subject: Global Recession and its Impact on UK Labor Market [print this page] Global Recession and its Impact on UK Labor Market
Introduction
We have selected this topic of global recession and its affects in UK economy especially with the context of labor market in UK, because this is the most happening macroeconomic issue around the world that is affecting all countries in its longest phase after the Second World War. By writing this paper, we aim to have a better understanding of the macroeconomic concepts and its far reaching affects on economies that also covers multiple important concepts to review. We are using different sources such as web based articles and books to support the research material and hope that this will add a rich experience of knowing the economic concepts in depth, and enhance our knowledge to use further in our professional lives more effectively.
Historical Overview
Global Recession is not a new dilemma that world is experiencing, however in present circumstances and the situation where the world has become a global village the term is better understandable by the economists, government authorities and business sector. Historic evidence shows that in past three decades there were three global recessions that affected different countries around the world and during these recessions the global per capita output growth rate was estimated to be zero or negative. As per the rough estimation of IMF global recession occurs over a cycle between 8 or 10 years. There is no proper definition that can exactly explain this term but as per the IMF (international monetary fund) whenever the global growth rate goes down to 3% or below this level, there will be a global recession.
UK economy had been affected six times including the current recession. Firstly after the First World War in 1919 -1921 that stayed for 3 years, second time the recession was given the name of Great Depression that lasts for 2 years from 1930 to 1931. The major causes for this depression were the US depression, reduction in UK export demands, high interest rates and some sources says for defending the gold standards. In this phase of recession UK was much less affected than the US. Third one came in Mid 1970s because of oil crises and stayed for almost 2 years. Next came in early 1980's that also stayed for 2 years. In this era the unemployment rate increases to 124% and took almost 13 quarters to recover the GDP level. Fifth recession came in early 1990's for two years. In this recession UK experienced the highest budget deficit, unemployment rises to 55 % and this also took 13 quarters to recover back its GDP level. Sixth one is the current ongoing recession that started in late 2000s (2008 09) and still the economy has not been fully recovered. The unemployment increases to 2.8million at the beginning of 2010 and expected to cross 3 million in the year ahead. This is considered as the longest recession phase after the Second World War and has largely affected the banks and the investment firms. Further in the research paper we will discuss this ongoing UK recession in detail. (List of recessions in UK).
Effects of Recession on UK Economy
Among all the developed countries Year 2009 had the hardest hit on UK economy where the GDP fell 1.9 % in the fourth quarter of last year as compared to the previous year and considered as the worst performance since 1991. Consumer spending dropped sharply and extended the slump phase. Manufacturing and production output showed a decline of 4.5%, and service sector shrunk by 0.9%. (UK recession deepens as manufacturing wilts, 2009)
Household spending had seen a sharp decline of 0.7% in the fourth quarter that is mainly because of the wage rate that has seen no signs of improvement since 2008. Output shrunk continuously in 2008 2009 that extended the recession phase more deeply, Year 2008 had seen a steep recession condition that makes the year 2009 more worse however year 2010 has brought some hopes for the economy but still recovering is in a slow pace, as Gordon Brown said in his new year message on December 2009, for the affects of recession in UK economy, "don't wreck the recovery. The recovery is still fragile, and it needs to be nurtured in the interests of those who were hit hardest by the recession, the people on middle and modest incomes who don't want any special favors - they simply want a bit of help to own their own home, set up their own business, and give their children the best start in life."(Famous Quotes, 2009).
Effects on Labor Market & on Unemployment Conditions
Signs of recession became evident in the second quarter of 2008 in UK when the claimant count (jobseekers allowance) increased to 3.6%, the vacancy levels declined by 5.6% and the redundancy levels increased by 14%. In third quarter the circumstances moved the employment levels to decrease by 0.3%, the workforce jobs declined by 0.4% and the trend continued in the year ahead. In 4th quarter the recession affected the consumer credit levels as well and eventually became a major cause of record job losses of 3.3%, as a result of this economic output also reduced that further added in the downturn of the employment levels in the country. (See Appendix 1, for the relevant graphs)
Research also depicts that these effects of unemployment are harsher on the social groups in the earlier recessions such as low-skilled workers, younger population and on people having low education levels. Recession has affected public as well as private sectors and hence reduced the average earnings in both areas, moreover in connection to this the aggregate demand also fell down that leads to the reduction in labor market demand. (The impact of the recession on the labour market , 2009).
Recession effects on labor market and empoyment levels at the macro level can be measured in the percentage but its social effects are far reaching. The job insecurity enhances the depression levels if the job loss is for short term still the concequenses are not that bad but those having long-term job loss and facing the financial crises are much more affected than the previous lot. The situation furhter leads to the health problems that adds more pressure on the government spendings on health sector. Despite all this year 2010 has started with some hopes and it is expected that UK's economy will come out of the recession phase in 4th quarter and expects to grow at a moderate pace ahead. The employment conditions are also expected to improve in the upcoming months of current year. (UK Inflation Hedges Up and Unemployment Rate improves, 2010)
Literature Review
To cover up this section in our research paper we have reviewed multiple articles related to the recession condition in UK and hereby presenting the summary of the five relevant articles reviewed:
Julia Kollewe writes in her article published in January 28, 2009 that as per the IMF, UK economy will have a hardest hit of recession among the developed countries after the Second World War where the GDP is expected to decline 2.8%. As a consequence UN agency has already alarmed for overall 50 million job losses in the world. It also depicts that UK economy will shrink by 2.8% and will experience the worst average drop of 2% in output among the advanced countries. The author writes that after the great depression, this is the worst downturn of the global economy where 51 million jobs will be lost by the end of 2009 that will lead to 7.1% of unemployment level globally and also says that the global job crises will face worse scenario if the recession extended more. IMF also depicts that the developing countries will face worse conditions where Sub-Saharan Africa and South Asia will be having the harsh labor market conditions with the highest share of poor working class among all the regions. According to the International Labor Organization (ILO) North Africa and the Middle East had the highest unemployment rates of 10.3% and 9.4% by the end of 2008 whereas in the developed economies and the EU almost 900,000 people lost their jobs. (UK Economy will be hardest hit , 2009)
In another article the author David Rosser states that UK's flexible economy is working to help the unemployed people. Wales is the most affected area for unemployment in UK that carries half of the share out of the total unemployment; author also says that the unemployment level will continue to increase. Government sector has initiated to employ 13,000 people and continue to help the job seekers by providing them the opportunities to combat with the recession, as the unemployment rate in UK is much higher than the other developed countries but for a short term and getting back on jobs faster than France, US, Japan and Germany. Author also states that in present circumstances it is quiet usual for organizations to be vigilant while recruiting more people and stayed reluctant to increase salaries of their employees that makes it more difficult for the economy to recover from recession, on the other hand the government should also not force the employers to increase the recruitments as it is a risky job in present situation. (Our Flexible economy is working for the jobless, 2009)
Next the authors Grainne Gilmore and Gary Duncan states in their article that UK is in the grip of deeper recession and the statistical figures depicts the GDP drop out of 1.9% that was estimated to be 1.8%. GDP declined by 3.0 % in 2008, the pay level hardly grew just as 0.1% that is weakest in the past 14 years, and became the major reason of sharp decline in consumer and household spending. Further 1.5% decline in GDP in 2008 is the sharpest drop since 1980. Author also states that the manufacturing and production output has sharply declined by 4.5% and the service sector shrunk by 0.9%, he expects that as the output is shrinking continuously hence the recession will continue ahead in 2009, he also states that to bring the UK out of this critical situation bank of England will take further steps to improve the monetary conditions that may be by printing more money. (UK Recession Deepens as manufacuturing wilts, 2009)
Gerri Peev the Westminster editor wrote in his article that in year 2010 the unemployment will touch 3 million that shows a slow recovery signs of economy, he also states that organization for economic Co-operation and Development expects that by the year 2011 the unemployment rate will reach to 9.5% from current rate of 7.5%.
and suggested that substantive measures should be taken to protect the labor market as the structural unemployment may extends till 2017 till it gets back to prerecession state. The author has criticized the UK flexible labor laws that allow the employers to make the labor redundant easily as compare to other EU countries. By pointing some figures he further states that between July and September was 2.46 million with a record high rate of unemployment 19.8% for age group 16 to 24 years. Despite these figures the retail sales has increased by 3% since last year August. The national statistics figures also depicts the 0.9% sales increase in textiles, clothing and shoe stores and house hold goods increased by 2%. Bank of England says that business lending reduced by 4.6% in September and growth rate moved to a record low of minus 6%. Author also states the remarks of Howard Archer the chief European economist at HIS Global Insight said that tight credit conditions, high unemployment rate, low earnings growth, rising debt and shaky economy are the conditions against future growth in spending. Against this the council of Mortgage Lenders presents some positive figures that shows an increase of 13.5 billion GBP in gross mortgage lending that's 5 % increase from September yet 27% low than the previous year. Council also said that re-mortgage activity is at the record lowest level of decade. (Britain's lost generation as three million unemployed by next year, 2009).
In another article the author says that according to the Scottish Government Economic Researchers data, in terms of unemployment women are most affected by this recession in Scotland where female employment rate declined by 1.9% as compared to the whole UK employment rate that was declined by just 0.8%. Scottish govt economic researchers also depict that male employment declined by 1.3 %, whereas the inactivity rate increased by 1.3% among women as compared to a decline of 0.2% in UK as a whole. For men in Scotland and in entire UK the decline rate is 0.1 and 0.2% respectively. For the first quarter of year 2009 the female employment rate for 60% of the overall decline in working age employment in comparison with the UK labor market where 70% of the decline comes from the male employment. Service sector has seen a major downturn where sharp increase in employment was seen in 2006 and 2007. Author also states that the Rigid Economizing by Scotland's banks is also contributing in the decline rate of employment. (Women Hardest hit as Recession closes in, 2009).
SWOT Analysis
Strengths
Strong Infrastructure to support the slump situation.
Weaknesses
Improper or Slow Government reforms to tackle the situation.
Flexible Labor laws that allows the employers to make people redundant easily.
Unrecorded and hidden data of the unemployed people that can give misleading figures and hence can affect the remedial measures.
Opportunities
Weak consumer spending may hurdle the prices to go up or inflation to increase.
Slow and favorable trend of employment conditions may take the UK's economy out of recession in Q4 of the current year.
Threats
The currency depreciation (GBP) is likely to push the prices up that will add in the inflation.
The weak situation of the global financial crises affecting the output and exports levels.
Highest redundancy level among the developed countries.
Declining trend of manufacturing and construction industries.
Economic Theories Linking with Recession
Multiple economic concepts link with the current recession, however in our research paper we are going to discuss two main theories such as Phillips Curve that covers the expectation augmented Phillips curve and its relation with aggregate demand and supply concept. As well, the DP that has an integral connection with the recession phase of economy.
Phillips Curve Theory
Professor A.W. Phillips presented this theory, in which he researched on the given statistics of 1861 to 1957 regarding the wages and unemployment level. He came up with a conclusion that there is a trade-off relationship between unemployment and inflation. His theory suggests that any measure taken by the government to reduce unemployment level will result in inflation. As unemployment and inflation can't be reduced at the same time, hence in such circumstances, economists are required to make a choice where they can select unemployment or inflation. (See Appendix 2, for the graph)
Expectations- Augmented Phillips Curve Theory
During 1970s, Phillips Curve faced criticism as economies suffered from a situation where unemployment and inflation both were rising together. Economists began to find a solution to this problem until Milton Friedman came up with the valuable explanations of Expectations-Augmented Phillips Curve. According to Milton Friedman, expectations play a vital role in increasing inflation and unemployment together. People expect inflation which results in an expectation of wage rise and then suffer the consequences. (See Appendix 3, for the graph).
Aggregate Demand and Aggregate Supply
Recession is that state of the economy when GDP declines continuously. Therefore, we can say that GDP is the scale which measures whether economy is in recession or not. A report published by San Francisco Federal Reserve Bank says that Phillips Curve proves useful in recession and downturn of economies but it's not useful in normal times.
As we can see from the graphs presented (See Appendix 4, for graphs) shows that UK economy was facing deep recession and higher level of unemployment over the past two years. This unemployment contributed towards the decline in the rate of inflation until the middle of 2009, which is not in contradiction with the Phillips Curve. Consequently, till this phase of recession Phillips Curve Theory is applicable. However in deep recession, UK economy faced higher level of unemployment and UK government tried to lower the level of unemployment by increasing aggregate demand (AD) which increases national income in short run. During this short span of time, shortage of goods and services, and certain other factors increase the prices that led people to demand for higher wages above the inflation level. At this point, we would like to mention that as in UK economy trade unions have a strong role that had probably helped people in getting the demanded higher wages.
Higher wages in turn increased the costs of businesses that forced the businesses to reduce employment and eventually as a result the aggregate supply was also reduced (AS). Now, we can examine that in a situation where aggregate supply was low and aggregate demand (AD) was high, naturally it resulted in higher inflation level and unemployment level might remain the same. The increase in the aggregate demand was not in real terms, therefore the increase in the employment level disappeared unfortunately. Thus, UK continues to face higher inflation and probably the same or high unemployment level hence the present UK situation matches with the second phase theory of Expectations-Augmented Phillips Curve.
Gross Domestic Product (GDP)
GDP is the fundamental part of any economy's financial records. It provides a summary of the total economic activity in the country. By definition GDP is the market value of all the final goods and services produced within the country in a given period of time. It is calculated by ONS (Office for National Statistics) in stages. The first estimate of GDP is called the preliminary estimate. This is produced about three and a half weeks after the end of the quarter, and is based solely on estimates of the economy's output. The second estimate is produced eight weeks after the end of the quarter, and is based on output, income and expenditure data from the economy. The third estimate is the full national accounts, and is produced 12 weeks after the end of the quarter. (The impact of the recession on the labour market, 2009)
GDP, Unemployment and Recession
Continuously declining Gross Domestic Product (GDP) and rising unemployment demonstrates its clear links with recession. Our research and analysis shows that UK was enjoying a robust economic conditions and positive GDP level since past 16 years before experiencing the downward trend in GDP in 3rd and 4th quarter of 2008 that indicated first time the UK's economic journey towards the recession phase. However, the 4th quarter of 2009 has shown some signs of recovery though at very slow pace where GDP increased by 0.4 percent which is 5.8 percent below the level when recession began. During 2008/2009, recession UK economy shrunk by 6 percent as it suffered six quarters of consecutive decline in GDP.
The continuous declined GDP has no doubt adversely affected the UK's economy and left far reaching affects on unemployment level, inflation trends and on aggregate demand and supply conditions that will take unpredictable time to bring the economy back to the prerecession conditions. (See Appendix 5, for GDP graphs).
Empirical Analysis Results
To conduct the empirical analysis we have divided the avaialble data in 3 parts. In part 1 the given figures for unsecured loans and Credit Card has been used to present in the Time Series Analysis. In part 2 the regression analysis is done by using the data of lending money to UK businesses and in part 3 the scattered plot is presented by using the data for lending to small and medium size enterprises (See Appendix 6 for the available data used in the empirical analysis)
All the given trends and graphs justifies the cuurent state of recession in the UK economy. The improving signs and trends for the year 2010 shows that UK economy is recovering itself to come out from the recession phase, though this recovery is at very slow pace but yet gives the sign of hope for the future to get back to its prerecession state.
Time series
Based on the information of the customer credit, the following time series plot (Figure 1) show us that the net unsecured lending flows in UK have been fluctuated up and down in an increasing trend till October 2007 then they fall dawn sharply in a decreasing trend till December 2009. Some improvement has been appeared in the last two quadrants. In contrast, the credit cards of the customers have been increased rabidly to high levels (around 0.7) till September 2008, and then it starts to fall dawn to a stable level of 0.2 by the end of January 2010.
Figure 1: The net unsecured lending flows in during Jan 2007-Jan 2010
Figure 2: The Credit card of UK customers during Jan 2007-Jan 2010
Regression
To investigate the amount of lending money to UK businesses, we studied the relationship between all SMEs and smaller SMEs. The given figures indicate the shrinking economy that eventually results in declined GDP that is an indication of Recession. When businesses have reduced the levels of loans For the statistical investigation the regression analysis is vital in this regards. The following Minitab output give us the regression line equation which is:
All SMEs = - 1.56 + 1.21 Smaller SMEs
This means that an increase in the smaller SMEs by one billon will lead to increase in all SMEs by 1.21 billon. The negative constant -1.56 means that if no one of smaller SMEs ask for money, this will lead of extra money for all SMEs to be lend for medium businesses.
The coefficient of determination (R-Sq = 55.2%) indicates that 55% of the variation in the All SMEs lending is due to the differences in the Smaller SMEs lending, the remaining 45% is due to other factors not listed in this regression model. The analysis of variance table presented below shows that the model in general is acceptable. The small p-value (0.000) indicates t hat the independent variable ( Smaller SMEs ) is important in the mentioned model.
Regression Analysis: All SMEs versus Smaller SMEs
The regression equation is
All SMEs = - 1.56 + 1.21 Smaller SMEs
Predictor Coef SE Coef T P
Constant -1.562 1.820 -0.86 0.398
Smaller SMEs 1.2075 0.2019 5.98 0.000
S = 6.00063 R-Sq = 55.2% R-Sq(adj) = 53.7%
Analysis of Variance
Source DF SS MS F P
Regression 1 1287.8 1287.8 35.76 0.000
Residual Error 29 1044.2 36.0
Total 30 2332.0
Scatter Plot
The following scatter plots (Figure 3) present the Lending to small and medium-sized enterprises. The right panel shows that there is a very strong correlation between the Loans flows of new lending to SMEs and the net lending. The persons correlation coefficient (r = 0.89 positive and close to one) confirms this result. The left hand side panel shows that there is a week negative correlation between the Loans flows of new lending to SMEs and the repayments. The persons correlation coefficient (r = -0.329 negative and close to zero) confirms this result as well.
Correlations: New lending, Net lending
Pearson correlation of New lending and Net lending = 0.890
P-Value = 0.000
Correlations: New lending, Repayments
Pearson correlation of New lending and Repayments = -0.329
P-Value = 0.109
Figure 3: The Lending to small and medium-sized enterprises during Jan 2007-Jan 2010 with relation to the net lending and repayments.
Solutions and Recommendations
The global recession of late 2000 has affected many countries around the globe and UK has the hardest hit among the developed countries for its labor market. The unemployment level increases to a drastic level and affected huge number of people in the country. After making all the detailed analysis we would like to present some recommendations to improve the situation which are as follows:
UK Government has to take some aggressive steps to combat with the situation, where it may increase the budget on spending programs that can produce the job opportunities to improve the employment level.
The Government may pass some laws for the private as well as public sector to restrict employers from making people redundant easily.
Government can give subsidy to some selective organizations with higher costs to keep the people employed to reduce unemployment.
Government can increase the accountability reforms on price checking to control the inflation.
Conclusion
In short, to conclude the global recession of late 2000s has affected many countries around the world. UK that is facing the recession sixth time since 1919 is having this recession in its longest phase since second world war and is continuously struggling hard to combat with this condition but yet recovery signs are slow that alarms that taking out economy from slump and bringing it to the recovery is still fragile and UK Government requires more strong steps to take to help the economy to raise its head with more force. The most effected labor market and unemployment levels are the signs worrying the slow recovery of the GDP levels. Yet the year 2010 is showing some signs of hope but still the economists are not sure that how much more time it will take to get back to the prerecession state. Although the Government is taking steps and increasing the spending to improve the employment levels but the major cause of recession the financial crises of 2007-2010 are not that easy to be recovered soon.
At the end we must say that this research paper has really helped us in enhancing our knowledge in terms of understanding the economical facts around the world and how economies are shattered with the global economic crises.
References
Britain's lost generation as three million unemployed by next year. (2009, November 20). Retrieved April 06, 2010, from http://news.scotsman.com: http://news.scotsman.com/recession/Britain39s-39lost-generation39-as-three.5842537.jp
Our Flexible economy is working for the jobless. (2009, November 18). Retrieved April 06, 2010, from http://www.walesonline.co.uk: http://www.walesonline.co.uk/business-in-wales/business-columnists/2009/11/18/our-flexible-economy-is-working-for-the-jobless-91466-25195602/
The impact of the recession on the labour market . (2009). Retrieved April 07, 2010, from http://www.statistics.gov.uk.
UK Economy will be hardest hit . (2009, January 28). Retrieved April 04, 2010, from http://www.guardian.co.uk: http://www.guardian.co.uk/business/2009/jan/28/ilo-global-unemployment-to-soar
UK Inflation Hedges Up and Unemployment Rate improves. (2010, January 25). Retrieved April 06, 2010, from http://www.dailymarkets.com/economy/2010: http://www.dailymarkets.com/economy/2010/01/25/uk-inflation-hedges-up-and-unemployment-rate-improves/
UK recession deepens as manufacturing wilts. (2009, February 25). Retrieved April 05, 2010, from http://business.timesonline.co.uk: http://business.timesonline.co.uk/tol/business/economics/article5801174.ece
UK Recession Deepens as manufacuturing wilts. (2009, February 25). Retrieved April 06, 2010, from http://business.timesonline.co.uk: http://business.timesonline.co.uk/tol/business/economics/article5801174.ece
Women Hardest hit as Recession closes in. (2009, May 29). London, United Kingdom.
Bank of England - Trends in Lending. (2010, April 07). London, United Kingdom.
Appendices
Appendix 1
Appendix 2
Phillips Curve
Appendix 3
Expectations-Augmented Phillips Curve
Appendix 4
Unemployment rate
Employment rate falls to 72.2%
The employment rate for the three months to January 2010 was 72.2%. The rate is down 0.3% on the quarter.
