no such deal at all. The benefits have been revealed as a myth, the silver linings of inequality as an illusion. Take poverty, for instance. As a result of the squeeze on wages, it is now the case that there are more children in poverty who are living in working households than there are living in workless ones. The damage being inflicted on families was masked throughout the early 2000s by an increasing reliance on credit. The consequence is that now something like a third of family income among low earners is spent on debt repayment.

As Lansley pointed out yesterday, this is not just bad for the individuals directly concerned, it is also for the wider economy. Demand contracts, the economy grinds to a halt, and we ‘lose’ a decade or more of prosperity through stasis. Moreover, the inequality created by low skilled, low wage jobs induces societal fragmentation, distrust and intermittent bursts of anger from the most dispossessed.

So what is the way forward? High quality jobs that pay a decent wage is a good starting point. For those who say that businesses can ill afford it, the Resolution Foundation has argued persuasively that average wage bills for the larger companies would increase by only a few per cent. By implementing a system along the lines of the Living Wage, they may even benefit by way of increased productivity and retention rates. Indeed, this is the rationale for the ‘Living Wage City Deals’ being proposed by some.

Yet we have to do more than just fiddle with wages. We need a root and branch rethink about the kind of society we want to live in, and the type of economy and workforce we want to build. Some like Will Hutton, for instance, have mooted the idea that we should follow a model of ‘flexicurity’, whereby flexibility for employers is matched with high quality jobs that are backed by a strong system of education and welfare protection. Labour’s announcement today that they are considering implementing a ‘contributory principle’ for unemployment benefits suggests this is finally being taken seriously.

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