The recession of 2008-09 inflicted a larger cumulative loss of UK output than any of the previous post-war recessions, yet there has been a relatively low loss of employment, at least so far. Paul Gregg and Jonathan Wadsworth look for an explanation.labour market, recession, unemployment, wages

Jonathan Wadsworth

Paul Gregg

English

Research Papers in Economics

CentrePiece Summer 2010
26
A
fter 15 years of near
continuous job growth,
the UK’s employment rate
in the middle of 2008
stood at around 75% of
the working age population, a rate
broadly in line with previous employment
peaks in 1968, 1978 and 1989. The UK
had also experienced 12 years of near
continuous decline in unemployment after
1993, following the double digit rates of
the early 1980s and the early 1990s. 
Despite the predictions of some, the
introduction of the minimum wage in
1999 appears to have had little effect on
employment over the last decade. In
2005, the unemployment rate fell below
5% for the first time since the 1970s and
hovered around this rate for the next three
years. Then in 2008, the UK entered what
was to be its worst recession since the
Second World War in terms of lost output. 
During the latest recession, GDP fell by
The recession of 
2008-09 inflicted a 
larger cumulative loss of
UK output than any of
the previous post-war
recessions, yet there has
been a relatively low loss
of employment, at least
so far. Paul Gregg and
Jonathan Wadsworth
look 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%
0
1%
2%
3%
4%
5%
6%
7%
2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979
■ GDP – annual change
■ Employment – annual change
P
e
r
c
e
n
t
a
g
e
 
c
h
a
n
g
e
s
 
o
n
 
y
e
a
r
Jobs in
the recessionCentrePiece Summer 2010
27
over 6%, which is worse than in the
recessions of the 1980s or 1990s (see
Figure 1). What’s more, with six quarters
of falling output, this recession was both
longer and deeper than the previous two.
In the 1980s recession, the percentage
decline in employment was broadly in line
with the percentage fall in GDP. In the
1990s recession, the relative fall in the
employment rate was somewhat larger
than the percentage decline in GDP.
Moreover, in the previous two
recessions, the fall in employment was
only halted 12 to 14 quarters after the
onset of recession (see Figure 2).
Employment then also remained below its
pre-recession levels for 18 months or so
after the recovery in output started.
Typically GDP growth of 2% or higher
seems to be needed before employment
starts to rise again (or unemployment
starts to fall).
But the latest recession was strikingly
different. While the fall in GDP was
markedly worse than in past recessions,
the loss of employment was much smaller
– roughly 3% of the initial level – and the
period over which employment fell was
much shorter than in the past. 
The number of UK jobs saved so far
relative to what might be expected by the
drop in GDP amounts to roughly one
million. How has this happened? 
The first point to consider is how
widespread this pattern has been across
countries and whether it is related to their
institutional differences.
Table 1 shows that France and Canada
have escaped relatively lightly from the
recession with around a 3% fall in GDP
and a similar rise in unemployment, in line
with past norms. In the United States,
Spain and Ireland, the rise in
unemployment exceeded the fall 
in output.
But there are a large number of
countries with smaller than expected
employment falls. Some of them adopted
a deliberate strategy to encourage short-
time working rather than lose jobs. In
Germany, the government has supported
a policy of short-time working, and similar
employment subsidy schemes are
operating in Italy, the Netherlands and
Figure 2:
Employment levels from the start of the recession for the
1980s, 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
40 35 30 25 20 15 10 5 0
■ 1980-81 recession (100=1979 Q4)
■ 1990-91 recession (100-1990 Q2)
■ 2008-09 recession (100=2008 Q1)
E
m
p
l
o
y
m
e
n
t
 
i
n
d
e
x
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 unemployment
across selected countries over the recession
This recession represents
the first serious test of
the UK’s active labour
market policiesJapan. The UK is one of a smaller number
of countries to have experienced relatively
small employment losses without a
deliberate government-funded strategy of
fewer working hours.
Does this mean that employment in
the UK has benefited from its putative
flexible labour market? The evidence does
not support this view. The countries with
low employment loss are not those
regarded as having flexible labour markets.
The United States is held to be the prime
example of the flexible model and Ireland
is also a relatively less regulated country,
and both countries experienced large falls
in employment. Spain has strong labour
protection but also has a large share of
temporary jobs, which are weakly
protected and have proved to be
vulnerable in the downturn.
In contrast, Sweden, Italy, Germany
and the Netherlands have relatively high
levels of employment protection and
relatively good employment records over
the recession. In short, there appears to be
little relationship between a country’s
supposed degree of labour market
flexibility and employment losses in 
this recession.
So what explains the UK outcome? It
seems that the answer consists of several
elements. First, policy-makers were better
prepared this time round. After all, there
had been two severe recessions well
within the memory of most adults over
the age of 30. The understandings that
were gained undoubtedly helped frame a
policy response in the latest downturn,
allied with a greater willingness to
intervene than in the past.
This recession was notable in that,
unlike the previous two recessions, it was
not exacerbated by a deliberate policy of
fiscal and monetary tightening to squeeze
demand out of the system to get inflation
down. Instead, unemployment rose
because of an old-fashioned collapse in
demand following the bursting of a
financial bubble.
Moreover, this time round there has
been a deliberate larger and more rapid
loosening of fiscal and monetary policy to
try to offset the fall in demand. Policy-
makers did the right thing in saving the
banks, cutting interest rates and inducing
fiscal and monetary stimuli, which have all
helped to maintain demand and firms’
cash flow.
Workers also did the right thing in
accepting lower nominal wage growth
which kept firms’ costs down and reduced
the need to cut costs through layoffs. At
the same time, real take-home pay was
sustained by cuts in interest rates and VAT
and this may have maintained consumer
demand. And firms did the right thing in,
wherever possible, holding onto valuable
labour in the face of the pressure on
profits and the severe nature of the crisis.
Employers entered the recession in
good financial shape and this has also
helped avoid the level of job shedding that
occurs when firms get into deep financial
trouble. But the recession means that
firms have under-used labour at the
moment and this will allow them to grow
without the need to hire much in the
short to medium term. And if demand
continues to be weak, then job shedding
is likely to continue on a slow but
sustained basis.
This recession represents the first
serious test of the active labour market
policies that have been put in place since
1996. Increased conditionality on welfare
claimants to take active steps to secure
work, packages of support services for job
search available to those claiming benefits
and use of outside providers to deliver
these services rather than Job Centres are
all innovations aimed at keeping
individuals in the labour market and
maintaining search effectiveness.
Reforms that increased the financial
returns to working relative to not working
– the minimum wage and in-work tax
credits – should also help continue to
make work pay through a downturn,
when job prospects may not be as good
as when the economy is doing well.
The signs are that unemployment also
has not risen as much as many expected.
This is to be welcomed, though the ability
of the new policies to withstand a build
up of long-term unemployment that has
in the past followed in the wake of a
recession is still to be tested.
The cost has been huge for the public
finances and in terms of productivity and
this will affect cost competitiveness going
forward. There are also serious jobless
concentrations among more marginal
groups that 15 years of sustained growth
did little to remedy. For some groups,
there has been a ratchet upwards in
joblessness from the 1980s onwards and
this will need to be addressed when the
economy recovers.
Yet overall, it seems that the labour
market has performed better than
expected. Whether this generally good
news will be sustained as the focus shifts to
cuts in public spending and employers
begin to assess their longer-term
employment needs is less clear.
Employment took eight to nine years to get
back to pre-recession levels after the last
two recessions. This time it might be less if
a second wave of job shedding is avoided.
CentrePiece Summer 2010
28
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 relationship
between a country’s
degree of labour market
flexibility and
employment losses in
this recession

Jobs in the recession

http://cep.lse.ac.uk/pubs/download/cp317.pdf

Jobs in the recession

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