In recent years economic forecasting has come under increasing attack for two main reasons. The first is that since 1973 the economic outlook for the United Kingdom has been worse than most people in the economy would have liked. As the purveyors of bad tidings, economic forecasters have been thought, albeit largely unconsciously, to bear some responsibility for the outcome they expect. It is implied that if it is possible to point out the dire consequences of any current policy it should be equally possible to point to a better alternative policy, and hence enable the policymaker to avoid the undesirable outcomes. This very plainly has not happened; judged by the criteria of economic growth, price inflation and unemployment the United Kingdom has done worse since 1973 than in any period of comparable length since the second world war. Indeed comparisons have been made between the last few years, 1979–81, and those of the slump in 1929–33. On that occasion, however, there was no corresponding fear of rising prices. The second source of attack has been on grounds of accuracy. Despite the great advances in technique and the considerably enhanced complexity of macroeconometric models, forecast errors have not fallen markedly during the last decade and have in some instances increased.

Industrial production fell in 1974 for the first time since the 1958 recession. The all industries index showed a decline of almost 3 per cent. This was rather more than the fall in manufacturing production of 2 per cent because the wider category includes activity in mining and quarrying and construction, which were two of the worst hit sectors in the economy. Because of the weakness of these two sectors industrial production lagged behind manufacturing production throughout the year (chart 1), even though output in gas, electricity and water was one of the few growth areas. The only other sectors which saw some growth in 1974 were drink and tobacco, chemicals, mechanical and instrument engineering, shipbuilding, other metal goods and pottery and glass. Throughout the rest of industry the picture was one of decline. In manufacturing three sectors-ferrous metals, bricks and cement, and timber and furniture-suffered falls of over 10 per cent during the year, whilst motor vehicles fell by 9 per cent. The output of the engineering and allied industries as a whole declined by 1 1/2 per cent, which was a slightly smaller fall than for total manufacturing.

This paper summarises research on the labour market done over the past two years at the National Institute. It incorporates research into the determinants of employment—including the role of forward-looking behaviour—wage inflation and real wage models, and comments on some policy issues which have arisen in the past five years or so. The research was not aimed at producing a single approach to labour market behaviour, but touched on several separate topics. In part the present paper reflects this relative heterogeneity, although we will try to emphasise common themes where these are relevant.

Replacement ratios measure the relationship between income out of work and income in work. A ratio of 50 per cent for example would indicate that an employed person would have only half the income if he were unemployed. Interest in these ratios may be a reflection of concern either about living standards or about the incentive to work. For some purposes it is the current level and dispersion of these ratios that matter, for others it is necessary to build up a consistent set of ratios for a run of years in the past. The construction of time series is of particular importance if one is trying to assess the effect of the benefit system on wages or on employment.

In the first half of this decade, the world experienced a period of low short and long-term interest rates. Shortterm rates have risen from these low levels, first in Canada and the United Kingdom, then in the United States and finally in the Euro Area. Long-term rates, by contrast, remained low, suggesting that holders of longterm debt expected the rise in short-term rates to be only temporary. Only in the past few months has the apparently anomalous pricing of long-term debt started to disappear. But with interest rates on long-term debt similar to short-term market rates internationally, the market does not yet show that the traditional upwardsloping yield curve and, on this basis, long rates remain depressed. They are also markedly below the levels of two to three years ago.

The number of one parent families has risen by about 80 per cent since 1971, reaching just over a million in 1986. (Haskey 1989). In 1986, they made up 14 per cent of all families with dependent children, and the primary reason for this large increase is marital breakup: about 70 per cent of the increase is attributable to the growth in the number of divorced and separated mothers. At present, 90 per cent of single parents are women, and ¾ of mothers heading one parent families have previously been married.

The National Institute studied the diffusion of new technologies more than ten years ago: our first report on this subject was published in 1969 followed by a major book. The purpose of the earlier studies was to analyse the introduction and diffusion of major postwar process innovations in several industrial countries, the factors which facilitate or hinder the adoption of the then new techniques, the pattern of diffusion and the influences to which it is subject. The analysis was based on the situation at the end of the 1960s. Since then the processes, which were then relatively new, have matured. In 1982 we started a new project in order to assess and analyse their diffusion in a later phase.

The Treasury Bill rate is regarded as an exogenous policy instrument in the National Institute's forecasting model. Other interest rates in the model are linked to this rate by term-structure equations. This approach, while justifiable for forecasting, has limitations when the model is used for policy simulations since it ignores the responses of interest rates to changes in economic conditions. This note shows how the properties of the model are affected when interest rates are treated as endogenous.

In the past year, the high rate at which gold has flowed out of the United States has attracted attention. There has been talk of the ‘weakness’ of the dollar and even of the possibilities of devaluation. This article examines the developments in the United States balance of payments which underlie these opinions.