Another article from The Economist that I found interesting was published under the section Free Exchange: "The price of getting back to work" (issue of February 1st 2014).
Post 2008-09 there was a slump in GDP of both the economies. The American GDP bounced back relatively quickly but the employment in contrast suffered a more a dramatic decline. In case of Britain it was completely opposite; the GDP declined quickly without much downturn in employment as compared to US. The picture below taken from that very own article will help in visualizing the scenario.
Here I
would like to quote what Paul Bowles has written in his book Capitalism - a short history of a
big idea. He mentions business cycles under Capitalism and Crisis.
"In the boom period of the cycle the profit expectations are high and
investment is high. The demand for labor is high and as a result unemployment
falls and wages start to bid up. However, after a while, the rise in wages eats
into the capitalists profits and creates a 'crisis'; the crisis of
profitability. This is solved by capitalists reducing their investment levels,
with the result that growth falls and unemployment increases until workers are
disciplined to accept lower wages; at this point profit expectations pick up
and the whole cycle is repeated".
Though this
maybe the central idea of a business cycle many aspects about the paragraph
above can be debated. If this general idea is applied to the situation seen in
the graph, the puzzling thing is, the divergence in the unemployment-GDP
relation in the Britain and US economies.
According to the The Economist article
the US had a normal recession whereas Britain didn't and it can be explained by
what they call 'productivity puzzle'. In US the weak demand, which accounts for
output loss led to shortfall of jobs. In contrast in Britain falling demand has
been accompanied by strange decline in workers' productivity. Falling
productivity cushioned the economy against large jobs losses, since more
workers were needed to do the same amount of work. As it reflected the loss of
productive capacity, it led to higher inflation. The annual inflation in
Britain has been double that of US since late 2007.
This is where the even more interesting part comes in. Bill
Martin and Robert Rowthorn, of the University of Cambridge, argue that this
productivity puzzle has an opposite causation effect: 'wages did not fall in
response to declining productivity; declining productivity was instead a
consequence of falling real wages'. Putting it simply; as the nominal wage rise
in Britain was 1.6% and inflation was more than 3% the real wages fell by 7.8%
making the labor cheaper than the prices of goods and services. Hence the
moderately high inflation was the difference between a jobless recovery and a
job-filled one.
