Why British Unemployment Is So Relatively Low

The last few years has been the by far worst for the British economy since the 1930s, in fact by some measures it has in fact been even worse than the 1930s, with GDP being 4% lower in Q2 2012 than in Q2 2008 (adjusted for terms of trade) and with per capita GDP being 7% lower as population has increased by 3%. Yet despite a drop in per capita GDP by a cumulative 7% in four years, unemployment is a relatively moderate 8.1%. While that is significantly above the roughly 4% it was at during the previous boom, it is far lower than in for example Ireland, Portugal, Greece and Spain. So how come British unemployment has risen so little?

Simply because productivity has been falling. Output per hour for the whole economy was 3.5% lower in Q2 .Output per worker, a variable that also depends on average hours per worker, fell slightly more, 3.9%. That number if of course basically the same as the 4% drop in GDP. So the drop in per capita GDP can be almost entirely attributed to two factors: the increase in population and a big drop in productivity, with a smaller part being due to a small drop in the average work week. However, the absolute number of employed are basically the same now as when the slump started. As this chart illustrates, when the crisis began both employment and productivity fell. In 2010 and early 2011 there was a moderate recovery in both, but since the second half of 2011, the two has diverged as employment has continued to recover while productivity has started to drop again.