I make no apology for returning to the subject of the recession. What can we now say about how the UK labour market is faring and how policy is responding?
It’s received wisdom that the labour market is a ‘lagging indicator’ in a recession. Well, as recent research from the Office for National Statistics shows, that’s not quite true: ONS notes that in the current recession ‘unemployment levels responded immediately and noticeably to the fall in GDP1 Strikingly, this is exactly what happened in the Thatcher and Major recessions. Looking at the rate of increase of unemployment, the current recession is almost identical to that of the early 1980s: in both cases, we entered recession with an unemployment rate just over 5%, and it increased by the same amount in the first nine months of recession (the 1990s recession started with a higher unemployment rate, but it didn’t increase quite as fast).
Seeds of recovery
So can we deduce that recovery will also follow the pattern of previous recessions? Probably not. Much depends on the course of output growth; the causes of the current recession are very different from those of the last two, as are the macroeconomic measures introduced to deal with them. As ONS points out, however, while the labour market did not ‘lag’ in entering the recession, it did lag in the upturn. In the 80s and 90s, unemployment continued to increase for two years after GDP growth had resumed. What hope, therefore, for a quicker turnaround this time? Some commentators argue that the labour market is now more ‘flexible’ and will respond more quickly to economic upturn. ‘More flexible’ in this context is usually a euphemism for ‘less regulated’ (or greater ease of hiring and firing). In fact, in the early 80s when the UK had one of the worst unemployment records in Europe, it already had the least regulated labour market; currently our unemployment performance remains better than the EU average, but our labour market is more regulated than in the early 80s (although it is still one of the least regulated in the OECD).
While citing flexibility as the source of a faster rebound from this recession is grasping at straws, there may still be reasons for optimism. These lie in the area of labour market policy. Since the 1980s, we’ve seen a massive shift from passive to active labour market measures (from income support during unemployment, to keeping the unemployed close to the labour market with incentives to re-enter work as soon as possible). In the 1980s hundreds of thousands of long-term unemployed languished on poorly-performing ‘make work’ schemes which did little to enhance their skills, and added to the stigma they faced in the eyes of employers. Additionally, many were tacitly encouraged to become economically inactive, claiming disability benefits. This helped keep the unemployment register down, but many experienced a permanent severing of links to the world of work, contributing to the massive increase in the population on inactive benefits which has bedevilled policy-makers ever since.
Different political landscape
The landscape is different now; the unemployed face a much more active policy regime, designed to move them quickly back to work wherever possible. Prior to the recession, this approach had some success, not only in closing some of the easier routes into economic inactivity, but also in beginning to reduce the numbers on inactive benefits. Perhaps the most remarkable statistic of the current recession is that economic inactivity has not risen as it did in previous downturns. While this means that more people show up on the unemployment register, it implies that much larger shares of workless people will receive active support from the public employment services and be in a better position for labour market re-entry once the economy picks up. Finally it is worth noting a belated recognition that the supply-side measures which dominated labour market policy since the early 90s are no longer sufficient. New initiatives on the demand side, a jobs guarantee for young people and the ‘future jobs fund’ to create work at local level, will provide an important supplement to the existing supply side measures.
Outlook
So although unemployment will continue to rise for some time, there are good reasons to hope that we may avoid the re-emergence of the hard core of long-term unemployment and inactivity that characterised previous recessions. This is particularly important for young people, who have borne the brunt of the downturn so far and who, the evidence suggests, are most likely to be scarred by long-term unemployment.
[1] www.statistics.gov.uk/downloads/theme_labour/impact-of-recession-on-LM.pdf