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Britain was hit harder than most rich countries by the global financial crisis, and its recovery from the crash has been one of the least convincing. Indeed, GDP fell for a second successive quarter at the start of 2012, marking a “double-dip” recession. The wonder is that unemployment is not higher. Among biggish rich countries, only Germany can boast that its jobless rate is lower than before the crisis. But Britain’s is little worse than the average OECD country. The latest figures put unemployment at 8.3%, on a par with America’s perkier economy and well below the rate in some European countries (see first chart).One explanation for this small mercy is that Britain’s economy differed in an important respect from others that ran up big mortgage debts. In America, Ireland and Spain, the collapse of jobs-intensive house-building added to the dole queues. Britain also had a boom in house prices but its rigid planning laws were a curb on construction. Fewer building jobs were created in the boom or lost in the bust.
Britain’s jobs market has also proved far more resilient than during previous downturns. Unemployment continued to rise long after the recession of the early 1980s had ended and stayed above 10% for most of the decade. The downturn of 1990-91 was mild compared with those before and after it, but it still produced double-digit unemployment (see second chart).
Not all jobless figures look better this time. The jobless rate among the under-25s has risen to 22%, higher than in the 1980s or 1990s. But unemployment is expressed as a percentage of those who are either in work or looking for it, a group that has diminished as the number of full-time students has grown. Unemployment as a share of all young adults is still below the levels reached in earlier recessions; so is the share of young adults who are not in education, employment or training (so-called NEETs), says Jonathan Wadsworth of Royal Holloway College. The young suffer more in recessions: they have fewer skills and so are first to be laid off. But joblessness among young adults has not deviated from that of other age groups any more than in past downturns, says Mr Wadsworth.
The corollary of sluggish GDP and a fairly stable jobs market is stagnant productivity, which itself is a puzzle. A partial explanation, says Kevin Daly of Goldman Sachs, might be that GDP is higher than the official figures currently suggest. Such figures are prone to upward revision over time. What is already clear is that employers have clung to employees more tightly than in past downturns. Real wages have fallen more sharply than they did after previous recessions, making the cost of stockpiling workers bearable for companies. It has helped, too, that many businesses had built up large reserves of cash during the boom, so they have not been under undue pressure to slash jobs.
The downside of such labour hoarding is that it implies there is less scope for unemployment to fall quickly. If firms are indeed carrying extra workers (ie, the productivity problem is cyclical) it is in the hope that the economy will recover. But the more elusive a sustained recovery seems–and the signs from the euro zone are scarcely encouraging–the greater the risk of a fresh round of lay-offs. If, on the other hand, recovery takes hold, firms can for a while draw on the existing workforce to cope with an increase in business.
But some economy-watchers are beginning to fret that productivity might have permanently slowed. One discouraging sign is that inflation, at 3.5% in March, has not fallen as quickly as hoped. If firms have underemployed staff and idle capacity, they should be competing harder for business by driving prices down, not marking them up. Stubborn inflation is the main reason why the Bank of England’s monetary-policy committee, which met as The Economist went to press, was not expected to sanction further “quantitative easing” immediately. The productivity puzzle and the bank’s recent poor record of inflation forecasting are likely to make the committee cautious for a little while.
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