UK jobs – good news amidst the gloom
By Andrew Sentance, Senior Economic Adviser
Despite all the doom and gloom surrounding the euro crisis, there is good news on the jobs front in the UK. The latest labour market statistics show a fall in unemployment – of around 50,000 in the last three months. This is being driven by rising private sector employment – with close to 850,000 new jobs being created in the past two years. Even though unemployment in the UK is currently around 2.6 million – 8.2% of the workforce – it has not risen as high as it did in the 1980s and 1990s. Then, unemployment rose above 10% of the labour force and in the 1980s remained at a double digit rate for over five years.
This picture is at odds with the GDP figures, which show a deep recession and a slow recovery in the UK. But GDP figures may be revised – as they have been in the past. Even so, they would have to be revised quite dramatically to explain these differences in employment performance. Rather, the explanation for the UK’s better recent job performance probably lies elsewhere - in the way businesses, policy-makers and the labour market have responded to the shocks created by the financial crisis.
Four key factors have played a part in delivering a more positive outcome for UK employment than we have seen in previous recessions. The first is a change in the structure of employment, with the services sector now playing a larger role in the economy. In major UK recessions, around 90% or more of the job reductions have occurred in two highly cyclical sectors of the economy – manufacturing and construction. These sectors now account for a smaller share of jobs, and so have generated less job losses. Instead of shedding 2-2.5 million jobs, as they did in the early 1980s and early 1990s, employment in UK manufacturing and construction fell by about half this amount in 2008/9 – by just over a million.
A second factor contributing to better employment performance through the latest recession has been the underlying health of the UK business sector. In the two earlier recessions, the loss of jobs was intensified by structural problems – the big shake-out in manufacturing in the 1980s and the unwinding of the “Lawson Boom” in the early 1990s. By contrast, the non-financial business sector of the economy was in much better shape when the financial crisis hit, and companies were in a better position to retain skilled and experienced workers.
The other two factors which helped to support employment through the recent recession and into the recovery are wage flexibility and policy measures. Though inflation has been high, wage increases have remained subdued, and this has helped employers to maintain a higher level of employment without incurring excessive costs. There have also been other aspects of labour market flexibility which have supported job growth – with part-time jobs and self-employment growing strongly.
Economic policy has also operated more flexibly through the most recent recession. In the early 80s and early 90s recessions, policy-makers were battling with high inflation and were reluctant to provide stimulus to the economy until they were clear that the battle against rising prices had been won. Concerns about inflation did not hold back policy relaxation in the 2008/9, though subsequent above-target inflation has raised concerns that policy was kept too loose for too long.
We should take encouragement from recent UK labour market and employment performance. The change in the structure of the UK economy over the past 20/30 years – towards a more service-oriented economy – has helped sustain employment through the recent recession. The UK non-financial business sector has proved itself remarkably resilient – despite the pressures of the financial crisis. And labour market flexibility – in a variety of respects – has been a great asset for an economy like the UK, which is vulnerable to big shocks from the global economy.
Looking ahead, the euro crisis casts a shadow over job prospects in the UK. But in the face of these current uncertainties, the resilience of employment and evidence of better labour market performance should be a source of encouragement about the ability of the UK economy to cope with any turbulence ahead.