During periods of above-trend economic growth, jobs are created and unemployment falls: when growth is below trend for a prolonged length of time, the reverse is true.

It is no surprise, therefore, that accurate monitoring of the labour market has always been seen as an essential tool in understanding the state of an economy.

The strong link between the state of the labour market and consumer confidence and, therefore, the pace of household spending and GDP growth, means that employment and unemployment data are key measures which are tracked regularly by analysts.

But, although it sounds straightforward, measuring the numbers of people who are in work or out of work is by no means a simple process, and different methodologies produce quite different results (see below).

Sustained growth in employment (or reduction of unemployment) is often a key objective of governments’ economic policies.

Indeed, the degree of success in achieving that aim is a benchmark that is widely used to assess the performance of a government in its management of the economy. In particular, high or rising unemployment can be a huge political liability.

In interpreting labour market statistics, it should be remembered that employment and unemployment are often ‘lagging’ indicators, meaning that an upward or downward trend may not become apparent until some time after a shift in the levels of, say, demand or output.

Upward moves in unemployment can sometimes be delayed by the so-called ‘hoarding’ of labour by employers which manifests itself as an initial reluctance by firms to shed labour in the early stages of a downturn.

For such firms, the concern is that if business subsequently picks up, they might find themselves short of suitably skilled employees, or at the very least incur significant re-hiring costs. Often, therefore, firms will delay shedding labour until they are convinced that a downturn is likely to be substantial and sustained.

The converse is also true: when an economy is starting on the recovery phase of the economic cycle, companies may still be seeking to reduce costs by cutting their workforce.

And, as the economy moves through the recovery phase, companies may choose to use their existing labour force more fully through greater use of overtime (paying the same workers to work more hours) rather than hire new workers immediately.

Decisions on exactly when to expand its labour force will be affected by a company’s views on how strong and how durable the recovery is expected to be.

Company decisions on when to expand their labour force will also depend on how flexible labour markets are.

Where regulations make it difficult to shed labour, companies will be loath to hire new workers until they have used their existing workforce as efficiently as possible and until they are certain that the upturn in the economy is permanent.

The cost of shedding labour again, should the improvement in the economy prove to be weak or temporary or both, would be too great.

The same will be true where non-wage costs (for example, National Insurance contributions) are high, thus making it relatively expensive to take on extra workers.

Companies need to be certain that the strength of the recovery is sufficient to justify hiring extra hands. The degree of labour market flexibility, therefore, has a direct effect on the length of the lag between changes in the real economy and labour market shifts.

How companies react to any given change in economic circumstances will also be coloured by how they perceive the underlying state of the economy and the capability of economic management.

The UK economy in the 1990s was characterised by shallow cycles. If this is seen as the norm, then companies may view any slowdown as temporary and/or shallow.

Their response in terms of adjusting their workforce would be different from, say, what it might have been in the 1970s and 1980s when economic cycles were much more volatile, booms often became busts and economic macroeconomic management had less credibility.

This is an important element in maintaining economic stability. If companies do not respond immediately to a slowdown by shedding staff, the result may well be to modify the extent of the dip and bring forward the recovery.

Keeping people in work has the dual effect of preserving consumer spending power and public finances, in the latter case by both maintaining tax revenues and avoiding an increase in unemployment benefit.