Economic and Social Research Council
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Britain has now been in recession for over a year. How can policy-makers respond most effectively, on a global scale as well as nationally? And what are the likely effects – both now and in the future – on jobs, on businesses and on people’s lives?
A new report published by the Economic and Social Research Council (ESRC) explores what can be learned from evidence on previous recessions: the three that Britain has experienced most recently – in the mid-1970s, the early 1980s and the early 1990s – as well as recessions elsewhere in the world, and the global recessionary period to which current times have often been compared, the 1930s.
The Minister for Science and Innovation, Lord Drayson said, “The current economic climate has underlined the urgent need to understand and address the impact it has had on our lives. Recession Britain brings together world-class economic and social research into the challenges we face in preparing for recovery of the global market and building a stronger, more sustainable UK economy for the future.”
The report draws on analysis of a broad range of data sources and the work of numerous researchers and research institutions, many of them centres, programmes and individual scholars funded by the ESRC. Among the findings:
BRITAIN IN RECESSION
The extent of the downturn: In June 2009, the British economy was around 5.5% below its peak in the first quarter of 2008, when the recession began. National income per head is predicted to take until March 2014 to return to its level in March 2008.
Uncertainty and investment: The financial crisis has increased uncertainty in the ‘real economy’ – and higher uncertainty has led firms to postpone making investment and hiring decisions. The longer firms wait, the more economic activity will slow down.
House prices: Prices may fall for three more years. With fewer houses on the market, potential buyers know that it will be harder to find a house that matches their tastes or needs – so more buyers drop out of the market, leading to further declines in prices.
The impact on spending: By reducing household wealth and thereby reducing consumer spending, falling house prices can sustain an economic downturn. Reduced household wealth also makes it harder for entrepreneurs to finance new businesses.
Public spending cuts: The financial crisis and the recession have made real cuts in some areas of spending on public services inevitable. Britain’s 1920s experience of the ‘Geddes Axe’ offers a model of how to put public spending growth into reverse.
THE IMPACT ON JOBS
Unemployment: The full impact of a recession may not feed through to job losses until several quarters after the recession officially begins. In the 1980s and 1990s, it was five years after the recession began before unemployment fell to its pre-recession levels.
Regional disparities: The south was unusually hard hit in the early 1990s recession, which suggests that it is very capable of bouncing back even if it is worst hit this time. There is unlikely to be a fundamental long-run shift in Britain’s economic geography.
Labour market losers: Lay-offs in financial services notwithstanding, it is low-educated, low-skilled workers whose employment prospects have suffered most as the recession worsens. This is not been the ‘middle-class recession’ that many predicted.
Longer-term damage: After the early 1990s recession, there were severe longer-term consequences for many workers who lost their jobs. The experience of unemployment can damage people’s chances of keeping a job once they find one.
Older workers: Past recessions suggest that employment among older workers may be particularly sensitive to the economic cycle. But the situation now is very different: access to early retirement benefits or disability benefits is much more restricted.
Youth unemployment: Just as in previous recessions, younger workers are being particularly hard hit by this recession. Unemployment is most volatile for 18-24 year old workers, whose unemployment level has grown at a rapidly accelerating rate.
The threat of ‘scarring’: The early 1980s recession had a lasting adverse effect on the employment prospects of low-skilled young people aged 16-18 in 1981. Higher-skilled individuals of this generation stayed out of the labour market to develop skills.
Job guarantee: Policy interventions – like the Job Guarantee – designed to reduce the exposure of young adults to substantive periods of unemployment could, if successful, have substantial returns in terms of the individual’s lifetime earnings.
School-leavers: In previous recessions, many young people who left school with few or no qualifications ended up shuttling between labour market programmes, inactivity and unemployment, accumulating long spells of stigmatising joblessness.
Staying in school: Rising unemployment may help the government to meet targets in terms of increasing the number of young people staying on in education. Research shows that enrolment rates in post-compulsory education rise when jobs are scarce.
Graduate employment: There is a risk of lifetime earning losses for the generation of graduates joining the labour market in the recession. The situation may be worsened by the increased supply of graduates and lower returns to a degree for some graduates.
THE IMPACT ON PEOPLE’S LIVES
Incomes: Average household incomes fell in real terms during each of the past three recessions, with falls continuing after the recessions ended as unemployment continued to rise. The incomes of the less educated fell the most.
Living standards: Families dependent on wages and salaries – working-age adults without children and couples with children – are more affected by recessions than people dependent on fixed incomes or benefits – pensioners and lone parents.
Reduced benefits: Compared with previous recessions, a sharp rise in unemployment may have a bigger impact on the relative living standards of those losing their jobs. Unemployment benefits have fallen relative to average incomes for the past 20 years.
Unemployment and divorce: People who lose their job in Britain increase the chances that they will lose their partner. A woman losing her job is increasingly likely to lead to partnership dissolution the longer the partnership has lasted.
Falling house prices and family life: Unexpected downturns in the housing market can damage family stability. Price falls are particularly destabilising for the relationships of young couples with low family income, high mortgage debt and dependent children.
Unemployment and health: Unemployment increases the risk of psychological disorders such as depression. Secure employment among healthy adult men and women of all ages greatly reduces the risk of developing a work-limiting illness.
Longer-term effects: Young men from advantaged backgrounds, who did well at school but who were unemployed for a year or more in the 1980s recession, were much less likely to be high earners, in a professional job or own their homes by 1991.
Job loss and happiness: One fifth of the steep decline in happiness that people experience when they lose their job is because of the fall in income. But the rest comes from something different – perhaps loss of status, self-esteem or social networks.
Housing and health: Housing repossession (but not evictions) and unsustainable housing commitments, which are likely to be greater in a recession, significantly increase the risk of common mental illness and reduced well-being.
Social attitudes on housing: As of the summer of 2008, people's certainty in the advantages of home ownership had been shaken, but it had not dented their faith in home ownership being the ideal arrangement. Perceptions may be more negative now.
Social attitudes on public finances: In 2007, for the first time since the mid-1980s, the level of support for more taxation and spending dropped below the level of support for keeping taxation and spending the same. It remained at a similar level in 2008.
THE IMPACT ON BUSINESS
Productivity: Productivity tends to fall in the early stages of a recession but rebounds as weaker firms close. In the early 1990s, the dispersion of productivity across all firms fell because the lower tail of poorly performing firms was reduced in size.
Shedding workers: Employment is falling much faster than output in the US recession. This may be because information technology and aggressive management practices are allowing firms to cut workers and introduce new practices that keep output high.
Profitability: Performance differences between firms tend to increase significantly in recessions. While the average profitability across firms follows the path of the business cycle, the variation in profitability across firms rises sharply in a downturn.
Returning to growth: Firms cannot cut their way out of the recession but must grow their way out. Since growth will not come by competing on cost, it is essential to move up the ‘value chain’, offering ever more valuable products and services.
Innovation: Firms that have innovated at some point in the past are better able to flourish in a recession, perhaps because of better management practices. Bad ‘shocks’ can actually stimulate firms to innovate, especially making organisational innovations.
Small businesses: Despite the severity of the current recession, a higher proportion of firms expect to expand in the coming years than in 1991. Fast-growth and innovative firms are especially resilient: over two thirds expect to expand in the next three years.
Competition policy: Recessions have provided opportunities for anti-competitive mergers to concentrate markets unnecessarily. Suspension of competition policy in the United States in the 1930s may have extended the Great Depression for seven years.
Charitable giving: The proportion of individual income given to charity is likely to remain generally constant, as it did during the Great Depression. In Britain’s 1980s recession, there was no obvious effect on the average amount of household donations.
WORLD IN RECESSION
Trade: There is a danger that countries will respond to the decline in trade with protectionist policy measures, for example, the ‘Buy in America’ provisions associated with the US fiscal stimulus. This could lead to a protectionist spiral as in the 1930s.
Migration: History and recent experience suggest that every 100 jobs lost in a high-immigration country result in 10 fewer immigrants. History also reveals rising anti-immigrant sentiment in a global recession: this is evident in Britain today.
Aid: Developing countries may suffer from reduced aid budgets in developed countries as they face recession and retrenchment of public finances. Between 1975 and 2005, per capita aid in Africa was higher during good times and lower during bad times.
Climate change: An environmental tax reform could shift taxes from wages to pollution in a ‘revenue-neutral’ way, which be good for jobs and bad for pollution – an ideal policy to boost employment without extra borrowing, ‘saving the economy and the planet’.
Financial markets: Current regulatory systems assume that regulations that make individual banks safe also make the whole system safe. ‘Micro-prudential’ (bank-level) regulation and ‘macro-prudential’ (system-wide) regulation must be coordinated.
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NOTES FOR EDITORS:
1. ‘Recession Britain’ published by the Economic and Social Research Council (ESRC), is based largely on ESRC funded research. For further information on this booklet and related research please see http://www.esrcsocietytoday.ac.uk/recessionbritain
2. All data and statistics are correct at the time of going to press.
3. The Economic and Social Research Council (ESRC) is the UK's largest organisation for funding research on economic and social issues. It supports independent, high quality research which has an impact on business, the public sector and the third sector. The ESRC’s planned total expenditure in 2009/10 is £204 million. At any one time the ESRC supports over 4,000 researchers and postgraduate students in academic institutions and independent research institutes. More at http://www.esrcsocietytoday.ac.uk