Academic journal article National Institute Economic Review

As Good as It Gets? the UK Labour Market in Recession and Recovery

Academic journal article National Institute Economic Review

As Good as It Gets? the UK Labour Market in Recession and Recovery

Article excerpt

Labour markets, both in the UK and internationally, have surprised both in recession and recovery. Contrary to the prior literature summarised in OECD (1994) that argued that unemployment was caused by the levels of unemployment benefits, job protection and other labour market factors including high levels of union density, unemployment grew most in countries a) with large financial sectors (the UK and the USA); b) that had house price bubbles (e.g. Ireland, Latvia, Spain, the UK and the USA); c) that had low levels of job protection and unions (the UK and the USA). By contrast, countries with high levels of job protection and high levels of union bargaining coverage have had relatively small rises in unemployment (e.g. Germany and Austria). (1) The prior literature on the causes of unemployment essentially has nothing to say about this crisis.

In the UK, unemployment did not rise nearly as fast as I, or others, had expected, based upon past performance of the UK labour market and the scale of the shock; and, since a modest recovery began in 2013, it has fallen considerably faster than expected. Overall employment growth has also been healthy and the employment rate is now back to roughly the 2003-7 level, although growth now appears to be flattening off.

Figure 1 plots annual unemployment rates using data from the ONS from 1984 and from 1963-83 using data from the CEP-OECD Institutions Dataset (Nickell, 2006). In the recessions of the 1980s and 1990s when unemployment rates hit double digits, this time, the peak was 8.0 per cent at the start of 2010 when there were just over 2.5 million unemployed.

This relatively positive experience reflected both sustained structural improvements in the functioning of the labour market over the past 30 years, and a sensible macroeconomic response to the financial crisis: interest rates were cut to the zero lower bound, the Monetary Policy Committee undertook a total of 375bn [pounds sterling] of quantitative easing (QE) and the Labour Government introduced a huge fiscal stimulus.

The flipside of the employment numbers has been the astonishing, and virtually unprecedented, fall in real wages. This implies that while the unemployment (or employment) rate might have been a sufficient statistic to summarise the level of labour market slack before the Great Recession, that is no longer true post 2008. That arises because of the increase in underemployment levels to unprecedented levels, which combined with the unemployment rate keeps wage pressure down.

Table 1 reports the main labour market quantities and rates at the start of the recession in January 2008, May 2010 when the coalition took office, and the most recent data available at the time of writing for September 2014. (2) I also report wages according to the national statistics, the monthly Average Weekly Earnings (AWE); the quarterly Labour Force Survey (LFS) and the Annual Survey of Hours and Earnings (ASHE). Index numbers for the two main inflation indicators, the CPI and the RPI are also shown. In the final two columns I report percentage changes.

A number of points stand out.

* There has been a sharp increase in the size of the 16+ population, up 5.3 per cent since 2008 and 3.2 per cent under the coalition.

* Employment has risen 5.4 per cent since May 2010 but the employment rate, where the 16+ population is used as a denominator, is still below pre-crisis. While the number of people in work is at record levels, so far this simply reflects population growth.

* Self-employment numbers have risen by nearly 600,000 since May 2010 to 14.7 per cent of total employment. The wage data exclude the self-employed. The latest Family Resources Survey shows that real median weekly earnings of the self-employed are down 22 per cent between 2008/9 and 2012/13 and down from 236 [pounds sterling] to 207 [pounds sterling] or 12 per cent on the latest year. (3) So while the self-employed are a heterogeneous group, the sharp fall in average self-employment earnings suggests that much new self-employment is low paid/ low productivity. …

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