When talking about the Great Recession in the UK, we all know (I hope) that this is still the slowest recovery for at least a century and that we have only just regained pre-recession levels of output per head. I find it very frustrating when some people respond by saying the story is quite different when it comes to employment. The frustration is because the remark reflects a confusion which is not trivial to explain to non-economists, coupled with uncertainty about whether this is a real confusion or just political banter.
I was inspired to write about this again by a very good piece by Larry Elliott in the Guardian. He puts it well by talking about how we coped with recession, but I thought I could try and summarise the point slightly differently. In a recession, looking at output is all about the size of the cake. Looking at employment is about how that cake is distributed.
The recession of the early 1980s involved a smaller decline in output, but a bigger and much more persistent increase in unemployment. In contrast the really distinctive feature of this recession has been the decline in real wages. These differences are almost surely linked: unemployment increases were smaller this time, and unemployment then fell rapidly, because real wages declined. Low wages encouraged firms to first fire fewer workers, and later to take on more. There remains a lot we do not know, such as whether this is all a result of the recession or if other factors were involved, and to what extent is a more flexible labour market responsible. This is really just the UK’s productivity puzzle expressed in a different form.
I think most economists would agree with Larry Elliott that the Great Recession in the UK was distributed in a better way than earlier recessions. The high costs of prolonged involuntary unemployment are, I hope, also well known. Whether any of this better distribution should be credited to current politicians seems doubtful: if any politician deserves credit, the most obvious is Margaret Thatcher.
If you look at this in terms of the size of the cake (output) and its distribution (employment and real wages), then you can see why those who dispute the claims about how poor the recovery from this recession has been by pointing to employment are making a category mistake. It is almost certainly better that a recession should lead to declines in real wages rather than increases in unemployment. But to argue that rapid employment growth excuses poor output growth is just another way of celebrating a disastrous productivity performance.