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Why Brexit might look like it’s having a worse effect on the jobs market than it actually is

Unemployment remains very low in the UK.

Unemployment has risen in the UK for the first time in nearly two years. It follows continuous falls in the unemployment rate, pushing it up slightly to 4.4% from 4.3%. And despite this small rise, the number of people in work has grown, which continues the trend of jobs growth in recent years coupled with falling unemployment.

Low unemployment is generally seen as good news for any economy. But there are widespread concerns about the quality of many jobs and the extent to which they are a result of the growing gig economy.

There has been a drop in the number of self-employed people as more workers prefer the security of employment, and there has also been a slowdown of the number of business start-ups for the first time in almost a decade. Start-ups are generally seen as a source of creative disruptive dynamism in the economy and the stagnation in their yearly rise may be the first signs of trouble on the economic horizon. But as many of these start-ups are run on a part-time basis by those in employment, a decline in their number may not produce too much of a hit to future economic growth.

Alongside these official figures, we now have the almost weekly round of headlines speculating that thousands of job losses will ensue from Brexit, regardless of the type of Brexit deal that is finally negotiated. These have degrees of reliability, if any at all.

The wider pattern

These trends in unemployment and employment rates need to be understood in the context of the more general pattern of job gains and losses in the economy. The fact is, businesses are hiring and firing all the time. But it is how normal the scale of this is which often goes unreported – in both good times and bad.

An examination of the UK private sector between 1998 and 2017 reveals key trends in job creation and destruction. A look at this ONS data helps us to understand how normal the level of turbulence in jobs is. Using employee data for all employer businesses in the UK, colleagues and I examined the average annual job creation and destruction rates between 1998 and 2017.

We found that 4.5m jobs in the UK were either created or destroyed in 2016-17. That means that just over a fifth (22%) of all jobs in the private sector were either destroyed or created over the most recent 12-month period. This shows a remarkable level of turbulence in the UK economy, or so it would appear.

The process is summarised for the 2016-17 period below:

Mark Hart | Data: ONS Business Structure Database (1998-2017), CC BY-ND

Mark Hart | Data: ONS Business Structure Database (1998-2017), CC BY-ND

From the annual data on job creation and destruction (shown in the next graph), however, we can in fact see that there was very little variation in these rates of job creation and destruction from 1998-2017. It averaged at around 20-28% over 20 years.

Job Creation and destruction, 1998-2017 (ratio to opening stock %) Mark Hart | Data: ONS Business Structure Database (1998-2017), CC BY-ND

The recession following the 2007-08 financial crisis reduced job creation through business start-ups and the growth of existing businesses. But what is particularly noticeable is the steady decline since the turn of the century in the amount of job creation through the expansion of existing businesses – a challenge recognised by the UK government’s recent Industrial Strategy white paper.

Job creation through start-ups, however, has been on the rise since the economic downturn. And job destruction through businesses folding and the contraction of existing businesses has been falling steadily since 2010 and is much lower now than it was 20 years ago.

So we need to be very careful in disentangling any Brexit effects in the months and years ahead from what is actually a normal degree of turbulence in the hiring and firing practices of UK businesses. How many of the economic forecasting models or the sector-by-sector Brexit impact studies (real or imaginary) actually grasp this level of job churn in their underlying base assumptions on the future performance of the UK economy?

While the headline, low unemployment figures are to be welcomed, the huge levels of churn in the labour market over a 12-month period is rarely recognised and it is important to understand how unpredictable, external shocks can upset these relatively normal levels of turbulence. The recent collapse of a big company like Carillion as a result of a rapidly rising and unsustainable debt pile and the ongoing debate over the impact of Brexit on jobs bring this into sharp focus.

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