The curious case of recoveries in UK and US post recession

     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.