The most striking UK data released today were the latest set of labour market figures. While the decline in public sector borrowing in December was welcome, if not particularly pronounced, it is the fall in unemployment that really catches the eye. The headline rate fell markedly to 7.1% in the three months to November, with the total number of people out of work falling by 167,000, the largest drop since 1997.

On the face of it, this is very good news. Unemployment is a blight on any developed society, and can wreck individuals' lives if sufficient support and training are not available. The ability of the economy to generate 1.3 million jobs since employment troughed in early 2010 (or 0.7 million compared with the end of 2007) is very encouraging. In fact, it really should put paid to concerns about immigrants 'stealing' jobs, which is just another version of the 'lump of labour' fallacy. Over time, market-oriented economies are generally good at providing new opportunities for workers as old jobs become obsolete – provided, of course, that support and training are in place (and people want jobs).

The data are mildly embarrassing for the Bank of England, of course. Under Mark Carney's flagship 'forward guidance' policy, the Monetary Policy Committee promised not to even think about raising rates until unemployment had fallen below 7%. Announced to great fanfare last year, and implicitly aimed at reassuring people that rates wouldn't rise before 2016, we're almost through the threshold in well under a year – and almost two years earlier than the bank first thought when the policy was unveiled. Having nailed its colours to the mast, the challenge for the MPC will now be to justify keeping rates low for longer (as I think they want to) without the symbolic policy.

As I take some comfort in the Bank getting its forecasts so badly wrong – all economic forecasts are wrong, and I get similar grief from colleagues and clients when mine go awry, so it's nice to not be alone – it may seem like today's data are unambiguously good. But there is a serious implication that is likely to get overlooked, particularly by the coalition government.

The whole reason the MPC specified forward guidance in the way that it did was because they didn't understand what was happening with productivity. Output per worker (or hour worked, or some other metric) is one of the fundamental drivers of increases in living standards and GDP. Typically, it rises from year to year as we get more advanced machines, learn how to do things more efficiently, or people move from less productive to more productive roles.

Job Centre Plus by J J Ellison

Job Centre Plus by J J Ellison

During the financial crisis and Great Recession, productivity plummeted relative to where it probably 'should' have been, and took another wallop when the austerity programme started. The big question for all policymakers was whether the decline in productivity would be temporary (cyclical, in the jargon) or permanent (structural). The best case scenario was that it would be temporary, and productivity would bounce back swiftly as the recovery took hold. In that world, it would take a long time for unemployment to fall back towards 6% or so, because firms would be able to meet the increased demand associated with recovery using existing workers and resources (because productivity would be stronger).

The worst case scenario was that the fall in productivity was permanent, and we would never make up the ground we lost between 2008 and today. In that world, firms have to employ more people to meet stronger demand, implying that unemployment falls more quickly. But the flipside is that the potential supply of the economy – or the sustainable level of national income – is that much weaker, due to the permanent loss of productivity.

After today's data, it is looking increasingly likely that we are in the worst case scenario, not the best. Conservative estimates of how much national income has been permanently lost were already at 10% of GDP, and those now look too low given the pace of job creation. Assuming the loss is spread equally – which in itself is highly unlikely – every worker in the UK could now be 15% worse off, even before tax rises, benefit cuts, and everything else. And not just in 2014, but every year from now on. If productivity had bounced back, that number would be commensurately smaller.

So although I am glad that people are finding work, and that the recovery does genuinely seem to have materialised, it is not without cost. In part, the sharp fall in unemployment just reflects the deep and lasting scars that the financial crisis and austerity programme have left on the economy. And it looks like we will all pay for that for the rest of our lives.

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