The persistence of UK employment and unemployment

This paper estimates a disequilibrium specification for UK employment and unemployment which takes account of both demand and supply factors. One implication of the functional form is that the elasticity of employment with respect to changes in output or real wages etc is larger when economic activity is low. This suggests that using fiscal policy to stimulate employment during a recession may be more effective than previously realised. In addition, analysis of the dynamics indicates that the speed with which the UK labour market responds to economic shocks may have become asymmetric in the 1980s (ie the labour market now responds more rapidly when employment is falling). One interpretation may be that the introduction of labour market reforms designed to improve the flexibility of labour demand may have made it easier to lay off workers without symmetrically easing the costs to firms of taking on workers. Another interpretation may be that increased flexibility in labour demand may have been accompanied by a reduced flexibility of supply, associated with an increase in the proportion of long‐term unemployment and a growing mismatch between the unemployed and the types of jobs being offered. Contact NIESR if copy required