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2.1.1 The Great Recession

The Great Recession of 2008/2009 caused a sharp rise in unemployment in the UK. Several studies found a link between financial crises and rising unemployment. Pissarides (2013) found unemployment increased in most OECD countries after the 2007-2009 recession. Farmer (2012) also found a high correlation between stock market performance and unemployment in the US dating back to 1929. Farmer's (2012) time series model showed unemployment and stock market declines were strongly correlated from 1979 onwards. The recession was thus a major contributor to increased unemployment in the UK.

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51 views

2.1.1 The Great Recession

The Great Recession of 2008/2009 caused a sharp rise in unemployment in the UK. Several studies found a link between financial crises and rising unemployment. Pissarides (2013) found unemployment increased in most OECD countries after the 2007-2009 recession. Farmer (2012) also found a high correlation between stock market performance and unemployment in the US dating back to 1929. Farmer's (2012) time series model showed unemployment and stock market declines were strongly correlated from 1979 onwards. The recession was thus a major contributor to increased unemployment in the UK.

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ThankGod Ukachukwu
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© © All Rights Reserved
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2.1.

1 The Great Recession

The recession of 2008/2009 is one incident that readily seems obvious as the cause of the rise
in unemployment in the UK. According to (Bell and Blanchfolwer, 2010), the Great
Recession was an outcome of government unwillingness to correct certain economic
imbalances and inability of the players in the financial sector to perceive risk inherent in the
activities of the housing market. It is very clear that such a decline in the economy of UK
would lead to decline in the labour market. Figure 3 above depicts a sharp fall in the level of
vacancies which has not been able to go back to the pre-2008 levels showing that companies
which generated those employment were affected therefore the vacancy levels we have today.
Furthermore, a look at the data obtained in figure 2 above depicts an increasing trend in the
unemployment rate which started as early as four years before that crisis. However figures
agree with the preceding explanation for the increased level of unemployment during the
peak of the recession. In this regard, some scholarly articles which have attempted to link the
financial meltdown to the upward trend. This assertions will be reviewed to ascertain
scientific evidence rather than the usually information given by opposition politicians on the
pages of newspapers and TV, where it is obvious that they will heap the blame at the doorstep
of the incumbent government.
Pissarides (2013) considered the impact of the recession of 2007-2009 on unemployment in
OECD countries of which the UK is a member. With the exception of Poland and Germany,
unemployment was on the increasing trend. Farmer (2012) established a high correlation
between the stock market and the unemployment rate using data from the US dating back to
1929. To provide more evidence to support this claim, Farmer (2012) estimated a bivariate
time series model of unemployment and this trend was said to have been structurally stable
from 1979 onwards and before that year. Illustrating further in figure 4 below, with instances
of the Great depression and Great Recession, the real value of wealth was compared against
unemployment, a strong correlation coefficient of -0.88 was discovered which shows that the
two events are related.

Figure 4: Unemployment and the Recession (Source - Farmer, 2012)

2.2 Structural unemployment


Structural unemployment occurs when the demand in an industry experiences a long-term
decline which translates to lower number of jobs coming from this industry as a result of
decreasing demand for labour. Instances include the computerization of work roles where
robots can be used to replace manual jobs and unemployment induced by foreign
competition. Structural unemployment is as a result of inability of existing skills to meet the
requirements of new job opportunities. The occupational and immobility of labour is a major
consideration because investment is need to match existing skills to the current work
situation. Here globalization plays a big role as the developing and emerging economies are
putting the West which includes the UK at a disadvantage. The manufacturing sector has
experienced a higher cost advantaged when compared to lower cost Eastern-Europe and Far
East Asia or even Africa. Consequently, structurally unemployed workers increase the level
of unemployment for the period when the unemployed workers try to adjust to gain more
skills. Structural unemployment can be reduced when an industry gains momentum such as
the revival of the UK motor manufacturing sector that has seen the production of the Range
Rover brand rejuvenated with over 11,000 jobs added in the UK in the last three years from
2013 amid growing investments (TheGuardian, 2013). Riley (2012) noted that over the past
three decades, the UK has continued in a decline of manufacturing jobs losing about 1.5

million jobs in the process. This situation was worsened by 2008/2009 recession though the
aftermath is an appreciation in the level of employment following mild recovery thereby
lowering unemployment. Though structural unemployment is mainly seen as associated with
manufacturing and construction sectors, but it can occur just in any sector of the economy.

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