People who are thrown out of work in the UK find new jobs much more slowly than in the United States. Not much more than one in every ten unemployed UK workers find new jobs within a month, compared with one in every two unemployed Americans.
That is the one of the findings of research by Professor Jennifer Smith, published in the May 2011 issue of the Economic Journal. Her study of inflows into and outflows from UK unemployment suggests that policies to help people find jobs could play a critical role in speeding the fall in unemployment as the economy recovers.
The research analyses 20 years of labour market history for more than 5,000 people interviewed each year by the British Household Panel Survey to assess whether rising unemployment is driven more by falls in the rate at which unemployed workers find jobs or increases in the rate of job loss.
Among the findings on these ''ins and outs'' of UK unemployment:
- Rises in unemployment are mainly driven by sharp increases in the job loss rate. Inflows into unemployment account for 60% of unemployment changes.
- This contrasts with claims made on the basis of US data that all changes in unemployment arise from variations in the job finding rate not the job loss rate.
- The new finding suggests that the government could go further in alleviating rises in unemployment in a recession through policies that encourage employers to hang on to workers. Germany''s ''Kurzarbeit'' policy, where the state subsidised jobs to allow reductions in hours during the recent recession, is an example.
- Changes in the speed at which unemployed workers find jobs are also important: outflows from unemployment account for 40% of unemployment changes.
- This finding adds support to current policy emphasis on helping people back into jobs, such as Jobcentre Plus and rationalisation of the benefits system.
- UK workers lose their jobs at a slower rate than their American counterparts. But transitions from unemployment to work are also much slower in the UK.
- These slow transitions mean that significant changes in the labour market, often driven by a recession, have lingering effects. This helps to explain why the UK has suffered from persistently high unemployment in the past.
In the 2008-09 recession, UK unemployment rose by over 850,000: from 1.6 to 2.5 million. Although this increase was less than many had feared on the basis of past recessions and the severe 6% drop in UK output, the end of recession has not brought a significant fall in unemployment.
Instead, the unemployment rate has continued to fluctuate between 7.9% and 8.2%, having risen from a pre-recession low of 5.2% in April 2008 and standing at 7.8% as of February 2011. This study investigates the factors behind such changes in unemployment.
To prevent large unemployment rises in recessions and to speed unemployment falls in recoveries, policy-makers need to know what drives unemployment movements: should they focus on slowing inflows into unemployment or on encouraging outflows from unemployment?
To know which policy is best, an analysis of the data is required because, in principle, rising unemployment in a recession could be due to a fall in the rate at which unemployed workers find jobs or to a rise in the rate of job loss.
Professor Smith shows that increased UK unemployment in recessions is mainly driven by sharp increases in the job loss rate. Overall, inflows into unemployment account for around 60% of unemployment changes. Because the initial rise in unemployment is mainly driven by job losses, the study''s results suggest that it would be possible for the government to go further in alleviating recessionary rises in unemployment through policies that encourage employers to hang on to workers.
The study''s findings support policies such as the ''Kurzarbeit'' (subsidies for short-time working) enacted in Germany during the recent recession, where the state subsidised jobs to allow reductions in hours. Other policies that might have similar effects would be pro-cyclical employment taxes: lowering employers'' National Insurance contributions in a recession would reduce labour costs and encourage worker retention.
But Professor Smith finds that changes in the speed with which unemployed workers find jobs are also important: she shows that outflows from unemployment account for around 40% of unemployment changes.
Thus, the study adds some support to current policy emphasis on helping people back into jobs, notably through Jobcentre Plus and rationalisation of the benefits system. The results indicate that this type of policy can stop unemployment rising as high as it would otherwise do in a recession, and that aiding job finding could play a critical role in speeding the fall in unemployment as the economy recovers.
Professor Smith''s study also points to two important differences between the UK and US labour markets. First, her finding that job loss matters contrasts with previous claims (made on the basis of US data) that all changes in unemployment arise from variations in the job-finding rate.
Second, she finds that those out of work find jobs much more slowly in the UK than in the United States. Only 11% of unemployed workers get jobs within a month in the UK, compared with 50% in the United States.
But those in work in the UK lose their jobs at a slower rate than the United States. Just 0.6% of the employed lose jobs each month in the UK, whereas the US monthly job loss rate is 3%.
The study shows that these low UK transition rates have several important and related implications. First, the UK labour market is much less fluid than the US labour market.
Second, because of these slow transitions, past ''shocks'' to the labour market have lingering effects. Past shocks to rates at which people lose and find jobs continue to affect current unemployment for a long time in the UK, whereas the effect of labour market shocks disappears much more quickly in the United States.
The ''half-life'' of a shock is close to one month in the United States, but around six months in the UK. (The half-life is the point at which half the original impact has disappeared). This helps explain why the UK has suffered from persistently high unemployment in the past, a phenomenon known as ''hysteresis''.
The main data source for Professor Smith''s study is the British Household Panel Survey (BHPS), which has interviewed more than 5,000 people each year since 1991 to 2008, and also asked them about their labour force history prior to 1991 so that the full labour market analysis in the study goes back to 1988.
BHPS results are backed up by analysis of the Labour Force Survey, the official source of UK labour market statistics, which interviews at least 75,000 individuals every quarter.
''The Ins and Outs of UK Unemployment'' by Jennifer Smith is published in the May 2011 issue of the Economic Journal.
associate professor at Department of Economics at the University of Warwick