The diverging unemployment stories in the USA, Britain and Spain

A couple of weeks ago, I was invited along with other youngish economics types¬† by the excellent Centre for the Study of Financial Innovation to a dinner with a top financial journalist. Macroeconomic forecasting is notoriously unreliable but I raised the question about why British unemployment (now 7.7%) hadn’t gone up anything like as much as anticipated with a 6% fall in GDP (about a million short according to Nadeem Walayat of Market Oracle) whereas US uemployment (now 9%) clearly had. What did this say about flexible labour markets in downturns when the UK’s was clearly less regulated in the early 90s?

There were several answers put to this from the speaker and around the table which I found fascinating;

  1. The UK had price-adjusted rather than quantity adjusted employment. In America – and I don’t know how much this may be because of regulation or culture – they tend to lay off the workforce rather than reduce their wages and bonuses
  2. The UK, like the USA may have had a big ramp-up in property prices, but unlike in America, there was no construction boom. Construction workers are very easy to lay off and that had a big impact on US unemployment
  3. The UK had a big increase in public sector workers over the last decade. Whether you agree with this or not, it’s certainly true that they were not laid off during and after the recession – in fact public sector employment actually increased so that soaked up a lot of people who might otherwise have been unemployed

But then does this mean that the UK is following the European model of employment behaviour?

No, if only because the diversity of Europe’s unemployment’s response is extreme.

Spain is actually far more like the USA. Spain had the mother of all building booms which collapsed and will take a long time to adjust. And Germany’s unemployment actually went down during the recession.