Wage increases could push up unemployment

Lower wage increases meant unemployment during the recession peaked at a lower rate than previous economic downturns, according to the Bank of England’s latest report.

But the outlook for the jobs market is uncertain if workers demand inflation-matching wage increases during a weak economic recovery, the Bank’s first quarterly bulletin for 2010 has warned.

Employment fell by 1.9 per cent in the 2008-09 recession, compared to a 3.4 per drop in the early 1990s and a 2.4 per cent fall in the 1980s downturn. This was despite the economy contracting by 6.2 per cent in the latest recession, compared to a decline of 2.5 per cent in the 1990s and 4.7 per cent in the 1980s.

But in this recession real wages, taking into account inflation, grew by just 0.1 per cent – contrasting with the 7.3 per cent increase seen in the 1990s and a 2.7 per cent rise for the 1980s.

“A marked feature of the response of our economy to the current recession is that employment to date has not fallen by as much as we might have feared given the falls in output,” said Spencer Dale, the Bank of England’s chief economist and executive director.

“To date, businesses have responded to the fall in output by reducing total labour costs by a similar proportion to that in the early 1990s. But the way they have done so looks rather different, with many employees appearing better able to protect their jobs by accepting lower wage growth.”

Inflation remained low during the recent recession, with workers willing to accept pay freezes or reductions rather than broach an uncertain jobs market. But now inflation is rising and the country has officially emerged from the recession, the study cautioned against sudden wage hike demands.

“Employees may have become more confident about the employment outlook and may be unwilling to accept a further squeeze in real wage growth,” it said. “That could lead them to push for higher pay settlements this year. But if companies cannot afford the increase, then they may shed labour in order to contain labour costs.”

The CIPD’s chief economic adviser, John Philpott, agreed that the report offered a realistic assessment of the outlook for jobs.

“The study adds a dose of realism to the view that unemployment is already close to its post-recession peak. As the Bank warns, the risk of further substantial job losses remains, especially if the economic recovery is as weak as most current indicators suggest,” said Philpott.

“While pay restraint helped save jobs during the recession, the dawning realisation that this will have to continue for some considerable time if jobs are not to be lost during the recovery will test the goodwill of UK workers to the limit. Superior line management skills will be crucial to maintaining employee motivation and business competitiveness against this austere backdrop,” he added.

The report also credited an increase in the average retirement age of workers and a fall in the exchange rate for keeping down wage costs in real terms. A lower level of bankruptcies than expected also mitigated the number of large-scale redundancies, said the analysis.

Source People Management