A Comparison of Labour Market Responses to the Global Downturn

Abstract

The global economic downturn has led to a crisis in labour markets, with an estimated 15.2 million job losses across the OECD economies, equivalent to a rise in the OECD unemployment rate from 5.5 to 8.9 per cent. Initially, the rise in unemployment appeared lower than expected. In Holland, Kirby and Whitworth (2009) we demonstrated a simple rule of thumb between output growth and the unemployment rate in the OECD as a whole, based on Okun's approach. Using a dataset that spans the period 1988–2008, regression analysis suggests that on average a 1 per cent decline in output is associated with a rise of 0.6 percentage points in the unemployment rate across the OECD economies. Between the first quarter of 2008 and the first quarter of 2009, output in the OECD economies declined by 4.8 per cent. The unemployment rate rose by 1.9 points over this period, as compared to 2.9 per cent given by the rule of thumb. However, the labour market tends to lag production. While most of the major economies started to grow again in the second or third quarters of 2009, OECD unemployment continued to rise into the final quarter of the year, with a cumulative increase in the OECD unemployment rate of 3.4 percentage points — even higher than that suggested by our rule of thumb.