THE stock market, which has given us so much excitement, is very important and has implications for interest rates, as I report on page 4. But so is the job market. How will it fare in what Mervyn King, governor of the Bank of England, described last week as the most testing set of economic circumstances in 10 years of Bank independence?

One fear is that economic weakness will lead to further problems for the banks. Another is that it will push up unemployment.

So much depends on the job market. If it cracks, the downturn in consumer spending will be even greater. The housing market, having lost one supporting pillar with sharply reduced mortgage availability, would lose its biggest remaining source of support if employment were to tumble.

There is another important test for the job market. Gordon Brown has promised “British jobs for British workers”. Official figures suggest that as many as four-fifths of the jobs created since 1997 have gone to foreign-born workers.

The question is whether migration will be a flexible friend for the economy. As it slows and job opportunities dwindle, will the flow of workers to Britain fade? Or will the migrants continue to arrive, adding to unemployment?

The first thing to say is that, if a cold front is on the way for jobs, it has yet to arrive. True, there have been some gloomy surveys and forecasts for 2008 and there have been one or two announcements from firms about job losses.

The employment numbers, however, remain strong. The latest figures cover the three months to November, when some of the effects of the credit crisis will have begun to be felt, and show a surge in employment of 175,000 to a new record of 29.4m. Employment over the year was up by 263,000.

The number of jobs in the economy, a bigger total than the employment figure because some people have more than one, stood at 31.6m, up 287,000 on a year earlier. Pretty well all measures, in fact, pointed to job-market strength. Vacancies in the final quarter of 2007 rose by 12,200 to 681,100, the highest for six years. The economic inactivity rate slipped.

The claimant count - those claiming jobseeker’s allowance – dropped by 131,400 in the 12 months to December and is now at its lowest rate since June 1975. Unemployment on the broader Labour Force Survey measure also fell. Hours worked, a good indicator of the underlying strength of the job market, rose.

There may be trouble ahead but so far employment has not skipped a beat. That should change, though not as dramatically as some fear. The consensus among economists is that this year will show below-trend growth, probably matching the 1.8% of 2005, a weak year.

Even that will not mean job growth comes to an end, however. Economists expect, on average, a rise in employment of about 0.4% – equivalent to some 120,000 new jobs. They also expect a modest rise in unemployment, but certainly not carnage.

Exactly how uncomfortable it feels will depend on another factor – the flow of migrant workers coming to Britain. There is anecdotal evidence that this flow has started to fade and that, for some groups of workers, it has even begun to go into reverse.

The economic outlook may be dull in Britain, but Poland, the Baltic states and many of the other new EU members are booming. Poland is set for at least 5% growth this year. True, these economies remain a long way back in terms of income levels but the gap is closing. The weakness of sterling against the euro has also reduced Britain’s attractiveness to eastern Europeans, many of their currencies being linked to the euro.

There is also an issue on the demand side. It may be that the bits of the economy that are weakest are those that provided the draw for migrant workers.

The weakness of the housing market means there are fewer direct employment opportunities for Polish plumbers and building workers from other accession states. The weakness of the financial markets means there is less demand for bankers and brokers in the City and Canary Wharf from other parts of the EU. The retail and catering trades are also struggling.

An even bigger impact may come from the fact that other European countries are in the process of liberalising their rules to allow in workers from the newer member countries. Germany relaxed its restrictions for skilled workers in November and over the next two years will complete the process of full liberalisation. Remember that part of the reason Britain attracted so many workers from eastern Europe was that most other EU countries restricted entry.

Is there any hard evidence on this? Given the strength of the job market, it would be unrealistic to expect too much yet. The latest official figures run only to the third quarter of last year. They show the number of “A8” migrant workers (those from eastern European countries that joined the EU in May 2004) applying to work in the UK under the worker-registration scheme dropped to 54,000 from 63,000 a year earlier, a fall of 14%. There was also a drop between the second and third quarters in migrant workers registering from the newest EU members, Romania and Bulgaria.

This is a big issue. Whether the migrant flows continue will determine whether the pendulum starts to swing back so that there are indeed more “British jobs for British workers”.

It may also mean, for firms, that more challenging times are on the way. Though few say it explicitly, migrants have provided a quick fix for their recruitment problems.

What if the flow of migrant workers into Britain turns out to be more cyclical than had been thought, and not a permanent shift? Official population projections have been hugely influenced by recent migration experience. The latest 2006-based projections assume net migration of 190,000 a year. For comparison, the 1996-based projections assumed only 65,000 of net migration annually.

The cumulative difference over time between these assumptions is enormous, particularly when differential birth rates between the foreign-born and indigenous population are taken into account. A lot rests on government assumptions about migration, which drive a projected rise in population to 65m by 2016 and 71m by 2031. This year we may find out whether those assumptions are realistic for the bad times as well as the good.

PS: Just as every generation thinks it has discovered sex, so we tend to believe we are the first to have hit on the idea of globalisation. In fact, as a magisterial new book by Ronald Findlay and Kevin O’Rourke points out, globalisation goes back a very long way. Power and Plenty: Trade, War and the World Economy in the Second Millennium, makes a case for pinpointing the dawn of globalisation in the 13th century, when Europeans ventured east from Venice and west from Genoa.

But there is also an argument, as the authors point out, for saying that globalisation came even earlier, about the year 1000, when there was extensive trade and commerce involving western Europe, eastern Europe, central, south, southeast and east Asia, sub-Saharan Africa and the Islamic world which, as well as the Middle East and North Africa, took in Muslim Spain.

In the “Islamic golden age”, in fact, it was only the Islamic world that had direct trade contact with all the other discovered regions. If that was the globalised world of the time, Islam was at the centre of it.

When we think about the shifting global economy these days, the emphasis has been on the rise of China and India and their return to the past dominance of the global economy. But largely thanks to oil, parts of the modern Islamic world are also enjoying something of a return to former glories. Nowadays, of course, power is often exerted through multi-billion-dollar sovereign wealth funds.

david.smith@sunday-times.co.uk

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