Last updated: November 11, 2009 7:21 pm

Labour market flexibility helps to restrict cuts

Although unemployment remains painfully high, the UK’s labour market is not only performing better than in past recessions, but it is also so far functioning relatively well by international standards.

By rights, it should be in a category with the US, Spain and Ireland – all countries that have suffered from the collapse of housing bubbles, in addition to a banking crisis and the global recession this has caused.

OECD unemployment rates

US unemployment has more than doubled to 10.2 per cent of the workforce since 2007, while Ireland’s has trebled to 13 per cent and that of Spain has more than doubled to 19 per cent.

But UK unemployment has risen over the same timescale by just 2.5 percentage points to 7.8 per cent – slightly better than the average rise seen in countries of the Organisation for Economic Co-operation and Development, although not quite as good as the eurozone’s performance.

The story of this recession so far has been the inverted roles of the US, normally seen as a job-creating flexible market, and Europe, often seen as a sclerotic environment with powerful unions and rigid hiring and firing rules.

Eurozone unemployment, although high at 9.7 per cent, has risen by just 2.2 points, even though many countries have seen larger falls in output than the US. Governments have achieved this with the help of short-time working schemes, in which people work fewer hours while the government tops up their pay, although there are questions about whether this merely delays job losses.

The UK is sometimes described as having an “Anglo-social” model, midway between the US and European variants. On this occasion, it has achieved a similar performance to other European countries but without a short-time working scheme.

The government, naturally, cites its economic stimulus measures, including £5bn ($8.3bn) aimed at creating or protecting jobs, although the impact of these is hard to quantify. They include £500m of “golden hello” recruitment subsidies for employers and the £1bn Future Jobs Fund, which subsidises the creation of 150,000 jobs for young people and those in unemployment hotspots.

The government’s “active labour market policies”, which combine stricter welfare rules with measures to encourage people back to work, seem to be having an effect. Extra staff have been drafted into the Jobcentreplus network earlier than in past recessions to keep up pressure on job seekers to look for work.

Although redundancies have been high, more than 300,000 job seekers’ allowance claimants have been leaving the register each month, many presumably to take up jobs. A significant rise in long-term unemployment has so far been avoided and 70 per cent of claimants are leaving the register within six months.

“Given a doubling of numbers coming through the door, to sustain that level of performance is a pretty good testament to the way the system is holding up,” said Jim Knight, employment minister.

Most important of all, perhaps, has been the flexibility seen within the labour market itself, whereby employers have used pay freezes and shorter working hours to hold on to skilled employees whom they will need in the upturn – creating a similar effect to that seen in the eurozone but by voluntary measures rather than by state schemes.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, said this was a “British-style flexible labour market” that “enables employers and workers voluntarily to adjust pay and hours of work, thereby limiting job cuts, while also ensuring that available public funds can be targeted at helping jobless people to move from welfare to work rather than used to support people already in jobs”.

But while reduced hours and pay restraint have restricted job losses, this may also slow down a labour market recovery as employers increase the hours staff work before they start hiring new people. Mr Philpott said the best we could hope for was “a very gradual increase in job creation with little prospect of a return to the pre-recession rate of unemployment before 2015”.

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