The UK labour market and the 2008-9 recession.
Gregg, Paul ; Wadsworth, Jonathan
The recession of 2008-9 inflicted a larger cumulative loss of UK
output than any of the other postwar recessions. Nevertheless,
employment rates remained higher than might have been expected given the
experience of previous recessions. The main reasons for this appear to
be a combination of high firm profitability levels going into the
recession, supportive monetary and fiscal policies during the recession,
reductions in real producer wages and relatively buoyant real consumer
wages. Unemployment had reached its lowest levels for 30 years going in
to the latest recession and has also remained relatively subdued through
the downturn, certainly compared to previous recessions. A combination
of lower inflow rates into unemployment, allied with a relatively higher
outflow rate into employment underlie this. As government support for
the economy is scaled back, it may be however that it will take a long
time for employment to return to levels last seen before the recession.
Keywords: Labour market; recession; unemployment; wages
Introduction
After some fifteen years of near continuous job growth, the UK
employment rate in the middle of 2008 stood at around 75 per cent of the
working age population, a rate broadly in line with previous employment
peaks observed in 1968, 1978 or 1989. The UK had also experienced twelve
years of near continuous decline in unemployment after 1993, following
the double digit rates of the early 1990s and in the first half of the
1980s. The introduction of the National Minimum Wage in 1999 had little
effect on these positive trends. In 2005, the (OECD-based) unemployment
rate fell below 5 per cent for the first time since the 1970s and
hovered around this rate for the next three years. Then in 2008, the UK
entered what was to be its worst recession since the Second World War,
in terms of output lost. This latest recession was notable in that it
was not, unlike the previous two recessions, exacerbated by a deliberate
policy of fiscal and monetary tightening to squeeze demand out of the
system in order to get inflation on track. Instead, unemployment rose
because of an old-fashioned collapse in demand following the bursting of
a speculative financial sector bubble. Moreover, this time around there
has been a deliberate larger and more rapid loosening of fiscal and
monetary policy to try and offset the fall in demand. In some ways,
policymakers were better prepared this time around. There had been,
after all, two severe recessions well within memory of most adults over
the age of 30. The understandings that were gained during these periods
undoubtedly helped frame a policy response in the latest downturn,
allied with a greater willingness to intervene than in the past. This
was also the first recession in which there was a raft of
interventionist unemployment schemes in place, centred around the
various New Deals, designed to help deal with job search effectiveness
and address the problems associated with long-term unemployment and
inactivity. The real test of these policies is yet to come, as long-term
unemployment starts to build, typically one year after the initial
shock. In what follows we focus on the immediate labour market
consequences of the recession compared to previous downturns in the UK.
So was UK labour market performance during this latest recession
any different? In what follows, we chart the performance of UK
employment and unemployment over the recession. We then offer some
explanations for the results that indicate that the impact on the UK
labour market has been much less severe than many expected, given the
pattern over previous recessions and the contemporaneous experience of
other industrialised countries. We then assess the prospects for the UK
labour market over the next few years.
[FIGURE 1 OMITTED]
Employment in the recession
During the latest recession, GDP fell by over 6 per cent, worse
than in the recessions of the 1980s or 1990s (see figure 1) and, with
six quarters of falling output, it was both longer and deeper than the
previous two. In the 1980 recession, the percentage fall in employment
was broadly in line with the percentage fall in GDP. In the 1990s, the
relative fall in the employment rate in the 1990s was somewhat larger
than the percentage decline in GDP (see figure 1). Moreover, in the
previous two recessions (see figure 2), the fall in employment was only
halted some twelve to fourteen quarters after the onset of recession.
Employment also remained below its before-recession levels for eighteen
months or so after the recovery in output started. Typically GDP growth
of 2 per cent or more seems to be needed before employment starts to
rise again, or unemployment starts to fall.
However, the latest recession was strikingly different. Whilst the
fall in GDP was markedly worse than in past recessions, the loss of
employment was much smaller, some 3 per cent of the initial level, and
the period over which employment fell was much shorter than in the past
(figure 2). This is notable, but could it be misleading?
To understand the factors that have influenced the preservation of
jobs through the recession it is worth considering what we know about
firms' workforce strategies. Experienced staff are valuable to
firms, they have firm-specific knowledge. Losing valuable staff
knowledge is costly, particularly if it will be needed again in the near
future (see Geroski and Gregg, 1997, on the evidence for this over the
1990s recession). So firms will hold labour where possible through a
recession, preferring instead to take short-term hits on profitability.
However, if a firm is in deep financial trouble such longer-term
planning is discounted and the firm will take emergency measures to cut
costs and improve cash flow. This means job cuts, as equivalent cost
reductions made through dramatic wage cuts are difficult to implement
quickly. So a large part of the story of employment through the
recession is shaped by the extent to which firms are in a battle for
survival rather than adjusting to, temporarily, lower demand.
[FIGURE 2 OMITTED]
One potential problem with the estimates of numbers in employment
concerns recent immigrants, particularly migrants from the accession
countries of Eastern Europe (the A8). Migrants from the A8 are not
covered by the Government's recently introduced points-based
immigration system and hence not monitored in the same way. This led
some commentators to suggest that A8 workers were underestimated in the
official employment numbers. So if unmeasured A8 migrants returned home
in large numbers in response to the recession, this could, conceivably,
generate a smaller decline in employment in the official data than would
be the case if all those in employment were measured in the official
statistics. The employment numbers in figure 1 are derived from the
Labour Force Survey (LFS), a survey of households. It is possible that
recent migrants living in temporary accommodation, on building sites or
farms may not be sampled by the LFS. However there are a number of
reasons to think that emigration is not a major factor behind the
moderate fall in employment.
First, an alternative data source on employment, the workforce job
series, which derives employment data based on surveys of firms, shows a
similar pattern to that given by the LFS. Second, whilst the numbers of
new migrants did fall back after 2006, until 2009 the stock of migrants
in the workforce was still rising, suggesting that the duration of stay
was also rising. It is also not obvious why immigrants to the UK would
return to the source country if relative job prospects in the source
country were worse, as they currently appear to be in many A8 countries.
Rising unemployment rates and depreciating home currencies in 2009,
relative to the pound, combined to reduce the relative returns to
returning. Thirdly there is a question of scale. The number of jobs
saved so far relative to what might be expected by the drop in GDP
amounts to some one million (3.5 per cent of employment). If, however,
one million jobs had been lost but obscured by immigration, the scale of
hidden migration would have to be huge and this is highly unlikely. (For
example a 10 per cent job loss centred exclusively on immigrants would
require 10 million hidden immigrants to generate a one million fall in
employment). Moreover the recession would have to be centred on sectors
that employ migrants and there is little evidence that this is the case.
In short, it is unlikely that mis-measurement of immigration underlies
the smaller than expected fall in employment.
So if an estimated net one million jobs appear to have been
preserved, how has this happened? The first point to consider is how
widespread across countries this pattern has been and whether it is
related to institutional differences across countries. Table 1 shows
that countries like France and Canada have escaped relatively lightly
from the recession with around a 3 per cent fall in GDP and a similar
rise in unemployment, in line with past norms, whilst in the US, Spain
and Ireland, the rise in unemployment exceeded the fall in output.
However there are a large number of countries with smaller than expected
employment falls. Some of these countries adopted a deliberate strategy
to encourage short-time working rather than lose jobs. In Germany the
Government has supported a policy of short-time working. Similar
employment subsidy schemes are operating in Italy, the Netherlands and
Japan.
The UK is one of a smaller number of countries to have experienced
relatively small employment losses without a deliberate government
funded strategy of short-hours working. Does this mean then that the
putative flexible labour market in the UK helped by facilitating
adjustment in hours or wages instead of jobs? It is important to note
that the low employment loss countries are not those regarded as having
flexible labour markets. The US is held to be the prime example of the
flexible model and Ireland is also a relatively less regulated country
and both countries experienced large falls in employment. Spain has
strong labour protection but also has a large share of temporary jobs,
which are weakly protected and have proved to be vulnerable in the
downturn. In contrast, Sweden, Italy, Germany and the Netherlands have
relatively high employment protection levels and relatively good
employment records over their recessions. In short, there is no
relationship between a country's degree of labour market
flexibility and employment losses in this recession.
Hours of work
It is typical in recessions for total hours to fall faster than
employment. Overtime working is often cut first, some workers are placed
on short-time working and others move into part-time work when they
struggle to find fulltime jobs. Figure 3 gives the annual change in
employment across the past three recessions (as in figure 1) and adds
the change in total hours worked. The difference between the fall in
total hours and employment then reflects what is happening to average
hours. Hours did fall in this recession, by around 2 per cent, but less
so than in the past two recessions, especially during the 1980s when the
Government did subsidise short-time working in many major manufacturing
plants and hours fell by around 4 per cent.
[FIGURE 3 OMITTED]
Part-time working rose from around 16 per cent of employment in
1980 (excluding students) to 22 per cent in 1995, after which it has
been broadly stable. The share of part-time working has risen during
this recession, consistent with the fall in hours above. However this
pattern is not unique to this recession. Similar or sharper rises in the
share of part-time work can be found during the past two recessions. The
part-time job share tends to stabilise when employment recovers to
before-recession levels.
One explanation for differential employment performance across
countries over the recession is that the shock of the recession hit
sectors with different capital intensities or productivity differentials
by differing amounts across countries. A high productivity, high capital
intensity sector, subject to a negative shock, is likely to experience a
sharper fall in output than employment. Figure 4, which shows employment
indexed for the beginning of the recession across major industry
groupings, and table 2 indicate that, in the UK, the manufacturing
sector once again experienced the sharpest percentage fall in employment
over the latest recession, as in previous recessions (in contrast to the
financial sector, the source of: the recession). Manufacturing and
construction have been hardest hit with 8-10 per cent of employment lost
compared to services at tinder 2 per cent. Since high productivity
manufacturing experienced the largest employment loss, it is unlikely
that the simple shock to a high productivity story explains much of what
we have observed in the UK. However, within the service sector there is
considerable variation. In the public services of education, health and
administration employment has grown by 4 per cent, and employment has
fallen by around 4 per cent in finance, retailing (and transport). While
these proportionate rates of decline are well below those of
construction and manufacturing, because these latter sectors are larger,
they account for around half of the total jobs lost.
[FIGURE 4a OMITTED]
[FIGURE 4b OMITTED]
[FIGURE 5 OMITTED]
Since UK output fell much faster than employment or hours worked,
then productivity also fell sharply. Over the past fifty years,
productivity growth has allowed real wages to grow by around 2 per cent
a year, on average. Falling productivity puts downward pressure on
wages. Squeezing real wage costs during a recession is not as
straightforward as it seems, as pointed out by Keynes. Price inflation
also tends to fall during downturns so offsetting any moderation in
nominal wage growth. Furthermore, wages are a major driver of consumer
spending and squeezing the earnings of consumers, and hence demand,
makes stabilising output harder. Figure 5 shows the patterns for real
wage growth including and excluding the impact of mortgage interest
rates. It thus captures the growth of real wages including mortgage
rates, which is relevant to consumers, and excluding mortgage rates,
which is more relevant to firms. In all three recessions, both prices
and nominal wage growth slowed sharply. In the latest recession real
consumer wages rose quite markedly, as mortgage rates were cut following
the slackening of monetary policy to accommodate the fallout from the
crisis in the financial sector and VAT was temporarily reduced to 15 per
cent. However, real wage growth to firms fell to around -3 per cent.
This gap between consumer wage growth and that faced by producers will
have undoubtedly helped firms cope, while sustaining demand.
[FIGURE 6 OMITTED]
[FIGURE 7 OMITTED]
In the 1990s recession, profitability was already being squeezed
ahead of the recession proper, as interest rates were set high to bear
down on inflation (figure 6). By contrast this time, profits were much
higher immediately before the recession. This means that the immediate
pressure on firms to cuts jobs in order to survive was reduced. Since
then, profitability held up well through the recession and indeed rose
as a share of GDP. This is in part due to lower interest rates making
financing debt easier; partly due to the fall in the exchange rate,
unlike in the early 1990s when membership of the ERM precluded
devaluation; partly due to rapid falls in real wages and partly due to
the maintenance of spending in the economy.
Unemployment and the recession
As with employment, the rise in (ILO/OECD) unemployment this time
around has been small relative to the fall in GDE Following the 1980
recession, unemployment rose for some five years after the recession
end, reaching a peak of 12 per cent in 1986 (figure 7). In the 1990s,
unemployment took three years to reach its height following the 1990
recession and while still in excess of 10 per cent was lower than in the
1980s. In this recession the rise in unemployment was sharp, but,
significantly, appears to have stabilised much earlier, even before the
recession had ended.
Figure 8 documents the flows that shape the stocks of unemployment,
employment and inactivity, all measured on the ILO/OECD definition. The
top left row gives the flow out of employment. It is clear that the
employment outflows in this recession were lower than in previous
recessions, with 96 per cent of those in work staying in work through
the year compared to 92 per cent in the past two recessions. Similarly
the outflow from unemployment into employment remained higher this time
round than in the past downturns, with 35 per cent of those unemployed
getting work compared to 30 per cent in previous recessions. As a
result, the duration of unemployment, captured by the U-to-U flow, in
row 2 of figure 8, remained lower than in previous downturns. The
numbers flowing into economic inactivity, E to N and U to N, have been
falling or stable in recent years. Outflows from inactivity into
unemployment have risen in recent years, perhaps as a result of schemes
like the New Deals for Lone Parents, Disabled People and 50+, which are
all aimed at bringing groups with high rates of economic inactivity back
into the labour force. The Working Tax Credit schemes expanded and
augmented under Labour, aimed at making hitherto low-paid jobs more
attractive to the unemployed, may also have helped maintain flows into
employment. However outflows from inactivity into employment are as low
in this recession as in previous ones.
The net result of all these flows is that lower unemployment in
this recession has been driven by a combination of lower rates of job
loss and slightly higher return rates to work than in past recessions.
[FIGURE 8 OMITTED]
Long-term unemployment
It is perhaps not realised the extent to which people move in and
out of work. In any 3-month window, some one million people move into
work and one million stop working. In a recession there are small but
important shifts in these patterns. An additional 100,000 individuals
lose work each quarter and 50,000 fewer gain work, leading to
unemployment rising by 50,000 a month or so. What shifts more markedly
is that vacancies are filled much faster. Indeed the numbers of unfilled
vacancies, registered at Job Centres, have fallen from around 700 to 430
thousand over the latest recession. More competition for fewer jobs
means that it takes longer for any one person to get a job. Inflows into
unemployment drive initial rises in unemployment, so that the stock is
dominated by short-term unemployed. As the recession continues and job
prospects and hiring stagnate, so long-term unemployment tends to rise.
[FIGURE 9 OMITTED]
[FIGURE 10 OMITTED]
Long-term unemployment typically begins to rise around one year
after the initial rise in total unemployment and may often continue to
rise even when the total unemployment first starts to fall again. In
previous recessions, LFS-based long-term unemployment (twelve months
spell or longer), reached 1.2 million, some 40 per cent of the
unemployed. Long-term unemployment is starting to rise again this time
and had reached 700,000 or 25 per cent of the unemployed workforce by
early 2010, still much lower than in the past. The numbers of long-term
claimants for unemployment benefits (JSA) tend to be lower than the
numbers saying they have not worked in the past year (LFS) (see figure
9). Since the New Deal schemes were introduced this gap has widened
sharply. As a result, the number who have claimed JSA for over a year
remain very low in this recession. With the government intervention
programmes in place the latter should remain relatively low.
The experience of unemployment is also far from even in the
population. Unemployment has always depended on factors like age,
education, gender, ethnicity and region. Often the combination of these
characteristics acts to make job prospects rather bleak for a
significant minority. In good times, relative prospects tend to improve
for these most disadvantaged groups. In bad times, relative prospects
for the most disadvantaged worsen.
[FIGURE 11 OMITTED]
Disadvantage amongst the young has been a longstanding feature of
the labour market. As a general rule of thumb, the youth unemployment
rate is always double the adult rate. However younger workers, as figure
10 shows, typically have much shorter spells of unemployment than
others. The share of younger workers who are long-term unemployed is
lower than the share of older workers who are long-term unemployed.
Other things equal this must mean the duration is lower amongst young
people. So, while the risk of unemployment is higher among the young, so
too are the chances of escaping it. There are however recent concerns
that, for some youths, the chances of escaping unemployment are not that
high. Unemployment rates among less educated young people in the latest
recession were well above those of previous recessions, whilst the
situation for older workers is much better. In this recession, youth
unemployment rates are nearer three times that of prime age adults,
rather than double as in the past. The share of long-term unemployed
among younger workers in 2009 was much closer to the share among older
workers than in the past. This development looks set to be to be a cause
for concern over the next few years.
Inactivity
Only a minority of those not working at any point in time are
unemployed. It is more common for people not working to be not actively
seeking a job. It is also true that unemployment can fall both because
individuals find work and because they become economically inactive. The
main reasons for inactivity are study, sickness, early retirement or
looking after children. Inactivity normally rises in a recession,
typically lagging behind movement in the unemployment rate by about a
year. Some people losing work don't seek or are unable to find a
fresh job. Others take early retirement because of this. For others
there is a move from, often long-term, unemployment, into
sickness-related inactivity. In some respects, for some, this latter
movement has proved akin to an extended spell of what is effectively
long-term unemployment. Figure 11 shows the proportion of the working
age population who have been economically inactive since 1979. The
long-term average is for about 22 per cent of the adult population to be
neither working nor actively looking for work. In each of the past two
recessions the inactivity rate rose by around 2 percentage points. The
rise in the latest recession has been more modest, but, on the basis of
past experience, might be expected to increase later in the cycle.
One major development worthy of note is the increase in numbers of
young people staying on in both further and higher education. Staying-on
rates have risen in past recessions and the latest downturn has also
seen a substantial rise. The second line on figure 11 tracks the
inactivity rate excluding full-time students. On this basis, economic
inactivity has fallen steadily, by around 2 percentage points, since the
aftermath of the 1990s recession. In 2009 there were just over 16 per
cent of the adult population neither economically active nor in fulltime
education, the lowest rate for over thirty years. The figure also makes
clear that the small rise in inactivity observed in this recession has,
so far, been mainly due to increased participation in education.
However the news is not all good. The composition of the
(non-student) economically inactive has shifted markedly over time
towards men. The gender ratio in favour of women has fallen from 87 per
cent in 1979 to 61 per cent in late 2009. Back in 1979 around 40 per
cent of women aged 25+ were economically inactive compared to a rate of
under 5 per cent for men. Since then the number of women entering the
labour force has grown rapidly and shows little sign of halting. Rising
inactivity for reasons of ill health and disability is concentrated on
men. At around 2.3 million, there were almost twice as many inactive men
as there were unemployed men (on the ILO/OECD definition), in the fourth
quarter of 2009. Policy changes on pensions and incapacity benefits has
arrested the inflow of sickness-related inactivity recently, but the
overall level of inactivity among men has been persistently high for
twenty years. The net result is that inactivity among men is, at best,
static and remains three times higher than the rates observed in the
1970s. Indeed more than half of the fall in the male unemployment rate
from 1993 to 2008 can be accounted for by rising inactivity, though much
of that rise in inactivity took place in the 1990s.
[FIGURE 12 OMITTED]
Figure 12 shows the numbers in receipt of the major welfare
benefits available to those out of work. In addition to the large
cyclical fluctuations in unemployment benefit receipt over time there
have been marked increases in claims fur Income Support (IS) for lone
parents and in sickness-related benefits. This amounted to around 3/4
million extra claims in the 1980s recession and 1 million extra claims
in the 1990s recession. Unlike unemployment related benefit, claims for
these other benefits did not fall back after the recessions ended. The
claimant numbers for these inactivity benefits only started to fall
around 2001 and then mainly for lone parents. Lone parents with children
aged seven and over are now being moved from IS to unemployment benefits
(JSA) that require active job search and the new Work Capability
Assessment tests are also making claiming disability benefits much
harder. These changes are pushing up the number of claims for JSA during
the recession, making the small rise in JSA unemployment all the more
remarkable. Yet claims for lone parent benefits did rise, once again
during the latest recession. The uncertainty arises around how far,
compared to previous recessions, they will rise this time. The
expectation is that they will not, because of the extra support and job
search schemes targeted not only at the unemployed but also at the
inactive.
Conclusions
This recession has been remarkable for the depth of the fall in GDP
and the lengthy duration of falling output, but also for the relatively
low loss of employment, at least so far. it seems that the explanation
of how Britain got away with a smaller fall in employment in 2008-9
consists of several elements. Policymakers did the right thing in saving
the banks, cutting interest rates and inducing fiscal and monetary
stimuli, all of which have helped maintain demand and firms'
cashflow. Workers did the right thing in accepting lower nominal wage
growth, although real wage growth was sustained by cuts in interest
rates and VAT. Firms did the right thing in, wherever possible, holding
onto valuable labour in the face of the pressure on profits and the
severe nature of the crisis. Employers entered the recession in good
financial shape and this has helped avoid the level of job shedding that
occurs when firms get into deep financial trouble. However, the
recession means that firms have under-used labour at the moment and this
will allow them to grow without the need for extra jobs in the short to
medium term. If demand continues to be weak, then job shedding will
continue on a slow but sustained basis.
This recession represents the first serious test of the active
labour market policies that have been put in place since 1996. Increased
conditionality on welfare claimants to take active steps to secure work,
increased packages of support services for job search available to those
claiming benefits and the use of outside providers to deliver these
services rather than Job Centres are all innovations aimed at keeping
individuals in the labour market and maintaining search effectiveness.
Reforms that increased the financial returns to working relative to not
working, the National Minimum Wage and Working Tax Credit, should also
continue to help to make work pay through a downturn when job prospects
may not be as good as in recovery.
The signs are that unemployment also has not risen as much as many
expected. This is to be welcomed, though the ability of the new policies
to withstand a build-up of long-term unemployment that has in the past
followed in the wake of a recession is still to be tested.
The cost has been huge on the public finances and in terms of
productivity and this will affect cost competitiveness going forward.
There are also serious jobless concentrations among more marginal groups
that fifteen years of sustained growth did little to remedy. As a
result, for some groups, there has been a ratchet upwards in joblessness
from the 1980s onwards and this will need to be addressed when the
economy recovers. Yet, overall, it seems that the labour market has
performed relatively better than expected. Whether this generally good
news will be sustained when the focus shifts to cuts in public spending
and employers begin to assess their longer-term employment needs is also
less than clear. Employment took eight to nine years to get back to
before-recession levels after the past two recessions. This time it
might be less if a second wave of job shedding is avoided.
doi: 10.1177/0027950110372445
REFERENCES
Geroski, P. and Gregg, P. (1997), Coping with Recession: Company
Performance in Adversity, Cambridge: Cambridge University Press.
Gregg, P. (2008), Realising Potential: A Vision for Personalised
Conditionality and Support, DWP (http://www.dwp.gov.uk/
welfarereform/realisingpotential.asp).
OECD (2009), Employment Outlook. Tackling the Jobs Crisis, Paris,
OECD.
Paul Gregg, University of Bristol, CMPO and CEP.
Jonathan Wadsworth, Royal Holloway College, University of London,
CEP, CREAM and IZA. E-mail:
[email protected].
A fuller version of this article can be found in The Labour Market
in Winter. The State of Working Britain, Oxford University Press
(forthcoming).
Table 1. The percentage change in GDP and unemployment
across selected countries over the recession
Per cent change Per cent point change
in GDP in unemployment
2008Q1-2009Q2 2008Q1-2009Q4
Countries with small unemployment rise
relative to decline in GDP
UK -5.9 2.7
Sweden -6.1 2.9
Countries with small unemployment rise
relative to GDP and with employment subsidies
Italy -6.5 1.8
Germany -6.3 -0.1
Netherlands -5.8 1.2
Japan -7.1 1.3
Countries with similar unemployment rise and GDP fall
France -3.1 2.4
Countries with larger unemployment rises than GDP falls
US -3.5 5.0
Spain -4.3 9.7
Ireland -9.6 8.2
Countries with little or no GDP fall
Australia +1.5 1.5
Source: OECD (2009).
Table 2. Sectoral trends in employment
1979 1983 1990 1993 2008Q2
-83 -90 -93 -2007 -2009Q4
% [DELTA] Employment -7.3 +15.0 -6.3 +15.6 -2.9
% [DELTA] Manufacturing -21.5 -5.6 -16.7 -27.8 -9.7
% [DELTA] Finance +3.7 +45.4 -1.5 +51.7 -4.3
% [DELTA] Construction -9.2 +35.2 -20.6 +18.9 -8.2
% [DELTA] Retail, Hospitality -3.9 +20.7 -3.6 +12.8 -3.9
% [DELTA] Public Admin. 0 +13.8 +1.5 +21.9 +3.5
Source: Workforce jobs series ONS. Authors' calculations.
