Unemployment is rising, but still not as fast as expected. Why?by Tim Leunig / August 27, 2009 / Leave a comment
Lines at the job centre are lengthening. No surprise in a recession. But this one has been different, so far at least. For a start, the rise in unemployment has been less than economists would expect, given that the economy contracted by a record 5.6 per cent in the last year. One might predict that Britain’s much-vaunted flexible labour market would shed jobs quickly in a downturn. But the growth of employment protection under Labour makes it harder to fire people than in the slump of the early 1990s.
More important is a second trend: management and workers are trying to preserve jobs. Our economy is now more reliant on human capital for success, so that businesses have greater incentives to retain workers (and their skills) in place. Employees, whose skills are often specific to their company, have a similar reason to stay put. Both are more willing than in the past to agree to wage freezes, pay cuts, unpaid holiday or sabbaticals to make this happen. In its co-operation between management and workers, Britain is looking ever more like continental Europe from 1945-1973.
Youth unemployment is more refractory; 835,000 18-24-year-olds are not in work or training. Jobless graduates steal media attention, but the biggest rises are among those with no skills. Again, this is partly because of new employment rules. In a recession firms reduce costs. Employment legislation makes it hard to sack existing workers, so companies decided not replace those who retire or leave for other reasons. Since young people entering the labour market often rely on replacing such people, this inevitably means higher youth unemployment. Put simply: employment protection benefits existing workers at the expense of those out of work. This helps to explain the huge youth unemployment in France and Spain. Britain has taken some steps in their direction and young people are paying the price. The real danger here is that young people who do not get into the labour market at first will find it difficult to work in the future. Employers traditionally have been reluctant to hire those who have been unemployed immediately after leaving school. If that is the case, the cost of employment protection after this recession will be very high indeed.
The figures contain one further surprise: unemployment actually began to rise before the start of the recession. This is unusual. Joblessness is famously a “lagging indicator” that rises only…