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Chapter I. the British Economy in the Medium Term

Published online by Cambridge University Press:  26 March 2020

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Extract

This chapter considers the prospects for the British economy over the next five years. The intention is not to put forward an unqualified set of numbers as a forecast with a strong probability; to do so would be to pretend to a knowledge of the future—of political and world events as well as economic developments—which we could not possibly possess. Our more modest aim is to present a conditional projection, based on ‘unchanged policies’, as a frame of reference for appraising the scale of future problems and the use of economic policies to combat them.

Type
Articles
Information
National Institute Economic Review , Volume 98 , November 1981 , pp. 6 - 28
Copyright
Copyright © 1981 National Institute of Economic and Social Research

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References

(1) This section draws on material, in G. D. N. Worswick, “What caused the recession?”, Bank of England, a paper presented to the Panel of Academic Consultants, No. 15, July 1981. Copies may be obtained on application to the Economics Division, Bank of England, London EC2R 8AH.

(2) See Economic Trends, March 1975 and subsequent issues. The dating of turning points before 1957 is from D. J. O'Dea, “Cyclical indicators for the post-war British economy”, Cambridge University Press, 1975.

(3) A fairly serious data problem is encountered when looking back to 1930. All data for 1929–32 are taken from ‘National Income Expenditure and Output of the United Kingdom, 1855-1965’, by C. H. Feinstein, Cambridge University Press, 1972.

(1) Bank of England, op. cit.

(1) See, for example, J. K. Bowers, P. C. Cheshire, and A. E. Webb, ‘The change in the relationship between unemployment and earnings increases’, National Institute Economic Review, No. 54, November 1970.

(2) This measure was first proposed by J. C. R. Dow and L. A. Dicks-Mireaux, in ‘The excess demand for labour’, Oxford Economic Papers, February 1958. It assumes that the relationship between unemployment and vacancies is highly non-linear (a rectangular hyperbola in fact) on the grounds that unemployment, which cannot shrink below zero, becomes increasingly insensitive to the demand for labour as demand rises and, similarly, that vacancies become increasingly insensitive to the demand for labour as demand falls.

(1) We refer here to the ‘private’ wage. Arguably account should also be taken of the ‘social’ wage provided by public services.

(1) See A. B. Atkinson and J. S. Flemming, ‘Unemployment, and social security and incentives’, Midland Bank Review, 1978.

(2) The fact that real wages behave pro-cyclically is inci dentally not a new idea—it was suggested in a famous article some forty years ago J. T. Dunlop ‘The movement of real and money wage rates’, Economic Journal, No. 48, 1938.

(1) A four-year moving average of output was regressed on the gross capital stock; the maximum deviation of output from the regression line (which occurred in 1973) was taken to be ‘full capacity’, and a line parallel to the regression line drawn through this point to be ‘potential output’.

(2) See D. R. Glynn, ‘The CBI Industrial Trends Survey’, Applied Economics, 1, 1969 and R. Price ‘The CBI Industrial Trends Survey—an insight into answering practices’, CBI Review, Summer 1977.

(3) See, for example, ‘The stock of fixed assets in the United Kingdom: How to make the best use of the statistics’, Tom Griffin, Economic Trends, October 1976.

(1) The CSO's calculations of retirements from the capital stock depend on broad assumptions about the average lives of different assets; they do not relate directly to the volume of assets scrapped or sold by firms.

(1) The Engineering Industry Training Board has recently predicted that the number of craft and technician apprentices going into the engineering industry this autumn will be the lowest since records began. See also Department of Employ ment Gazette, September 1980.

(2) This was demonstrated by the over-estimate of half a million in the size of the working population in 1980 made by the Department of Employment in 1977. See National Institute Economic Review, No. 94 November 1980.

(1) In a formal model, the former view would be represented by an expectations-augmented Phillips curve and the latter by a Sargan (or ‘real wage’) equation with an exogenous trend real wage target.

(1) A reduction of one per cent in the inflation rate raises consumption by about one quarter of a per cent.

(1) At the time of writing trade figures have not been released for the months between April and September of this year.

(1) See Modelling and forecasting the capital account of the balance of payments: a critique of the ‘reduced form’ approach by K. Cuthbertson, S. G. B. Henry, D. G. Mayes and D. Savage, NIESR Discussion Paper No. 36.

(2) Defining the real rate as the banks' base rate minus the annual change in consumer prices. Of course ideally real interest rates should be based on expected rather than past inflation rates.

(1) According to the augmented Phillips curve, a one per centage point rise in unemployment would eventually reduce wage inflation by 3½ per cent. The long-run coefficient on price increases is unity. According to the Sargan equation, real wages tend to rise by 3 per cent a year irrespective of the level of unemployment.

(1) A once-and-for-all devaluation, the effects of which have the usual J-curve time profile, would start to improve the current balance after a year or so; the distributed lag relationship between a steadily depreciating exchange rate and the current balance is, in effect, a convolution of successive J-curves.

(1) Layard and Nickell argue, in particular, that a marginal subsidy would have bigger effects on exports and import substitutes than a general subsidy costing the same amount. This is because many firms are price-takers in international markets, so that a cut in their marginal costs of production would have an appreciable effect on their sales, even if there were only a small reduction in unit costs. See The Economic Journal, March 1980. There are two basic sorts of marginal subsidies; those in respect of workers who would otherwise be made redundant and those in respect of additional workers who would not otherwise have been employed. The Tempor ary Employment Subsidy, introduced in August 1975 and discontinued in March 1979, is an example of the former; the Youth Opportunities Programme, which subsidises the employment of school-leavers, of the latter.

(2) See Martin Neil Baily and James Tobin, ‘Macro- economic effects of selective public employment and wage subsidies’, Brookings Papers on Economic Activity, 2, 1977.

(1) These include a shift in the composition of employment in favour of depressed regions and disadvantaged workers, a redistribution of earned income in favour of low income earners, and additional investment in human capital provided by a higher level of youth employment. On the other hand, it has often been argued that the most common types of subsidy, which are intended to avert redundancies or encourage employment in depressed regions, discriminate in favour of declining sectors of industry in a way which is deleterious to resource allocation; they may also tend to erode the incentive to adopt technologically superior capital-intensive techniques. While such micro effects may be of considerable importance they are, unlike the macro effects, not generally amenable to precise quantification.