Abstract
As in many European countries, labour productivity in the UK has been stagnant since the start of the Great Recession. This article uses individual data on employment and wages to try to understand whether real wage flexibility can help shed light on the UK's productivity puzzle. It finds, perhaps unsurprisingly, that workforce composition cannot explain the reduction in wages and hence productivity that we observe, even compared to previous recessions; instead, real wages have fallen significantly within jobs this time round. Why? One possibility we investigate is that the labour supply in the UK is higher compared to previous recessions.
Highlights
As in many European countries, labour productivity in the UK has been stagnant since the start of the Great Recession
One obvious possibility is that effective labour supply is substantially greater during this recession than in the past: the labour supply curve has shifted to the right
The real question is: why have wages for existing workers been able to fall so much in this recession compared to previous recessions?
Summary
The UK has recently experienced its deepest recession since the Second World War, with real GDP falling by over 6% (see Figure 1). These patterns are consistent with recent changes to welfare policy in the UK, such as the increasing number of welfare-to-work programmes available to jobseekers, the more stringent job search conditions attached to benefits claimed by the unemployed, those with disabilities and lone parents, and, more recently, the increase in the state pension age for women Another potential explanation for higher observed labour supply in this recession compared to previous recessions might be that individuals have experienced substantial wealth shocks (or shocks to expectations of their future income) as a result of the financial crisis that mean they decide to work for longer. This suggests that much of the change in wages must have occurred as a result of decreases in the returns to particular characteristics and that we would expect wages to have fallen significantly among individuals who remained in the labour market.
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