Ec 111 week 4b(1)


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Ec 111 week 4b(1)

  1. 1. EC-111 British EconomyRecent UK MacroeconomicTrendsDr Catherine RobinsonF26, Richard Price BuildingOffice Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30Appointments:
  2. 2. Productivity Considering trends in economic growth and productivity Helps put the UK into context Structured around 3 papers Muellbauer‟s 1991 paper on competition and productivity O‟Mahony and Robinson (2007) Disney, Jin and Miller (2013), „The ProductivityPuzzles‟, IFS Green Book, Chapter 3ALL AVAILABLE ON BLACKBOARD
  3. 3. The Basics:Economic Growth Growth in GDP But this stems from Increasing labour Increasing capital Improving the way these two are combined through technology PRODUCTIVITY Growth Krugman‟s 1991 quote: “productivity isn‟t everything, but in the long run, its almosteverything” Producing more output from inputs (technology or betterorganisation) Sectoral perspective
  4. 4. Early Work of Muellbauer Focussed on productivity and competitiveness inmanufacturing “Manufacturing is the bell-wether for theeconomy”(Muellbauer, 1991, p.99) International competitiveness, 1966-1990 relative input prices, relative export prices and relative unitlabour costs (figure 1) In all cases, we see a rise in costs/prices overtime, especially from 1978 onwards Noticeably worse in the late 1980s than in the late 1970s Substantial labour shedding in 1991 expected to stabilise ULCmeasure
  5. 5. Productivity growth in UKmanufacturing (1980s-1990s) Manufacturing experiences faster productivity growththan other parts of the economy Easier to measure? Noticeable speeding up of labour productivity in the1980s In part yes, a speeding up, but also followed on from a veryslow 1970s period Muellbauer looks at the slow-down and the upturn
  6. 6. Labour productivity index (1995=100) MANUFACTURINGDEUKLEMS, 2009releaseGross value added per hour workedMuellbauer, 1991O‟Mahony andRobinson, 2007
  7. 7. Causes for the 1970sslowdown Raw material prices Oil crises Exacerbated by inappropriate capital Suitable for low energy prices Became inefficient with the change in prices Global recession Led to scrapping of plant, machinery, buildings ALTERNATIVE VIEWS Bruno and Sachs (1982) – all down to measurement Labour markets and industrial relations Adjustment costs because of the input price shocks
  8. 8. Causes for the 1980s upturn(Muellbauer) Capital productivity and unobserved scrapping of the earlier periodreverses UK manufacturing firms were too optimistic and hoarded labour Great labour shake-out followed with the Thatcher administration Industrial relations Over valued exchange rate, high interest rates, withdrawal ofsubsidies and state-financed rescues and the SCALE of recessionput managers under pressure to cut costs and improve workpractices Improvement in the quality of workers New technology Catch-up hypothesis (Crafts, 1991)
  9. 9. Muellbauer in conclusion…. Not just a manufacturing phenomenon but data outsidemanufacturing are ropey Links it back to macro policy Weakening of union power did help to increase productivitygrowth in unionised plants more than non-unionised plants(Metcalf 1989) Long run education and training of workers crucial toproductivity growth and competitiveness UK housing market hindered labour mobility Warnings about interest rates as sole policy response Too much faith put in the Thatcher Miracle Tax cuts and other improvement in incentives and institutions torevolutionise the UK economy
  10. 10. Productivity and growth from aninternational perspective, 1970-2004 Data from EUKLEMS UK compared with France, Germany and US Takes a more whole-economy approach Splits the period in two 1970-1995 1995-2004 Notes that recent performance shows RLP growth faster thancomparable countries BUT a relatively lower starting base (Table 2) Still a significant productivity gap
  11. 11. In part, education?
  12. 12. Sectoral sources of growth Need to take into account thesector size as well as theproductivity growth UK sees a collapse inproductivity growth intraditional manufacturingsectors (not shown) But in marketservices, outperforms Franceand Germany This is due to financial andbusiness services (rather thanretail/wholesale – in whichGermany does well)
  13. 13. US outperforms Europe First mover advantage with technology Different sectoral mix US has natural advantages A more entrepreneurial spirit US has greater organisational capital Institutional differences Europe has more labour and product market regulation
  14. 14. The Current ProductivityPuzzle Until this last quarters figures, there were more peoplein employment now than before the recession BUT Output per worker fell by 3.2% between 2008(Q1)and 2012(Q3) Why? ....previous recessions saw smaller drops becauseemployment fell faster than output
  15. 15. Disney et al (2013) provide someexplanations Measurement issues (again) Industrial composition…productivity falls in some sectors morethan others Changes in workforce composition Fall in real wages Level and allocation of capital Impact of recession has fallen disproportionately on the publicsector (6% decline since 2009) While output has increased – productivity gain BUT all sorts of problems measuring productivity in the publicsector
  16. 16. Or to put it another way…. The Economist…
  17. 17. Summary Two periods of productivity growth in the UK economy The Thatcher Miracle Concentrated in the manufacturing sector The ICT adoption Splits along ICT using and producing lines, not traditionalsectoral breakdowns UK, like the rest of Europe, seems to lag the US Some cause for optimism in UK performance stemming fromthe business and financial services sector BUT – 2007 saw the credit crunch and the start of thefinancial crisis Productivity has fallen and employment held up Labour hoarding/capacity utilisation Public sector productivity improvements?
  18. 18. ReferencesONS podcasts – great one on Balance of Payments, and also some onunemployment etc. Tend to be short term, but informativenonetheless, especially with current data., J. (1991) ‘Productivity and Competitiveness’, OxfordReview of Economic Policy, 7(3), 99-117O’Mahony, M, and C. Robinson (2007) ‘UK Growth and Productivityin an International Perspective: Evidence fromEUKLEMS’, National Institute Economic Review, 200, 79-85Disney, R. W. Jin and H. Miller (2013) ‘The ProductivityPuzzles, Chapter 3, IFS Green Budget’, available at