IES VIEWPOINT: a different downturn?
1 Feb 2010
Nigel Meager, Director
In the previous issue, I expressed the view that the UK labour market might perform somewhat better in the current recession than many commentators predicted. The evidence so far is consistent with this view: in GDP terms, the UK recession is much deeper than both of the last two recessions, yet the fall in the employment rate is somewhat less severe than either. It’s too early to be sure of the explanation for this, although the smart money would be on a combination of two factors: one is the much greater intensity of active labour market and welfare-to-work measures in the current recession, working to keep many more people closer to the labour market; the other is the more benign industrial relations climate and low inflationary environment, combining to make it easier for employers to implement alternatives to mass redundancies and to ‘hoard labour’ through the downturn (using pay freezes and cuts, shorter hours, temporary layoffs etc.).
In line with the international theme of this issue of Employment Studies, however, and before we get too excited about the UK’s performance in the current recession, we should probably acknowledge that many of the UK’s main competitors have fared much better. Indeed, policy-makers and academics in European countries, who’ve become used, in the last decade, to being lectured by British politicians and economists about the supposed superiority of the ‘Anglo-Saxon’ flexible labour market model, over the sclerotic model of social Europe, can be forgiven a certain Schadenfreude following the events of the past two years.
Indeed, if we look at how far (according to Eurostat or OECD data) national unemployment rates have increased over the two-year period from November 2007 to October 2009, and compare this with generally-accepted rankings of the degree of labour market flexibility (eg the OECD index of the strictness of employment protection legislation), there is no evidence that countries with flexible labour markets have fared better so far. If anything, and with a few exceptions (such as the Baltic states and Spain, which have faced rather specific circumstances) the relationship seems to be in the other direction. Thus some of the low-regulation countries have seen dramatic increases in unemployment over the two years: Ireland’s rate increased by 172 per cent and that in the US by 117 per cent, while the unemployment rate in Denmark (the continental country with the lowest level of employment protection) shot up by 102 per cent. By comparison, the UK did better (53 per cent rise), but many of the high-regulation countries performed much more strongly, including France and the Netherlands (unemployment up by ‘only’ 28 per cent), Italy 27 per cent, Norway 24 per cent, Austria 15 per cent, Belgium 14 per cent, while two of the largest EU economies (Poland and Germany) actually recorded slight falls in unemployment over the same period.
Admittedly, some of these started from a higher unemployment base than the UK but it is notable that the recession has (at least for the moment) wiped out the UK’s unemployment advantage over many European countries. UK unemployment now lies only just below the EU 27 average, and is slightly higher than Germany (for the first time since 1995), while it is more than twice that of the Netherlands. In looking at the policy responses which might underlie these differences, we are assisted by some recent international reviews from the OECD and the European Commission. In general terms these show that most countries have increased the level and intensity of their expenditure on active labour market measures, but the specifics vary considerably. In the UK, while there have been some new initiatives, the dominant response has been to scale up the existing, largely supply-side approach aimed at keeping workless people as close to the labour market as possible during the downturn, while increasing the spend on advice, guidance and support, and making employment programmes available to people earlier in their unemployment spell. In many other countries (such as Germany), however, there has been an equal or greater emphasis on short-time working subsidies to employers, aiming to retain employees in work during the downturn, and on job-creation and ‘make work’ programmes for those who do lose their jobs.
It is too early to judge the longer-term outcome of these different routes, and we will need to revisit the evidence once the economic recovery is well-established. Its proponents may, of course, argue that the flexible labour market will bounce back more quickly as output picks up, and that short-time working and similar schemes simply distort markets and delay the inevitable structural adjustment which will be worse when it does come. The jury is out, for the moment, but it is at least clear that the flexible labour market has not fared better in the downturn phase of the cycle than the competing models.
 OECD (2009), OECD Employment Outlook: Tackling the Jobs Crisis, Paris: Organisation for Economic Co-operation and Development.
 European Commission (2009), Employment in Europe, Luxembourg: Office for Official Publications of the European Communities.