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The UK paradox on employment

In its latest Economic Outlook released this morning, the OECD aims to shed some light on the so-called ‘UK paradox’ of employment rates rising while economic growth remains weak.

Loss of jobs in the financial sector may have reduced UK productivity

Today’s Outlook says of the UK : “Although employment grew strongly in 2012, unemployment is expected to rise slightly in 2013, as the subdued recovery and continued uncertainty may make firms hesitant to hire.” The OECD forecasts unemployment to rise slightly to 8.3% in 2013 and to fall back to 8.0% in 2014.

Overall, according to new analysis by OECD employment experts, UK employment has held up surprisingly well during a difficult economic period:

  • The tendency of the UK labour market to perform better than might be expected given weak output growth has been visible ever since the global financial crisis broke out in 2008. Nearly four years after the onset of the crisis, real GDP in the United Kingdom is still 3.1% below its value in the first quarter of 2008, but employment is back where it started. This discrepancy has led some observers to speak of a “UK paradox.”
  • One partial explanation for the decline in UK labour productivity is that the recession has led to many high-productivity jobs being lost and some of those jobs being replaced by less productive ones. Full-time employment has fallen sharply since 2008, while part-time employment and self-employment have increased modestly. However, this probably is not the full story since the United States has experienced a similar change in the composition of employment.
  • A number of supply-side factors may help to explain the UK productivity paradox. For example, declining real wages may have induced the substitution of labour for capital. Retrenchment in the financial sector may also have played a role, since output per worker was very high in this sector prior to the crisis. Indeed, most of the short fall in productivity relative to the pre-crisis trend is due to the services sector, as well as to declining yields from the North Sea oil fields.
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Posted in Employment, productivity, unemployment

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