IMF: Britain’s unemployment lower than expected

As new unemployment figures are released today, again showing a mixed picture, new research from the IMF shows that Britain’s unemployment rate during the “Great Recession” has been kept lower than economic models anticipated.

The IMF’s World Economic Outlook, released on Friday, details what has contributed to the changes in unemployment during the recession. According to the paper, economic theory predicted that unemployment in the UK should have risen by around 3.5 per cent. In reality, it was far lower at 2.5 per cent.

The chart shows that only Germany, Sweden and Finland had unemployment come in this far below the expected level. By contrast, Ireland experienced unemployment that was far higher than expected.

Another chart (Figure 3.9) attempts to detail why Britain’s unemployment came in below expected. It highlights that an “unexplained component”, partly due to Government policy, pulled down unemployment by 2 per cent while the UK’s reliance on the financial sector and, to a lesser extent, the housing bubble, pulled it in the opposite direction. The unexplained component is worth 600,000 to 700,000 jobs.

The IMF report says:

Unemployment dynamics in Canada and the United Kingdom remain difficult to explain: these countries have sizable negative unexplained components but did not implement large short-time work programs. For the United Kingdom, pay moderation may help explain part of this puzzle.

The Government’s policy response to the economic crisis including the creation of the Future Jobs Fund may also contribute to the lower than expected unemployment. The Conservative party opposed this approach while many right-wing figures praised Ireland’s policy decisions which appear to have raised unemployment.

Graeme Cooke’s monthly analysis of today’s unemployment figures will appear later today.