Falling real wages in the UK
David Blanchflower, Stephen Machin 12 May 2014
The pain of the UK’s Great Recession has been spread more evenly than previous downturns, with falling real wages across the distribution. This column asks why this happened, how it compares with the US experience, and what the prospects are for recovering lost wage gains.
There have been unprecedented falls in real wages in the UK since the start of the recession triggered by the financial crisis of 2008. This did not happen in previous economic downturns – median real wage growth slowed down or stalled, but it did not fall. Indeed, in past recessions, almost all workers in both the lowest and highest deciles of the wage distribution experienced growing real wages. It was the unemployed who experienced almost all the pain – they lost their jobs and much of their incomes, and many were unemployed for a long time.
Labour markets Poverty and income inequality
US, unemployment, wages, Inequality, UK, Great Recession, real wages
From sick man of Europe to economic superstar: Germany’s resurgence and the lessons for Europe
Christian Dustmann, Bernd Fitzenberger, Uta Schönberg, Alexandra Spitz-Oener 03 February 2014
In a slow-growth, high-unemployment continent, Germany’s performance stands out. The success is often ascribed to the politically difficult Hartz labour-market reforms. This column discusses evidence to the contrary. The Hartz reforms played no essential role. Rather, the key was the threat of offshoring to central Europe together with the pre-Hartz structure and autonomy of the German labour-market institutions. This structure allowed trade unions to make wage concessions necessary to adapt to the new realities. Other nations should decentralise bargaining to the firm level while keeping workers’ representatives.
In the late 1990s and into the early 2000s, Germany was called ‘the sick man of Europe’ (Bertram 1997). Today, Germany is Europe’s economic superstar.
unemployment, Hartz reforms
Labour markets reforms and unemployment: Estimating the effects of wage moderation in the Spanish economy
Miguel Cardoso, Rafael Doménech, Juan Ramón García, Camilo A. Ulloa 20 December 2013
After witnessing the destruction of almost 18% of its employment during the crisis, the Spanish economy is now recovering. Understanding the effects of the recent labour market reform and wage moderation is crucial in accelerating employment creation. Correctly implemented and accompanied by appropriate policies at the European level, labour and products market structural policies could be the solution to the anomalously high unemployment rate in Spain
With its huge unemployment rate, if there is a country in need of assessment of labour markets reforms and wage moderation, it is Spain. In the third quarter of 2013 the unemployment rate reached 26% of the labour force, more than twice the Eurozone’s 12.1%. As shown in Figure 1, since the beginning of the crisis in the first quarter of 2008, Spain has lost 17.5% of its employment (22.8% in the private sector), while the average real wage increased 7.6% until the second quarter of 2012.
Figure 1 Employment and real wages in Spain, 2007-2013
Europe's nations and regions Global crisis Labour markets
unemployment, reforms, labour-market flexibility
A penny spent is a penny earned (by someone else): Measuring GDP
S Borağan Aruoba, Francis X. Diebold, Jeremy J Nalewaik, Frank Schorfheide, Dongho Song 03 December 2013
GDP can be estimated by measuring either expenditure or income. Since a penny spent is a penny earned, both methods should give the same answer, but there is substantial measurement error in both estimates. This column presents a new method of measuring US GDP that blends these two estimates. According to the new measure, GDP growth is about twice as persistent as the current headline measure implies. The new measure also makes the current recovery look stronger, especially in 2013.
“A growing number of economists say that the government should shift its approach to measuring growth. The current system emphasises data on spending, but the bureau also collects data on income. In theory the two should match perfectly – a penny spent is a penny earned by someone else. But estimates of the two measures can diverge widely, particularly in the short term...”
[Binyamin Appelbaum, The New York Times, 16 August 2011]
Frontiers of economic research
US, GDP, unemployment, data, measurement, national income accounting
Currency wars and the euro
Jens Nordvig 25 November 2013
Having promised to do ‘whatever it takes’ to ensure the survival of the euro, the ECB now faces the problem of record high unemployment combined with a strong currency. There is accumulating evidence that the ECB is more willing to fight currency appreciation than the Bundesbank would have been. Capital inflows have been a key source of recent upward pressure on the euro. Should this continue, the ECB may need to intervene more aggressively in order to promote economic recovery in the Eurozone.
A new battle for the ECB to fight
Last year, the ECB entered an existential battle for the euro. By promising to do ‘whatever it takes’ to safeguard the euro, the ECB managed to calm sovereign debt markets and engineer a much-needed easing of overall credit conditions in the Eurozone.
EU institutions Exchange rates Monetary policy
ECB, eurozone, euro, unemployment, Bundesbank, Currency wars
Can temporary in-work support help the long-term unemployed enter sustained work?
Richard Dorsett 21 November 2013
Individuals moving from long-term unemployment into work face a number of challenges. This column discusses the use of temporary in-work support during this transition. Recent experimental evidence has shown the potential for such support to have a positive long-term effect. It can increase not only employment entry but also employment retention, and so may provide a means of addressing the low pay, no pay cycle.
There is growing awareness among policymakers that, in order to break the so-called ‘low pay, no pay’ cycle, labour market programmes must do more than just encourage job entry. To help the unemployed achieve long-term self-sufficiency, they must also support them in work. For a long-time, the UK and the US have provided in-work payments to low-paid workers via Working Tax Credit and Earned Income Tax Credit, respectively. These are available on an ongoing basis, and are intended to sharpen work incentives by increasing the rewards to employment.
unemployment, incentives, low pay, tax credits, hysteresis
How much unemployment insurance do we need?
Rafael Lalive, Camille Landais, Josef Zweimüller 09 November 2013
In response to the Great Recession, unemployment insurance has been extended in many countries, but there is controversy over whether such extensions are optimal. Unemployment insurance entails direct fiscal costs, and encourages job seekers to prolong their search. The familiar benefit of unemployment insurance is that it allows the jobless to maintain their consumption. However, by reducing the search effort of other workers, it also improves a given worker’s chance of finding a job. Unemployment insurance extensions appear less costly when these search externalities are considered.
The global crisis that erupted in 2008 has put millions of workers out of a job. The US, for instance, experienced a dramatic increase in unemployment from around 4% to more than 10% during the Great Recession. Unemployment remained stubbornly high even when the economy began to recover.
Global crisis Labour markets
unemployment, Unemployment insurance, search externalities
Unemployment, labour-market flexibility and IMF advice: Moving beyond mantras
Olivier Blanchard, Florence Jaumotte, Prakash Loungani 18 October 2013
The state of labour markets in advanced economies remains dismal despite recent signs of growth. This column explains the IMF’s logic behind the advice it provided on labour markets during the Great Recession. It argues that flexibility is crucial both at the micro level, i.e. on worker reallocation, and at the macro level, e.g. on collective agreements. It suggests that the IMF approach is close to the consensus among labour-market researchers.
Growth in advanced economies is gaining some speed. The IMF projects these economies will grow 2% next year, up from an expected 1.2% this year. The average unemployment rate in advanced economies is expected to inch down from its peak of 8.3% in 2010 to 8% next year. This is progress, but it is clearly not enough. The state of labour markets remains dismal for a number of reasons.
Labour markets Welfare state and social Europe
unemployment, institutions, IMF, trust, Unemployment insurance, labour-market flexibility, EZ crisis, collective bargaining
Social job-search networks and the transition from school to stable employment
Francis Kramarz, Oskar Nordström Skans 17 October 2013
Modest recoveries in employment following the crisis mask severe youth unemployment. Because labour market struggles during the early stages of working life can have persistent negative effects, understanding job-finding networks among youth is key to forming pro-employment policies. This column analyses the transition from schooling to working life of Swedish youth. Close familial ties are important in job searches, especially among the less educated. Preliminary evidence suggests that family association can signal worker ability.
The challenges faced by young workers transitioning from school into stable employment are a major concern throughout the OECD. The search for stable employment is a time-consuming process, particularly in countries without highly developed apprenticeship systems. Many young workers – especially the least educated – are caught struggling for years.
Considering the importance of this process we know surprisingly little about the strategies used by young job searchers looking for entry jobs. Two key insights arise from the large body of research on job-finding networks:
unemployment, jobs, youth unemployment, graduates
How the great recession affected unemployment of non-Western Immigrants in the Netherlands
Jan van Ours 06 October 2013
In absolute terms, the Great Recession affected the unemployment rate of non-Western immigrants more than that of native workers in the Netherlands. However, this merely reflects their generally weak labour-market position – job-finding rates are much lower for non-Western immigrants than they are for natives. There is little difference between the cyclical sensitivity of these two groups’ unemployment or job-finding rates. In relative terms, the labour-market position of non-Western immigrants is bad, but the Great Recession did not make it worse.
The labour-market position of immigrants in many European countries is weak – unemployment rates among immigrants are high, and employment rates are low (OECD 2011). There are various explanations for this. Immigrants often have lower educational attainment than natives, and fewer language skills. Furthermore, ethnic identity may be important.
Labour markets Migration
unemployment, migration, Netherlands, Great Recession