Employers need to create 850,000 extra jobs to reach the pre-recession peak, according to an in-depth report that undermines claims the jobs market has defied the recession.

An increase in the number of private sector jobs over the last four years has failed to keep pace with a steady rise in the UK's population of over-16s, leaving the proportion of people in work well short of the previous high, the Resolution Foundation said.

The UK adult population has grown by 1.7m since 2008, leaving the employment rate – the proportion of people in employment – 1.7 percentage points lower today than in 2008.

The analysis is a blow to the government, which has pointed to the high level of employment as a sign that its economic policies are working.

Ministers have hailed an expansion in private sector jobs over the last year as offsetting the cull in public sector posts. Recent figures show that 29.73m people hold some sort of job, the largest number recorded, following a rise of 154,000 between September and December 2012.

George Osborne is expected to argue that an increase in full-time private sector jobs in the second half of last year, following several years when most new jobs were part-time, shows the economy is "healing".

However, economists have struggled to explain the expansion in jobs against a backdrop of double-dip recession followed by flat growth.

Only a week before the chancellor delivers his mid-term budget, the UK remains in a long depression and most forecasts show the economy is unlikely to regain its former peak level of output until at least the end of next year.

The Resolution report is an attempt to explain the jobs gap by showing that while many jobs have been created, there are even more people over 16 eligible for work.

The thinktank claims that concentrating on the total number of people employed in the UK, which reached a record in December, gives a misleading impression when the employment rate is well below the peak.

Much of the growth in population comes from the number of over-65s, reflected in a surge in the total to more than 12m.

Even when retired people are excluded, the population has risen following a decade of strong net migration.

That inflow makes the picture even gloomier for Britons struggling on the margins of the jobs market. The employment rate for workers who have arrived from nine EU accession countries, including Poland and Lithuania, is more than 80%, against an average 58.7% for the entire workforce.

To get back to the pre-recession employment rate of 60.3% by 2018 will need a faster rate of growth than is forecast by the Treasury's budget watchdog, the Office for Budget Responsibility. It is even more difficult once a predicted population rise of 340,000 a year for the next five years is taken into account.

The OBR forecasts a further decline in public sector employment of 500,000 to 2017, meaning the private sector would have to create 2 million jobs in the next four years if the employment gap is to be closed by late 2016.

Instead, the OBR believes private sector job creation will proceed at about half this pace and the jobs gap will still be 820,000 in 2018.

James Plunkett, Resolution's director of policy, said: "The employment growth we've seen in recent months has been remarkable given the continuing weakness of GDP and is a rare positive piece of economic news.

But focusing on today's record levels of employment underplays the fact that the employment rate is still far below its level in 2008.

"The UK needs to create around 50,000 additional jobs a quarter just to stand still. Moving back decisively towards fuller employment will be a long, hard road, especially as our workforce continues to age."