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After 15 years of nearcontinuous job growth,the UK’s employment ratein the middle of 2008stood at around 75% of

the working age population, a ratebroadly in line with previous employmentpeaks in 1968, 1978 and 1989. The UKhad also experienced 12 years of nearcontinuous decline in unemployment after1993, following the double digit rates ofthe early 1980s and the early 1990s.

Despite the predictions of some, theintroduction of the minimum wage in1999 appears to have had little effect onemployment over the last decade. In2005, the unemployment rate fell below5% for the first time since the 1970s andhovered around this rate for the next threeyears. Then in 2008, the UK entered whatwas to be its worst recession since theSecond World War in terms of lost output.

During the latest recession, GDP fell by

The recession of 2008-09 inflicted a larger cumulative loss ofUK output than any ofthe previous post-warrecessions, yet there hasbeen a relatively low lossof employment, at leastso far. Paul Gregg andJonathan Wadsworthlook for an explanation.

Figure 1:

Annual change in UK employment and GDP,1979-2009

Source: Labour Force Survey, Office for National Statistics.

-7%-6%-5%-4%-3%-2%-1%

01%2%3%4%5%6%7%

2009200720052003200119991997199519931991198919871985198319811979

■ GDP – annual change■ Employment – annual change

Per

cen

tage

ch

ange

s on

yea

r

Jobs inthe recession

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over 6%, which is worse than in therecessions of the 1980s or 1990s (seeFigure 1). What’s more, with six quartersof falling output, this recession was bothlonger and deeper than the previous two.In the 1980s recession, the percentagedecline in employment was broadly in linewith the percentage fall in GDP. In the1990s recession, the relative fall in theemployment rate was somewhat largerthan the percentage decline in GDP.

Moreover, in the previous tworecessions, the fall in employment wasonly halted 12 to 14 quarters after theonset of recession (see Figure 2).Employment then also remained below itspre-recession levels for 18 months or soafter the recovery in output started.Typically GDP growth of 2% or higherseems to be needed before employmentstarts to rise again (or unemploymentstarts to fall).

But the latest recession was strikinglydifferent. While the fall in GDP wasmarkedly worse than in past recessions,the loss of employment was much smaller– roughly 3% of the initial level – and theperiod over which employment fell wasmuch shorter than in the past.

The number of UK jobs saved so farrelative to what might be expected by thedrop in GDP amounts to roughly one

million. How has this happened? The first point to consider is howwidespread this pattern has been acrosscountries and whether it is related to theirinstitutional differences.

Table 1 shows that France and Canada

have escaped relatively lightly from therecession with around a 3% fall in GDPand a similar rise in unemployment, in linewith past norms. In the United States,Spain and Ireland, the rise inunemployment exceeded the fall in output.

But there are a large number ofcountries with smaller than expectedemployment falls. Some of them adopteda deliberate strategy to encourage short-time working rather than lose jobs. InGermany, the government has supporteda policy of short-time working, and similaremployment subsidy schemes areoperating in Italy, the Netherlands and

Figure 2:

Employment levels from the start of the recession for the1980s, 1990s and 2008-09 recessions

Source: Office for National Statistics.

Index at start of recession = 100 for 1979 Q4, 1990 Q2 and 2008 Q1 respectively.

92

94

96

98

100

102

104

106

108

4035302520151050

■ 1980-81 recession (100=1979 Q4)■ 1990-91 recession (100-1990 Q2)■ 2008-09 recession (100=2008 Q1)

Em

plo

ymen

t in

dex

Numbers of quarters since start of the recession

Percentage change Percentage point change

in GDP in unemployment

2008 Q1-2009 Q2 2008 Q1-2009 Q4

Countries with small unemployment rise relative to fall 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 -5.85% 1.2

Japan -7.1% 1.3

Countries with similar sized unemployment rise and GDP falls

France -3.1% 2.4

Countries with larger unemployment rises than GDP falls

United States -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

Table 1:

The percentage change in GDP and unemploymentacross selected countries over the recession

This recession representsthe first serious test ofthe UK’s active labourmarket policies

Japan. The UK is one of a smaller numberof countries to have experienced relativelysmall employment losses without adeliberate government-funded strategy offewer working hours.

Does this mean that employment inthe UK has benefited from its putativeflexible labour market? The evidence doesnot support this view. The countries withlow employment loss are not thoseregarded as having flexible labour markets.The United States is held to be the primeexample of the flexible model and Irelandis also a relatively less regulated country,and both countries experienced large fallsin employment. Spain has strong labourprotection but also has a large share oftemporary jobs, which are weaklyprotected and have proved to bevulnerable in the downturn.

In contrast, Sweden, Italy, Germanyand the Netherlands have relatively highlevels of employment protection andrelatively good employment records overthe recession. In short, there appears to belittle relationship between a country’ssupposed degree of labour marketflexibility and employment losses in this recession.

So what explains the UK outcome? Itseems that the answer consists of severalelements. First, policy-makers were betterprepared this time round. After all, therehad been two severe recessions wellwithin the memory of most adults overthe age of 30. The understandings thatwere gained undoubtedly helped frame apolicy response in the latest downturn,allied with a greater willingness tointervene than in the past.

This recession was notable in that,unlike the previous two recessions, it wasnot exacerbated by a deliberate policy offiscal and monetary tightening to squeezedemand out of the system to get inflationdown. Instead, unemployment rosebecause of an old-fashioned collapse indemand following the bursting of afinancial bubble.

Moreover, this time round there hasbeen a deliberate larger and more rapidloosening of fiscal and monetary policy totry to offset the fall in demand. Policy-makers did the right thing in saving thebanks, cutting interest rates and inducingfiscal and monetary stimuli, which have allhelped to maintain demand and firms’cash flow.

Workers also did the right thing in

accepting lower nominal wage growthwhich kept firms’ costs down and reducedthe need to cut costs through layoffs. Atthe same time, real take-home pay wassustained by cuts in interest rates and VATand this may have maintained consumerdemand. And firms did the right thing in,wherever possible, holding onto valuablelabour in the face of the pressure onprofits and the severe nature of the crisis.

Employers entered the recession ingood financial shape and this has alsohelped avoid the level of job shedding thatoccurs when firms get into deep financialtrouble. But the recession means thatfirms have under-used labour at themoment and this will allow them to growwithout the need to hire much in theshort to medium term. And if demandcontinues to be weak, then job sheddingis likely to continue on a slow butsustained basis.

This recession represents the firstserious test of the active labour marketpolicies that have been put in place since1996. Increased conditionality on welfareclaimants to take active steps to securework, packages of support services for jobsearch available to those claiming benefitsand use of outside providers to deliver

these services rather than Job Centres areall innovations aimed at keepingindividuals in the labour market andmaintaining search effectiveness.

Reforms that increased the financialreturns to working relative to not working– the minimum wage and in-work taxcredits – should also help continue tomake work pay through a downturn,when job prospects may not be as goodas when the economy is doing well.

The signs are that unemployment alsohas not risen as much as many expected.This is to be welcomed, though the abilityof the new policies to withstand a buildup of long-term unemployment that hasin the past followed in the wake of arecession is still to be tested.

The cost has been huge for the publicfinances and in terms of productivity andthis will affect cost competitiveness goingforward. There are also serious joblessconcentrations among more marginalgroups that 15 years of sustained growthdid little to remedy. For some groups,there has been a ratchet upwards injoblessness from the 1980s onwards andthis will need to be addressed when theeconomy recovers.

Yet overall, it seems that the labourmarket has performed better thanexpected. Whether this generally goodnews will be sustained as the focus shifts tocuts in public spending and employersbegin to assess their longer-termemployment needs is less clear.Employment took eight to nine years to getback to pre-recession levels after the lasttwo recessions. This time it might be less ifa second wave of job shedding is avoided.

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This article summarises ‘The UK Labour

Market and the 2008-2009 Recession’ by

Paul Gregg and Jonathan Wadsworth, CEP

Discussion Paper No. 950 (http://cep.lse.ac.uk/

pubs/download/occasional/op025.pdf). An

extended version of the paper will appear in

The Labour Market in Winter: The State of

Working Britain, a book to be published by

Oxford University Press later this year.

Paul Gregg is a professor of economics at the

Centre for Market and Public Organisation at

the University of Bristol. Jonathan

Wadsworth is a professor of economics at

Royal Holloway, University of London. Both

are senior research fellows in CEP’s labour

markets programme.

There is no relationshipbetween a country’s

degree of labour marketflexibility and

employment losses inthis recession