Between the first quarters of 2010 and 2015 the level of employment increased by 2.1 million, which was roughly double our June 2010 forecast. The additional 1 million reflected:

  • 0.2 million of faster population growth, with around two-thirds of this due to higher net migration. This will understate the effect of higher net migration, since labour market data have yet to be fully aligned to the latest migration data;
  • 0.2 million of lower unemployment. The June 2010 Budget forecast assumed a steady and gradual decline in the unemployment rate, but unemployment was initially higher before falling back more quickly; and
  • 0.6 million due to a higher participation rate, which has essentially been flat rather than declining as first predicted.

Despite stronger employment growth, GDP per capita increased by only 6.1 per cent over those five years, well below the 10.6 per cent forecast in June 2010. That reflected the net effect of:

  • a positive error of 2.6 percentage points due to the higher employment rate discussed above;
  • an additional positive error of 2.1 percentage points due to higher average hours per worker; and
  • a significant drag of 9.3 percentage points from much lower growth in productivity per hour (broadly matched by much weaker real earnings growth).

Judging when this pattern of strong employment growth and weak productivity (and real earnings) growth will come to an end remains the most important uncertainty in our economic forecast. Prospects for productivity growth are vital to the health of the public finances and to trends in living standards. We explore the economic and fiscal implications of different scenarios for employment and productivity growth in Chapter 5.