Economics never seems to be short of upsets. One of the most dramatic recent surprises has been in the UK labour market. And for once it has been favourable. What on earth is going on?

The facts are remarkable. Over the last two years, the unemployment rate has fallen from 8pc to 6.5pc. Over the last year alone, the number of people in employment has risen by almost 1m. What’s more, this good news during the recent expansion comes after a period when unemployment rose much less than expected during the downturn.

Meanwhile, despite the boom in employment, there has been no upward pressure on wage growth. Quite the opposite. Last week it was reported that, including bonuses, the year-on-year pay rate of growth fell back to 0.3pc. Yes, bonuses can distort the figures. But even excluding them, the rate of increase of average pay was just 0.7pc, the lowest on record.

How much further could unemployment fall?

Quite a way. In the 1960s, the economist Frank Paish caused outrage by suggesting that the unemployment rate needed to be as high as 2.5pc to keep inflation in check. (It had recently been much lower.) In fact, Paish’s number was an under-estimate. In the 1970s, inflation took off.

Gradually, governments came to accept that they could not keep unemployment so low without sparking accelerating inflation. If the 1960s had been labour market heaven, then the early 1980s were labour market hell. At the peak, the unemployment rate rose to over 10pc.

But recent figures have revealed another dramatic change. Why should there have been this improvement in the labour market? One explanation is that immigration and/or globalisation have weakened the bargaining power of labour and thereby forced down the rate of wage increases, and the level of the real wage, at any level of employment.

These have undoubtedly been powerful factors for some time but it is hard to believe that they have grown in importance enough to explain the radical changes of the last couple of years.

It is noticeable that in many countries similarly exposed to these forces, including France, Spain, Portugal and Italy, the unemployment rate has remained stubbornly high. (Interestingly, when you look at the recent under-performance of France against Germany, most of the explanation seems to rest with the poor French record on job creation.)

David Fuller's view

Roger Bootle mentions a number of factors contributing to the UK’s job creation but two really stand out.  First, UK Chancellor of the Exchequer George Osborne slashed tax rates for the lower end of the income scale, so that people can now earn up to £10,000 without having to pay any income tax.  Second, the government made it considerably more difficult for able bodied people to avoid working and live off benefits.  The combination of these two factors is an obvious example of good governance.