Pay restraint saved jobs, says IMF

Increase in unemployment was concentrated mainly in manufacturing, study finds

Britain's flexible labour market and pay restraint saved the nation from an even sharper rise in unemployment than in fact occurred, according to the latest analysis from the International Monetary Fund.

A "key area" for explaining why the jobless figures did not rise as far as was feared, given the 6 per cent drop in gross domestic product during the recession, was "wage flexibility and moderation", the IMF said.

Its researchers also warned that other advanced economies faced what has been dubbed "a jobless recovery", saying: "For several advanced economies, the potential for a slow recovery in output and the nature of the recent recession (financial crisis combined with a house price bust) presage persistently high near term unemployment rates."

The IMF forecast "persistently high unemployment rates in OECD economies over the near term", saying: "The unemployment rate remains high – about 9 per cent – through [to] the end of 2011. Moreover, the unemployment rate is still rising even as employment starts to grow, given the continuous expansion of the labour force."

Comparing Britain's relatively strong performance on unemployment with its historical record and other countries, the IMF said it was a "puzzle". It said the peculiar nature of the "Great Recession" – a collapse in the property market and the financial sector – had led to an increase in the number of people out of work, but a significant offsetting effect remained "unexplained", although it indicated that a flexible labour market probably accounted for most of that.

Another factor, said the IMF, was that the rise in UK joblessness was concentrated in areas such as manufacturing, which are relatively high in productivity, so that any given fall in production would be matched with fewer job losses than in other, more labour-intensive sectors. Manufacturing did indeed suffer badly during the recession, losing more than a million jobs, whereas the public sector, which contains many relatively low productivity posts, recruited 300,000 people.

Another factor, sometimes mentioned in anecdotal evidence, is that government measures such as the Flexible New Deal have pushed many unemployed people into accepting part-time and temporary work or training in a way that was not the case before. There has also been a rise in numbers leaving the jobs market altogether.

Many economists had expected an unemployment rate of 3.5 million or more by now, against an actual figure of 2.5 million, based on the numbers of job lost during the downturns of the early 1980s and 1990s. For now at least, unemployment seems to have peaked.

The IMF said that among the major economies Spain had seen the worst rise in unemployment, largely because of her large number of temporary contracts. Germany, Japan, Italy and the Netherlands have benefited from job subsidy schemes. While acknowledging the value of such projects, the IMF said they should now be wound down.

In a separate study, the OECD said it expected "a slight further increase" in UK youth unemployment over the next two years and praised Labour's commitment to offer 16 and 17 year olds education or training.

Election and talk of cuts hit confidence

There is increasing evidence that the uncertainty surrounding the election, and the hung parliament and cuts that will probably follow – is slowing the real economy. The Nationwide Building Society reports today that its index of consumer confidence fell by nine points in March, the largest monthly fall since July 2008, and wiped out all the increases seen since the start of the year.

The political debate about tax rises, spending cuts and reducing the deficit may have led consumers to wait before committing themselves to moving home or buying "large ticket" items. Those in the public sector will be especially anxious to know if cuts will directly affect them. Fear of a "double dip" may also have weakened confidence.

Earlier this week, the Royal Institution of Chartered Surveyors said vendors had brought forward sales of homes in advance of the election, weakening property prices.

Martin Gahbauer, the Nationwide's chief economist, said: "Perhaps unsurprisingly, the movements during March are not dissimilar to the changes we saw in the run-up to the 2005 election, where consumers appeared to be uncertain about the economy and employment situation. However, consumer pessimism appears to be stronger this time."