Why do job figures seem to defy gloom? Why is employment growing so rapidly while output is falling? This is the hottest question in UK economics, with profound implications for policy. Employment grew by 236,000 in the three months to July to 29.56m, the highest figure since March-May 2008. This means the number of people in work is virtually back to its pre-recession peak, even though output is down 4.2 per cent since early 2008. Ordinarily, that would have led to a sharp drop in employment. Economists put forward three possible explanations: that output is doing better than the national accounts data show, that the labour market is doing worse than it seems, or that productivity has significantly weakened - or some combination. The jury is still out. Output data tend to be more heavily revised than employment, which leads some to think the UK has not really been in a double-dip recession for the past three quarters. Others say the labour market is not so strong, because the rise in employment has been driven by self-employment, part-time work and temporary jobs. "People are pricing themselves into work through weakness in pay and the shift to less secure and less well-paid forms of work," said Michael Saunders an economist at Citi. John Zhu at HSBC pointed to the workforce jobs data as a sign that momentum in job creation is "slowing fast." This is a separate survey from the employment data, which come from the Labour Force Survey. By the workforce jobs measure, the economy created 93,000 jobs in the quarter to June, down from a 314,000 gain in the quarter to March. Are we nearer to resolving the productivity puzzle? Whatever the reality on output and employment, worker productivity fell 0.7 per cent in the first quarter, according to official figures, and remains well below its pre-recession trend. This has prompted debate about whether there is a deterioration in the growth trend of productivity, which would undermine economic prospects. Ben Broadbent, a member of the Bank of England's Monetary Policy Committee, said a weak financial sector meant capital was not being reallocated from less productive sectors to more efficient ones. Others have pointed to low demand, coupled with employers hoarding labour in anticipation of an upturn, or to people becoming self-employed and producing goods and services worth less than in their previous jobs. Philip Shaw at Investec said productivity may have been hit by the inability of credit-constrained companies to buy labour-saving equipment, but he saw no evidence of adverse trends in the labour market. If employment is rising, why is unemployment not falling faster? The jobless rate had fallen from 8.4 per cent to 8 per cent of the workforce this year, but has risen again to 8.1 per cent in the latest data. The reason it is not falling faster is that students, retired people and people on long-term sick leave are returning to the labour market. These "economically inactive" people fell by 181,000 in the latest quarter. That is not good news for the unemployed, more than 900,000 of whom have been jobless for more than a year. Unemployment has sat in the 2.4m-2.6m range for over three years. If we are to return to pre-recession levels (around 1.5m), an effective economic growth strategy is essential," said Nigel Meager, director of the Institute for Employment Studies. Will the news on jobs help the government? Up to a point, but it remains vulnerable on the economy. Ed Miliband, the Labour leader, said the government's "failure on long-term unemployment" was responsible for borrowing being up by 25 per cent in the first four months of the year, raising doubt over whether public debt would be falling by the next election. David Kern, chief economist at the British Chambers of Commerce, said: "The government must build on the positive job figures by implementing more policies that allow businesses to deliver growth." What are the prospects now? Forecasting the labour market is fraught with difficulty. The KPMG/Recruitment and Employment Confederation survey of job agencies this week reported a decline in permanent staff placements for a third month, but a Manpower survey pointed to the most buoyant hiring prospects for four years. George Buckley at Deutsche Bank said previous quarterly increases in employment of this size had heralded recovery. But Samuel Tombs at Capital Economics warned that "the labour market's exceptional resilience will not last." He said the Olympics had boosted the figures - 91,000 of the new jobs were in London, about 40 per cent - and some might struggle to find work now the games had finished.