Have the US and the UK something to teach Europe?
Posted on February 21, 2014 by Tom Healy
It’s a funny old world as a former British Prime Minister once said. The United States and the United Kingdom have distinguished themselves in the last quarter century as leaders in wage in equality, a declining share of wages in total income and enhanced ‘labour market flexibility’. Larry Summers has recently referred to the US economy as moving towards a Downton Abbey with a widening gap between rich and poor. Yet, the UK and the USA responded, each in their own way, differently to the Great Recession of 2008-2009. A sustained bout of ‘quantitative easing’ (money-printing), unprecedented low interest rates and a relatively moderate approach to fiscal consolidation have served to lessen some of the worst effects of the recession not only in these countries but in other parts of the world where US action is concerned. It has also helped explain why the US and UK economies have been growing more rapidly in recent quarters compared to most Eurozone economies.
Northern Ireland has benefited from the general, but partial, improvement in the UK economy. Generally low sterling values since 2009 have also helped recovery (although sterling has appreciated in the last year). However, fiscal austerity continues in the UK and is likely to render any recovery fragile. Any pick up in consumption has been largely associated with a fall in the savings ratio as noted in the most recent Inflation Report of the Bank of England.
Perhaps one of the biggest puzzles facing economists at the Bank of England and beyond is the what has been referred to as the ‘labour productivity puzzle’ – the pattern of increasing employment, slower growth in output and more or less stagnant productivity in recent times. This goes against what normally used to happen as economies recovered from recession. It is possible that some companies prefer to increase working hours as well as hire new workers rather than increase productivity. It also appears that a very significant proportion of total employment gain is associated with persons classified as ‘self-employed’ (this applies both in the UK and in the Republic of Ireland). Something is happening in labour markets in Ireland and Britain that has not been foreseen or experienced in recent economic history. It may be a temporary phenomenon. In any case various UK forecasting bodies expect further reduction in unemployment to below a rate of 7%. The Bank of England, up to recently, made explicit reference to the unemployment rate as a key factor in offering 'forward guidance' in regard to future upward changes in the Bank Rate of lending.
The reduction in UK unemployment is welcome news even if the pattern of recovery is uneven across regions and sectors of the wider UK economy. A residue of long-term unemployment as well as a significant number of households and individual workers stuck in low pay or poverty-level incomes is a drag on economic recovery. No amount of fiscal or monetary fine-tuning will fully address this latter problem. But, monetary policy has been helpful in the UK. Pity that the European Central Bank and European Government do not take a leaf from the US Federal Research Bank and the Bank of England in tying together monetary policy with policy to ensure macro-economic growth and movement towards full employment. Instead, the ECB and national central banks in the Eurozone are constrained by a one-pony target of price stability.
A coordinated and joined up effort to raise wages and living standards across the UK is a crucial part of the recovery.
Its back to wages and jobs!
Next month the NERI will be publishing its Spring Quarterly Economic Observer with a major focus on the labour market in Northern Ireland and low pay in particular.