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Stiff upper lipped response to recession will divide U.K.

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A sluggish recovery is taking root in Britain after one of the deepest and strangest recessions on record. Over the past few weeks, data signals have appeared pointing to more economic activity – the services sector is growing again, manufacturing picked up in May and output is finally rising. Manufacturers are more optimistsic and unemployment is coming down. Yet the good news arrives after a period of unprecedented wage cuts. The average Briton has suffered more financial pain over the past five years than in any recorded period as workers agreed to work for less pay to save their jobs.

Figures from the U.K. government showed unemployment fell by 5,000 in the three months to April. Unemployment benefit claimants are also down and the highest ever number are in work at 29.7 million. The oddity is that last number which has remained curiously high since 2008. This has been a recession with prolonged and steep falls in output but high employment. There have been relatively few sackings, business closures and bankruptcies. It is as if the British rode through this hideous downturn with clenched teeth, steadfastly refusing to allow it to happen.

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There are good and not-so-good aspects to this phenomenon, described by Britain's Institute of Fiscal Studies as "labour hoarding." Single parents and the elderly did not quit the labour market, as they did in previous recessions when vast numbers of otherwise capable workers were dumped into the state benefits system. Many never returned to work. Instead, this time, cuts to the welfare budget pushed people back on the jobs market, keeping the supply of workers high. The competition for jobs has forced many to accept lower wages.

According to the IFS, falls in real hourly wages even occurred among workers staying in the same job – one third of such workers have seen their pay cut or frozen between 2010 and 2011. The plus-side is that more people stayed in work during this recession which, when looked at from a statistical height, appears to be very much a shared experience for the British.

Normally, in a recession, firms sack surplus staff as the orders diminish; businesses cut their cloth to meet shrinking demand. Overall, the majority do well in a recession and profit quickly from the bounce-back when demand returns. The minority who lose their jobs suffer hugely. But in this recession, the pain has been spread more evenly and inequality of income has been reduced.

The big question is what this means for the future. The "labour hoarding" is accompanied by the negative consequence of poor productivity, especially in smaller businesses which have suffered a 7 per cent reduction in output per hours worked. If firms are carrying more staff than they truly need, the bounce-back from recession will be slow and the response to rising market demand may be less efficient and profits growth subdued.

There will almost certainly be a political consequence. Britain is now a divided nation, not so much by wealth but between public and private employees. It is the private sector of the economy that has endured the wage cuts and it is the public sector of government jobs that remains heavily unionised. As the debate over welfare and the cost of government continues, the question of who suffered most in the great downturn will become a running sore of argument.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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