1. EC-111 British Economy
Recent UK Macroeconomic
Trends
Dr Catherine Robinson
F26, Richard Price Building
Office Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30
Appointments: c.robinson@swansea.ac.uk

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 Productivity
Puzzles‟, IFS Green Book, Chapter 3
ALL AVAILABLE ON BLACKBOARD

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 almost
everything”
 Producing more output from inputs (technology or better
organisation)
 Sectoral perspective

4. Early Work of Muellbauer
 Focussed on productivity and competitiveness in
manufacturing
 “Manufacturing is the bell-wether for the
economy”(Muellbauer, 1991, p.99)
 International competitiveness, 1966-1990
 relative input prices, relative export prices and relative unit
labour costs (figure 1)
 In all cases, we see a rise in costs/prices over
time, especially from 1978 onwards
 Noticeably worse in the late 1980s than in the late 1970s
 Substantial labour shedding in 1991 expected to stabilise ULC
measure

5. Productivity growth in UK
manufacturing (1980s-1990s)
 Manufacturing experiences faster productivity growth
than other parts of the economy
 Easier to measure?
 Noticeable speeding up of labour productivity in the
1980s
 In part yes, a speeding up, but also followed on from a very
slow 1970s period
 Muellbauer looks at the slow-down and the upturn

6. Labour productivity index (1995=100)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
_1970
_1971
_1972
_1973
_1974
_1975
_1976
_1977
_1978
_1979
_1980
_1981
_1982
_1983
_1984
_1985
_1986
_1987
_1988
_1989
_1990
_1991
_1992
_1993
_1994
_1995
_1996
_1997
_1998
_1999
_2000
_2001
_2002
_2003
_2004
_2005
_2006
_2007
TOTAL MANUFACTURINGD
EUKLEMS, 2009
releaseGross value added per hour worked
Muellbauer, 199
1
O‟Mahony and
Robinson, 200
7

7. Causes for the 1970s
slowdown
 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. Causes for the 1980s upturn
(Muellbauer)
 Capital productivity and unobserved scrapping of the earlier period
reverses
 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 of
subsidies and state-financed rescues and the SCALE of recession
put managers under pressure to cut costs and improve work
practices
 Improvement in the quality of workers
 New technology
 Catch-up hypothesis (Crafts, 1991)

9. Muellbauer in conclusion….
 Not just a manufacturing phenomenon but data outside
manufacturing are ropey
 Links it back to macro policy
 Weakening of union power did help to increase productivity
growth in unionised plants more than non-unionised plants
(Metcalf 1989)
 Long run education and training of workers crucial to
productivity 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 to
revolutionise the UK economy

10. Productivity and growth from an
international 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 than
comparable countries
 BUT a relatively lower starting base (Table 2)
 Still a significant productivity gap

13. In part, education?

14. Sectoral sources of growth
 Need to take into account the
sector size as well as the
productivity growth
 UK sees a collapse in
productivity growth in
traditional manufacturing
sectors (not shown)
 But in market
services, outperforms France
and Germany
 This is due to financial and
business services (rather than
retail/wholesale – in which
Germany does well)

15. 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

16. The Current Productivity
Puzzle
 Until this last quarters figures, there were more people
in 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 because
employment fell faster than output

17. Disney et al (2013) provide some
explanations
 Measurement issues (again)
 Industrial composition…productivity falls in some sectors more
than others
 Changes in workforce composition
 Fall in real wages
 Level and allocation of capital
 Impact of recession has fallen disproportionately on the public
sector (6% decline since 2009)
 While output has increased – productivity gain
 BUT all sorts of problems measuring productivity in the public
sector

18. Or to put it another way….
 The Economist…

19. 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 traditional
sectoral breakdowns
 UK, like the rest of Europe, seems to lag the US
 Some cause for optimism in UK performance stemming from
the business and financial services sector
 BUT – 2007 saw the credit crunch and the start of the
financial crisis
 Productivity has fallen and employment held up
 Labour hoarding/capacity utilisation
 Public sector productivity improvements?

20. References
ONS podcasts – great one on Balance of Payments, and also some on
unemployment etc. Tend to be short term, but informative
nonetheless, especially with current data. http://www.ons.gov.uk/
Muellbauer, J. (1991) ‘Productivity and Competitiveness’, Oxford
Review of Economic Policy, 7(3), 99-117
O’Mahony, M, and C. Robinson (2007) ‘UK Growth and Productivity
in an International Perspective: Evidence from
EUKLEMS’, National Institute Economic Review, 200, 79-85
Disney, R. W. Jin and H. Miller (2013) ‘The Productivity
Puzzles, Chapter 3, IFS Green Budget’, available at
http://www.ifs.org.uk/publications/6560