Yesterday’s unemployment figures show that 2.4 million people are now unemployed. So, although bank profits may be recovering, the labour market continues to deteriorate. Unemployment is set to continue to rise through the rest of the year and probably for the first half of next year too. The full human cost of the recession is still to be felt as the number of people out of work climbs towards three million.

The message coming out of the recession is clear: we need to build a broader based economy, less reliant on consumer debt and more focused on investment and innovation.

What is less clear is where the new jobs will come from. In the last economic cycle nearly three quarters of all new jobs were created in the public sector, finance, construction and retail. Jobs will not be created in the same sectors in the next economic cycle. Other sectors will have to pick up the slack if we are to return to full employment.

While the need for the economy to rebalance is clear, the scale of the challenge that lies ahead is greater than people realise. After the last recession it took eight years to return to the previous level of peak employment – it could take even longer this time round. Employment in manufacturing – often presented as a potential source of jobs in the future recovery – has been falling at an annual rate of 3.7% over the last seven years, so just halting this decline would be a major change of trend.

The UK will therefore be reliant on a big turnaround in manufacturing and on services that aren’t in finance, retailing or the public sector for jobs growth in the next few years.

The challenge of creating these jobs and achieving more balanced employment may be large, but it is not insurmountable. The UK has strengths on which to build – high tech manufacturing, pharmaceuticals, services for export, business services, publishing, media and creative industries for example. It could also stand to gain from increasing demand for green technologies as a result of attempts to address climate change and for care services as a result of our ageing population. The weaker pound, growing markets in emerging economies and concerted economic stimulus at home and abroad will all help.

But a rebalanced economy will not develop by chance. Some strategic government support for industry is also needed.

As the financial crisis unfolded, Lord Mandelson trumpeted an ‘activist’ approach to industry in an attempt to create an economy ‘with less financial engineering and more real engineering’. This was a move in the right direction but has not gone far enough.

We believe there is a more structural role for the state to correct market failures. The role government should play in the economy doesn’t stop when the recession is over. That is why we are calling for the government to match its rhetoric with the creation of institutions and policies that will ‘fix’ an activist approach into the wider economy – including the creation of an infrastructure bank, government backed university-business links, a national ideas bank and greater control for city-regions over their local economies.

A debate is beginning about how the UK economy will grow and what role the government should play in the process. The government should seize the opportunity to put in place the institutions and policies required to build a more sustainable employment base and ensure a speedy recovery to full employment. There are reasons to be optimistic and tell a positive story about the possibilities for growth and job creation in the UK – but that optimism depends on a supportive, strategic government.

Rachel Reeves is co-author (with Tony Dolphin and Jonathan Clifton) of ‘Building a Better Balanced UK Economy’ published by the ippr in conjunction with Friends Provident Foundation. You can find the full report here.

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