We learn this morning that the UK
Prime Minister is writing to every household with a grim message on coronavirus
– ‘Things will get worse before they get better’. He’s referring of course to
the terrible effect of Covid-19 on people’s health. But the same can be said of
the effect on people’s livelihoods. So how much worse might things get and how
long might it be before they get better?
A times of economic crisis such
as that triggered by the pandemic, attention is understandably focused on the
severity or nature of the shock and specific policy interventions introduced to
counter it. As important, however, is the broader underlying orientation of
policy – the labour market policy model (LMPM) – which will ultimately determine
how the current crisis affects people’s jobs and incomes.
There is no off-the-shelf
definition of an LMPM. I think of it as the mix of polices that in different
ways affect the behaviour of employees, people in work, and people without work
who might reasonably be expected to find work. Ideally, during a time of
economic crisis, the LMPM will act to encourage employers to cut wages or hours
or work rather than jobs, encourage people in work to restrain wage demands,
and ensure people without work remain willing and able to fill any job
vacancies that are or become available.
In terms of specific policies
this covers things like employment protection measures (i.e. the ease of
ability of employers to hire and fire staff), individual employment rights, wage
bargaining procedures, wage subsidies/tax credits, and active welfare measures
that place job search conditions on jobless benefit claimants.
The way in which these types of policies
interact, operating as an LMPM, not only determines how much unemployment an
economy experiences in normal times but also makes a critical difference to the
way in which we experience recessions. Labour markets with good LMPMs are often
referred to as ‘flexible labour markets’, though one needs to be careful about
the latter term since conceptually it can mean different things and has
ideological connotations.
Guidelines on best practice began
to spread internationally following the OECD Jobs Study in 1992. A good LMPM will operate to minimise the peak
in unemployment during a recession and thereafter facilitate a rapid sustained
fall in unemployment to at least the pre-recession rate. To achieve this, the
LMPM must continually adapt to structural change in the labour market and if
necessary be easily amenable to short-run policy adjustments. No recession is
ever exactly the same as another and it’s important that one doesn’t persist
with a rigid LMPM only capable of ‘fighting the last war.’
The UK’s LMPM has developed
considerably in the last 40 years, during which the economy has suffered three
major recessions, in the early 1980s, the early 1990s and the late 2000s.
Between January 1980 and March
1981 GDP contracted by 4.6% before starting to recover. At that time,
employers’ ability to hire and fire was fairly weak but union power was still
very strong, limiting wage restraint. In addition, the welfare system was
almost totally inactive.
Large numbers of benefit
claimants gave up looking for work, effectively detaching themselves from the
labour market. This resulted in a massive pool of long-term jobless and cut the
usable supply of people, thereby putting upward pressure on wages and causing
mass unemployment to persist for years after the recession had ended.
The
unemployment rate increased from 5.5% before the recession to a peak of 11.9%
in the summer of 1984 and stuck at around that rate before staring to fall in
the second half of the decade, to a low of 7% at the onset of the 1990s
recession. The fall is normally attributed solely to the expansionary ‘Lawson
boom’ but the developing LMPM played an important part, notably the
introduction in 1986 of Restart job search interviews for claimants of
unemployment benefit which led the way in activating the welfare system.
At the start of the 1990s after a
decade of reform the LMPM was considerably different. Both employment
protection and union power had been weakened but active welfare reform was
still a work in progress.
The contraction in GDP of 2.5%
between July 1990 and September 1991 was less than that suffered in the early
1980s recession. However, the enhanced ability of employers to fire staff
outweighed slightly greater wage restraint. The result was what some economists
at the time called ‘oversacking’ because the shake out of jobs was much bigger
than the depth of the recession actually warranted.
On the plus side, however, once
GDP began to recover employers’ enhanced ability to hire and fire, plus the
emergence of a somewhat more active welfare regime, resulted in a much swifter
and sustained fall in unemployment than experienced in the 1980s. Although
unemployment peaked at a very high rate of 10.6% in the spring of 1993, the
peak came only 3 years after the previous trough. The unemployment rate then
fell almost continually and was still on a downward path in 2008 at the onset
of the Great Recession when the rate stood at 5.2%
As its name suggests, the Great
Recession was far worse than its two immediate predecessors, GDP contracting by
6.4% between April 2008 and September 2009. Within the LMPM, employment
protection was slightly stronger than in 1990, union power remained limited and
the welfare system had become much more active.
This combination resulted in a
smaller shake out of jobs than in either the 1980s or 1990s recessions, with
wage cuts and shorter hours predominant, and a correspondingly smaller rise in the
unemployment rate, from 5.2% at the start of 2008 to 8% at the start of 2010. The
main shortfall in the model at the time proved to be lack of adequate provision
for dealing with young jobseekers. By dampening the shake-out of jobs the LMPM also
served to depress recruitment activity, hitting young entrants to the labour
market even harder than usual.
The Noughties version of the LMPM
would almost certainly have enabled an earlier peak in total unemployment following
the Great Recession and a rapid subsequent fall had a nascent jobs recovery in early
2010 not been curtailed by strict fiscal consolidation measures that began to
be imposed on the economy later that year. Having dipped between the spring and
autumn of 2010, the unemployment rate started to rise again reaching a peak of
8.4% at the end of 2011. There was then a de facto easing of fiscal policy with
the acceptance that the initial deficit reduction timetable would need to be
extended, allowing for higher public borrowing than originally planned which
helped support aggregate demand.
From that point onward the LMPM
began to facilitate the kind of swift and sustained fall in unemployment that
one would otherwise have expected to see from early 2010 onward. This,
incidentally, places talk of a remarkable post 2012 ‘jobs miracle’ in its
proper perspective. An understanding of the Noughties version of the LMPM made
the supposed ‘miracle’ entirely predictable a decade ago, and some of us are on
record as saying so at the time.
What might we expect in the wake
of the Covid-19 crisis? How recession proof is LMPM 2020?
In its essential features the
LMPM appears as robust as it did when the Great Recession struck. But two
issues in particular are worthy of attention.
The LMPM is slightly weaker on
employment protection than in 2008, with employers able to fire regular
employees with less than two years’ service without legal comeback (at present that’s
around 7 million people). Moreover, the model has been largely permissive on the
rise of the so-called ‘gig economy’ of casualised contract workers (employing around
6 million people, including the self-employed) which now represents a
significant enclave of super (or maybe one might say uber) hire and flexibility
within the labour market.
There is therefore a clear risk
that the current LMPM leaves us more prone to a bigger shake-out of jobs than
during the Great Recession. In view of this the government’s Covid-19 emergency
adjuncts to the LMPM such as the Job Retention Scheme and Self-Employment Income
Support Scheme might have been necessary notwithstanding the sheer scale and
nature of the coronavirus crisis.
Another potential worry is the
operation of the Universal Credit (UC) welfare system. While UC is in principle
no more than the latest iteration of an activity focused benefit system, concern
has been raised that in practice it is performing less well than its
predecessor systems at helping claimants into work. Well before any of us had
heard of Covid-19, some labour market policy experts were warning that UC was
slowing flows from unemployment and economic inactivity to employment, leading
to a considerable rise in the stock of UC claimants. With early DWP figures
pointing to a surge in the inflow of UC claims since the Covid-19 lockdowns
came into effect, possibly leading to system overload, urgent improvement to
the activation aspects of the benefit would seem necessary.
At the time of writing, the
projected UK peak in coronavirus cases is still several weeks away and the
duration of the widespread social lockdown is unknown. There is also the
distinct possibility of further intermittent lockdowns to combat subsequent waves
of the virus in the absence of herd immunity or a suitable vaccine. With large
swathes of the economy already effectively placed in a coma, the contraction in
GDP is almost certain to be larger than during the Great Recession, and while it’s
hoped the Covid-19 induced recession will be shorter this cannot be taken for
granted.
At present I anticipate that
measures such as the Job Retention Scheme and the Self-Employment Income
Support Scheme should be enough to buttress us from some of the employment
protection weaknesses built-in to the LMPM since 2010. This would suggest a
doubling of the unemployment rate from 3.9% prior to Covid-19 to a peak of
around 8% (similar to the Great Recession peak), bad enough yet not disastrous. Additional interventions might also prove necessary to address particular problems if they arise, such as differential impacts on different groups in the labour market, so as to avoid a repeat of the Great Recession when too great a burden was allowed to fall on young jobless people.
The fiscal cost of achieving this outcome will be jaw dropping but preferable
to the combined economic and social cost of allowing the unemployment rate to
soar into double digit territory.
How long unemployment remains at
the peak rate before starting to fall will then depend in part on the length of
the Covid-19 recession and in part on the operation of the LMPM.
While the current hire and fire
features of the LMPM makes us more prone to a big shake-out of jobs during a
recession they should also enhance prospects of an early rebound in hiring
during the recovery. This bodes well for a swift post-recession jobs bounce back.
However, question marks over the operational effectiveness of UC raise
the possibility that the jobs recovery might be slowed by bottlenecks in the
system for moving jobless people off welfare and into work. This possibility
ought to be considered and addressed with considerable urgency.
In any event, to support the LMPM
economic policy makers will need to learn from the mistake of 2010 and adopt a
slow and steady rather than fast and furious approach to the major fiscal
consolidation that inevitably awaits us once Covid-19 has finally been
defeated.