Supply side reform and UK economic growth: what happened to the miracle?
Abstract:
The 1990s are one again witnessing a decline in the UK economy. Weaknesses in the industrial relations and education were responsible for the decline in UK productivity growth during the post-World War II era. However, the UK government has focused on productivity improvement since the 1980s. Trade union legislation in the 1980s has weakened labor union's power and has spurred economic growth.

Subject:
Economic development (Analysis)
Supply-side economics (Evaluation)
Labor relations (Economic aspects)
Education (Economic aspects)
Author:
Oulton, Nicholas
Pub Date:
11/01/1995
Publication:
Name: National Institute Economic Review Publisher: National Institute of Economic and Social Research Audience: Academic Format: Magazine/Journal Subject: Business; Economics Copyright: COPYRIGHT 1995 National Institute of Economic and Social Research ISSN: 0027-9501
Issue:
Date: Nov, 1995 Source Issue: n154
Geographic:
Geographic Scope: United Kingdom Geographic Name: United Kingdom
Accession Number:
18054102
Full Text:
Two institutions have retarded UK productivity growth in the post-war period: industrial relations and education. The failings of both were largely addressed in the 1980s. the productivity improvement of the 1980s was genuine and was largely due to the reduction in union power brought about by the trade union legislation of the 1980s. The 1980s and 1990s have also seen large falls in the proportion of the labour force which is unqualified and rises in enrolment rates in further and higher education, changes which tend to increase long-run growth. But two factors have obscured the extent of the improvement. First, the whole climate for economic growth is less favourable than it was in the so-called Golden Age prior to the first oil shock in 1973. Second, UK macroeconomic policy compares poorly with other OECD countries: booms have been shorter and recessions longer, so that microeconomic success has been masked by macroeconomic failure.

1. Introduction and summary

The great puzzle of British economic history in the years since the Second World War is, how did Britain manage to throw away such large advantages and finish up as a follower instead of as a leader? Britain started the period with a substantial advantage in income per head over most of the continental economies and she had suffered comparatively low losses of human and physical capital during the war. This article will not consider this question in its full generality, for which a whole book would (and has) been required. But some attention to the reasons for Britain's comparative failure is necessary, in order to assess to what extent the supply side reforms of the 1980s and 1990s have been successful in overcoming them.

Following recovery from the recession which began in 1979, optimism began to rise. To some it seemed that the supply side reforms of the 1980s had created an economic miracle in the UK. But since the 1990 recession, there is renewed pessimism about the future medium to long-run prospects for the UK economy. The Treasury view is that GDP can be expected to grow on average at about 2 1/4 per cent per annum, implying a productivity growth rate of less than 2 per cent per annum The corresponding productivity growth rate for the US economy (according to the 1995 Economic Report of the President) is 1 1/4 per cent. So despite the large productivity gap between the two countries -- the UK's is about a third lower -- the UK is only expected to close this gap at a very slow rate. Moreover France and Germany are also expected by many commentators to grow faster than the UK, despite already enjoying substantially higher living standards and despite the UK having had faster productivity growth than these two countries in recent years.

So what happened to the UK's productivity miracle? How could all those years of supply side reforms produce such an apparently disappointing result? The purpose of this article is to assess the evidence for an improvement in the underlying growth rate of output and productivity.(1) To summarise the conclusion, I argue that the improvement was genuine and moreover that it was indeed caused by the reforms, particularly the reform of the industrial relations system or to put it more bluntly, the reduction in union power which those reforms brought about. However, two factors have masked the extent of the improvement. First, the whole climate for economic growth is less favourable than it was in the so-called Golden Age of the post-war period which seems to have come to an end around 1973. Second, at the macro level UK policy compares poorly with other OECD countries so that genuine microeconomic success has been masked by macroeconomic failure. Since we do not understand the reasons for the deterioration in global economic performance, there is not much we can do about the first factor. However we can hope to improve the UK's own macroeconomic performance.

It is now generally agreed that the explanation for differences between countries in long-run growth rates should be sought in institutions (North and Thomas 1973; Barro and Sala-i-Martin 1995, chapter 12). Factors like low investment or low R&D expenditure may be the proximate source of poor performance but should be regarded as symptoms not causes. This view is particularly persuasive when the countries concerned all have access to the same pool of scientific and technical knowledge, when trade and investment flows are relatively free, and in the absence of war and political upheaval. Institutions are much longer lived than individuals and companies, carry a baggage of history with them, and require the concerted efforts of large numbers of people with different interests in order to change them. Moreover, they are frequently supported for distributional and non-economic reasons. Hence even when an intellectual case has been made that some institution harms growth it may be impossible to establish a coalition strong enough to change it, especially since many powerful interests are opposed to growth anyway.(2)

Two major UK institutions are candidates for retarding growth in the post-war period. The first is the system of industrial relations and the second is the educational system. Both these institutions differed in significant ways from their counterparts in other comparable countries. I argue below (section 3) that there are good theoretical reasons for expecting the pre-1980s industrial relations system to retard growth. I also argue that the empirical evidence supports the view that the productivity improvement was largely the result of the reduction of union power which the reforms helped to bring about.

The failings of the British educational and training system are by now well known. What is not so well known is that the last 10 years have seen a large increase in educational outputs, though this outcome seems to have been largely unplanned. The implications of this for economic growth are discussed in section 4.

Section 5 compares UK macroeconomic performance with that of other OECD countries. First, the most recent recession was much longer in the UK than in almost any other OECD country. Second, the evidence suggests that since 1970 up till the present booms have been shorter in the UK, while recessions have been longer than in most other OECD countries. For 13 OECD countries in the period 1970-94, the greater the tendency to short, sharp booms and long recessions, the lower the GDP growth rate. Also, countries like the UK which spent longer in recession over this period tended to have lower average rates of growth. If this evidence is accepted, and if (a big if!) UK macroeconomic policy improves, then a better estimate of the UK's prospects can be gained by looking at the period 1979-90 and ignoring the depressing experience of more recent years.

Finally, Section 6 offers some concluding comments. But before getting on to explanations and controversies, we should recall the reasons why people were once so optimistic and look at the UK's growth and productivity performance in quantitative terms. This is the task of the next section.

2. The improvement in UK productivity

There is evidence for an improvement in UK labour productivity growth in both manufacturing and services. For manufacturing, we also have estimates of total factor productivity and here too there is a sharp improvement. However, the improvement is relative to the 1970s. Relative to the UK's performance in the 1950s and 1960s, the picture is one of recovery rather than improvement.

Table 1 compares the growth rate of labour productivity (output per hour) in manufacturing for 12 major industrial countries.(3) In 1960-73, the UK had the lowest growth rate except for the United States and in 1973-79, the lowest of all 12. However in the period 1979-89, UK productivity grew more rapidly than in any other country, except for Belgium and Japan. Over the longer period 1979-94, the UK is surpassed only by Japan. UK productivity has also continued to grow rapidly even through the latest recession. All 12 countries have had lower productivity growth since 1979 than they did in 1960-73. Only 3 of the 12, the US, Sweden and the UK, have had higher growth in the most recent period than they did in 1973-79. But the UK shows by far most striking improvement. Table 1. Growth of output per hour in manufacturing, 12 countries: selected periods

Note: (a) 1979-93. Source: US Department of Labor, BLS News, September 1995 (except US 1960-73, from BLS News, August 1991).

Table 2 compares UK productivity growth (output per person employed in this case) in manufacturing, private services and the whole economy, 1960-93. The figures for manufacturing and GDP are the only official productivity statistics which are currently published. In manufacturing the growth rate of output per person employed fell drastically in 1973-79 but then recovered equally sharply in 1979-89. Even including the recession years (1990-93) does not alter the picture much. The growth rate in 1979-89 even exceeds slightly the rate during the Golden Age of 1960-73. Manufacturing is nowadays only about a fifth of the economy so Table 2 also shows estimates for productivity growth in private services. These estimates exclude the large part of the service sector for which productivity growth is zero by assumption of the national income statisticians. The service industries included made up 36 per cent of GDP in 1990. It has not yet been possible to push these figures back before 1973. Here too we can see that labour productivity growth increased sharply after 1979.

Note: Manufacturing: 23.8 per cent of 1990 GDP; Private services: 36.3 per cent of 1990 GDP Omitted sectors: Energy & water (10.6 per cent of GDP); Agriculture (1.8 per cent); Construction (5.9 per cent); Other (mainly public) services (21.5 per cent). Source: Manufacturing and whole economy: Economic Trends Annual Supplement 199S, Table 3.5. Private services: own estimates, weighted average of 5 service sectors (36.3 per cent of 1990 GDP); output from 1994 Blue Book, employment from Historical Statistics (Employment Department).

Total factor productivity growth, which allows for increased efficiency in the use of capital and of intermediate input as well as of labour, also rose substantially in 1979-86 compared with the 1973-79 period (Table 3). These estimates are based on the Census of Production rather than national income statistics and stop in 1986. Using a different concept of output (gross output rather than the more usual value added), labour productivity growth in manufacturing is also seen to recover sharply in 1979-86 after the very sharp fall in 1973-79. However its growth is still lower than in 1954-73 (Table 3).

Source: Oulton and O'Mahony (1994, Table 5.5).

The improved UK performance has led to a substantial narrowing of the gap between ourselves and other countries (Oulton 1994; see also Eltis and Higham and O'Mahony in this issue of the Review). On the other hand, if we look at output rather than productivity, the picture is not so encouraging, particularly if we include the years from 1990 onwards (Table 4). Again there is a substantial improvement over the 1973-79 period. But even excluding the recent recession GDP growth was still lower in 1979-89 than in 1960-73 by about 0.8 per cent per annum From 1979 to 1994, GDP grew at 1.85 per cent per annum, which is better than the rate achieved over 1973-79, but not to a startling extent.

Source: Economic Trends Annual Supplement 1995.

Long term growth rate comparisons

To get a better perspective on the UK's performance, data from the Penn World Table (version 5.6) have been employed. A distinguishing feature of this dataset is that all national income magnitudes are measured in a common set of international prices (derived from the various rounds of international price comparisons carried out by international agencies). Two periods have been distinguished: 1960-73 and 1973-89. The beginning and end-dates are constrained by data availability plus the desire not to contaminate the results with the recent recession. The variable to be analysed is the growth rate of GDP per worker. In order to further minimise endpoint effects, this is the trend rate of growth in each period (derived by fitting a loglinear time trend to each countries GDP per worker series).

The choice of countries to analyse was motivated by a number of factors. The Penn World Table contains data on 152 countries, many very small and many very poor. For present purposes it seems sufficient to analyse countries which are currently reasonably large and rich and 2.5 including the UK were selected. Inclusion of middle income countries might have been desirable but many of these countries had failing income in the 1980s. Controlling for these factors would have complicated the analysis considerably.

Trend growth rates for the UK and the other 24 currently successful industrialised countries in the two periods are shown in Table 5. As Chart 1 shows more clearly, in the period 1960-73 the UK came fourth from the bottom. Chart 2 makes the same comparison for 1973-89. The UK's relative position is greatly improved. We are now eighth from the top. However, Table 5 also shows that in 1973-89 the performance of every single one of these countries, including high fliers like Hong Kong and Singapore, deteriorated compared to 1960-73. The average growth rate in these 25 countries was 4.31 per cent per annum in 1960-73, but only 1.62 per cent per annum in 1973-89. Apart from Norway, the UK's decline was the smallest. So in this rather back-handed sense the UK comes nearly top of the league. Table 5. Trend growth of GDP per worker, 25 countries: 1960-73 and 1973-89

Note: Trend growth rates calculated by loglinear regression on time. Source: Penn World Table, mark 5.6 (November 1994) and own calculations.

The fact that every country's performance has deteriorated indicates some adverse change has occurred in the climate for economic progress, the reasons for which are not currently understood (Crafts and Toniolo 1995). Discussion of this issue would take us too far afield. However, we can still ask how well or badly the UK has done given what could reasonably expected in the circumstances. Accordingly, cross-country regressions of a fairly standard form have been fitted for each period. The dependent variable is the trend growth rate of GDP per worker ([Delta]y). The independent variables are the ratio of gross investment to GDP averaged over each period (I/Y) and the initial productivity gap between country i and the United States (GAPUS), defined for 1960 as log(US GDP per worker in 1960 [?] country i's GDP per worker in 1960) and analogously for 1973. These three variables are measured as percentages. The investment ratio is as emphasised earlier only a proximate determinant of growth but is included here in default of measures of the relevant institutional variables for the 25 countries. It would have been highly desirable to include a measure of investment in human capital as well but for reasons discussed below none of the available measures seems satisfactory. The initial productivity gap with the US is included because of the convergence hypothesis, the widely-held view that the bigger the gap the greater the opportunities for growth, which can be justified on both old and new growth theory grounds (Dowrick and Nguyen 1989). Other variables which were tried but found to be insignificant were the ratio of government consumption to GDP and the growth rate of the labour force to pick up possible scale effects). The results, with robust t statistics in brackets, were as follows:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

For 1960-73, these two variables explain a high proportion of the variance of growth rates. GAPUS is highly significant and indicates a convergence rate of some 2.7 per cent per annum. The investment ratio is significant at the 6 per cent level. For 1973-89 the explanatory power of the equation has clearly deteriorated. GAPUS is now only significant at the 6 per cent level and the rate of convergence seems to have fallen. The investment ratio is now only significant at the 14 per cent level. The coefficient has fallen by a quarter, implying a substantial decline in the return to investment.(4)

To some extent the UK's performance in the first period could be excused since in 1960 the UK was the eighth richest country out of 25. But the UK's poor performance was also a result of a low investment ratio, only 18.8 per cent of GDP compared with 28.5 per cent for France, 31.1 per cent for Germany and 31.5 per cent for Italy. Even so, the UK's actual growth rate fell below its predicted level by 0.31 per cent per annum And a low investment ratio is not the whole story, since even if the UK had invested as much as did Germany the growth rate would be predicted to rise to only 3.52 per cent, still below Germany's 4.22 per cent.(5)

In the period 1973-89, the UK continued to have a low investment ratio, in fact slightly lower than in the first period. The regression equation predicts that the UK should have grown at 0.98 per cent per annum In fact, the growth rate was 1.66 per cent, so in contrast to 1960-73 the UK exceeded expectations. Despite France and Germany continuing to have much higher investment ratios, these two countries managed to grow at only 1.20 per cent per annum

These results indicate that a genuine improvement in productivity occurred though against a background of a less favourable international environment. The period of relative economic decline has ended. It should be noted that for one third of the second period, 1973-79, the UK is almost universally agreed to have performed very badly, making the overall result still more striking.

3. The effect of trade unions on productivity growth

The UK system of industrial relations

The UK industrial relations system exhibited a number of distinctive features. Each of these features could be paralleled elsewhere when taken individually but collectively they made the system unique in the industrialised world.(6) First, union membership was high and rising, particularly in the 1970s. By 1979, 53 per cent of employees in employment were union members (Metcalf 1994, Table 4.1). Second, by its heyday in the late 1960s the dual system described by the Donovan Commission had arisen. Negotiations took place not only at company or national level with the union's central staff but also at local, plant level with shop stewards. Third, as a legacy of history, unions were organised neither on a company basis as in Japan nor on an industrial basis as in continental Europe or the United States, but on the basis of crafts (supplemented by some large general unions). An implication of this structure was multi-unionism, the presence of more than one union in the workplace. Multi-unionism was particularly important in large plants. In 1980, 41 per cent of establishments employing 2,000 people or more had 3-5 manual unions present and a further 38 per cent had 6 or more present. (Daniel and Millward 1983, Table 11.21). This is significant because though large plants are small in number they had a disproportionately large share of total employment in this period. For example, plants employing 1,000 or more accounted for 41 per cent of total manufacturing employment in 1979 and this proportion had been increasing over the post-war period (Oulton 1987, Tables 2 and 3). Fourth, under the British tradition of `voluntarism', trade unions enjoyed a wide range of legal immunities. Activities such as secondary picketing which would have attracted civil or even criminal penalties in other countries such as the United States were not actionable in Britain.

Though it is something of a commonplace amongst financial journalists and economic commentators that trade unions have adversely affected UK economic growth, this proposition is still quite controversial in academic circles. The standard economic history of Britain since the Second World War devotes some 16 pages out of 427 to trade unions (Floud and McCloskey 1994). In a long chapter entitled `Economic and commercial performance since 1950', Millward (1994) has only a couple of pages on the role of trade unions, mostly devoted to arguing that their role was very similar to that in the US.(7) The argument of this article is not that unions always and everywhere reduce productivity growth, only that they tended to do so in the UK. I turn first to theoretical considerations before discussing the empirical evidence.

Unions and productivity growth: theory

It has long been recognised that if unions push up wages then firms will wish to adopt more capital intensive techniques, so raising the level of labour productivity. On the other hand, restrictive practices would tend to lower labour productivity, so the net effect on the level seems unclear a priori. It is not so obvious that unions necessarily reduce the growth rate of productivity. Indeed, Freeman and Medoff (1984) argued that trade unions give workers a voice and so could raise the productivity growth rate as a result of more consultation and better information flows. Their work was widely cited in the UK literature, even though their evidence was drawn from the very different institutional setting of the US.

There are in fact a number of theoretical reasons to expect an adverse effect of unions, of least of the UK kind, on productivity growth:

1. Up till the 1980s, the UK system of industrial relations required, particularly in large plants, that several different unions had to be able to reach agreement with management on changes in working methods. If they could not agree, the status quo continued. The costs of change, in terms of management time or interruptions to production, were high and the probability of no agreement at the end of the day was not negligible. It seems very likely that the greater the number of partners to a negotiation, each with the power of veto, the lower is the probability of agreement. Common sense suggests that change is likely to occur at a slower pace than in systems not suffering from these handicaps. However, though this situation cries out for treatment from a game-theoretic point of view, I am not aware of any game theory results which are directly applicable.(8)

2. In the standard model of investment with adjustment costs, the rate of growth of the firm's capital stock is a function of the marginal cost of adjustment (Lucas 1967). If unions raise this marginal cost, for example by protracted negotiations on work practices, then the growth rate of the capital stock will be lower.(9)

3. Where it is not possible to make binding contracts, union-firm bargaining will result in a lower level of investment (Grout 1984). The reason is that if investment is at least partially irreversible, then any agreement today on wages and conditions risks a hold-up problem tomorrow. The union cannot guarantee that it will not attempt to skim off the firm's profit from its planned investment. Knowing this, the firm invests less. Though this is technically a level rather than a growth rate argument, it is certainly plausible that a growth rate analogue of the argument exists and one has in fact been supplied by Bean and Crafts (1995). Their engine of growth is expenditure on R&D to develop new intermediate inputs. Unions cause a reduction of such expenditure and so reduce the growth rate.

4. The arguments above suggest that investment and process innovation can be slowed down by trade unions. It is also possible that product innovation can be slowed down. Suppose that firms are in monopolistic competition. They can raise demand for their existing products or develop new products by expenditure on design, marketing, R&D etc. These costs are distinct from ordinary production costs since they are of an overhead nature and do not vary with the level of output. Product improvement which raises the price which consumers are willing to pay is just as much a productivity gain as is reducing the production cost of a given product. If unions raise the wages of production workers or lower their productivity through restrictive practices at a given wage, then firms will spend less on product improvement. The reason is that with higher production costs, the output over which the overhead expenditure can be spread is lower.(10) Though this is also strictly speaking a level of productivity argument, a dynamic version would run in terms of firms in international competition failing to spend sufficiently on product improvement and so growing more slowly while losing market share.

These theoretical arguments suggest the following broad conclusion. Multi-unionism, multi-level bargaining, and the absence of binding contracts meant that bargains which could potentially make all parties better off, with losers compensated by gainers (potential Pareto improvements), could frequently not be reached by negotiation. In this situation, two kinds of reform could be envisaged. In the first, the existing unions would be abolished and replaced by either company or industrial unions within a firm legal framework. Unions would remain powerful but they would become `encompassing' institutions as in more successful systems. However, it is difficult to see how this could have been carried out in practice and no-one seems to have seriously suggested this. The second course was simply to reduce union power and this is what the legislation of the last 15 years has progressively done. Union recognition rights have been restricted. The closed shop which involved 5 million workers in 1979 has been outlawed. The types of industrial action which are legal have been restricted, with potentially severe civil penalties for infringement available via the courts. The requirement for balloting has made it more difficult to call strikes and has therefore reduced the effectiveness of a threat to strike.(11)

The reduction in union power manifested itself in a number of ways. First, there was a straightforward fall in union density, down from 53 per cent in 1979 to 40 per cent in 1990, about the same as in 1960. Second, trade union recognition fell sharply, from about two thirds of all establishments in 1984 to about half by 1990 (Metcalf 1994, Tables 4.1 and 4.2).(12) Thirdly, even in establishments which continued to recognise unions there is ample anecdotal evidence for a more co-operative approach.

However the reduction of union power, particularly shopfloor power over work practices, was not solely due to the legislation, which tended to interact with other, complementary policies. First, the policy of `no bail outs' and of allowing lame ducks to die strengthened the hand of management in forcing through change. Second, the credibility of no bail outs' was raised by the early privatisations and sell-offs (British Leyland (now Rover), British Telecom, British Airways and British Aerospace), which made political interference less likely. Third, contracting out struck at union monopoly power in the public sector. Finally, it seems that a change in public opinion (which the government had itself fostered) allowed the government to use the powers of the state, e.g. employing the police to confront mass picketing, in ways which governments of the 1970s felt inhibited from doing.

Unions and productivity growth: evidence

When it first became apparent, the productivity improvement was often dismissed as an effect of the 1979-81 recession. In one version, the recession caused a one-off reduction in overmanning. In another version, closures killed off low productivity plants raising the average productivity of the survivors (the `batting average' effect). Though both these factors may have played some role, the persistence of the improvement up to and through the most recent recession makes exclusive reliance on such explanations increasingly implausible.

The widely cited survey article of Brown and Wadhwani (1990) sceptical on whether the trade union legislation of the 1980s had had an important role in the productivity improvement. They concluded: `The impact of the legislation on Britain's trade unions is undeniable; its impact on Britain's economic performance is far less obvious.' However, the evidence they themselves cite on productivity tends to the opposite conclusion. For example, Machin and Wadhwani (1989) found that unionised establishments had experienced more `organisational change' in the terminology of the 1984 Workplace Industrial Relations Survey. Brown and Wadhwani also cite a panel study of firms by Nickell, Wadhwani and Wall (1989). The latter found that total factor productivity growth was higher in heavily unionised firms over the period 1980-84. In fact, Brown and Wadhwani conclude this part of their survey by saying: `These studies suggest that the early years of the legislation were associated with an increase in productivity which was especially marked for unionised establishments'.

Since they wrote, evidence of several kinds has continued to accumulate. First, there is a vast mass of anecdotal material. Second, there are studies using industry level data. Third, there are studies using firm level data. Firm level studies are obviously very illuminating since we can hope to catch changes in behaviour under the influence of new incentives. But industry level studies are also important since part of the process of change is the rise of firms which respond to new opportunities and the decline of those who do not. This `biological selection' effect can be missed by panel studies of firms. For example, if panels are balanced, firms which fail may never appear; if panels are unbalanced, firms which fail to adapt go out of business and drop out of the panel. In either case, a policy change could produce a productivity improvement but this would not be picked up.

Amongst the industry level studies, Oulton (1990) showed that the productivity improvement in manufacturing of the 1980s was greater in the industries which had been more heavily unionised in the 1970s. The disadvantage associated with operating large plants also appeared to have fallen. This study also controlled for inter alia the shock effect of the 1979-81 recession, the rise in energy prices, and vintage type effects on productivity arising from capital scrapping (see also Oulton 1987 and 1989b on the role of closures and vintage effects).

Bean and Crafts (1995) employ the industry dataset developed by Oulton and O'Mahony (1994) combined with data from the Workplace Industrial Relations Survey on multi-unionism to show that the great change in the 1980s was the disappearance of the disadvantage previously associated with multi-unionism. Since multi-unionism is particularly important in large plants, this finding is consistent with the earlier one in Oulton (1990).

Amongst studies using firm level data, Denny and Machin (1992) showed that unionisation tended to reduce investment in the period 1973-85. Their figure for the gross effect is 28 per cent though there are offsetting factors which make the net effect smaller. Their data does not appear to allow an estimate of any improvement in the 1980s. Gregg et al. (1993) find that the disadvantages of unionisation for productivity growth have been reduced or even eliminated in the later 1980s as a result of management reasserting the `right to manage'. Machin and Stewart (1995) find that financial performance of unionised firms has improved in the 1980s. Only in a small minority of plants where unions still seem to retain their traditional power do they now have a significant effect on financial performance. If investment depends on profitability, then this should eventually lead to an increase in investment of all types. Indeed, on a `new growth theory' view the higher the rate of profit the higher the rate of growth, permanently.

4. Education and training

From an economic point of view, every educational system has two aims. The first is to select and train an elite. The second is to provide the whole population with an adequate level of education. Every system puts some weight on each of these two objectives but the balance differs between countries. In the British case, there can be no doubt that the bulk of the effort went into selecting the elite. Until quite recently, the overwhelming majority of British children left school at the earliest legal opportunity, frequently with no formal qualification other than that of having attended school for the prescribed period. Of these early leavers, a minority of the male half entered a traditional apprenticeship; the rest received little or no formal education or training for the rest of their lives. Potential members of the elite on the other hand were carefully selected in a series of stages through the 11 plus exam, O-levels (as they then were), A-levels and finally university degrees. The main changes in educational policy of the post-war period -- the raising of the school leaving age from 14 to 15 in 1945 and from 15 to 16 in 1972, the Robbins expansion of higher education in the late 1960s, comprehensivisation in the 1970s -- did little to correct this underlying bias.

As late as 1975, 70 per cent of the population aged 16-69 had essentially no qualifications, educational or vocational (Table 6). Even by 1987, 60 per cent of the UK's manufacturing labour force had no vocational qualifications, compared with 29 per cent in (Western) Germany (Table 7). By comparison with the rest of Western Europe,(13) it would now be generally agreed that the UK's main deficiency has been the low level of basic education and vocational training bestowed on those in the lower half of the academic ability range. The extent of the gap and the economic disadvantages which flow from it have been demonstrated in numerous studies emanating from the National Institute.(14)

Table 6. Highest qualification level attained: Great Britain

Key: Higher intermediate: Higher education below degree level

Lower intermediate: GCSE or O-level, grades A-C

Low or no qualifications: at best GCSE or O-level, grades D-E Source: General Household Survey 1993, Table 10.1.

Table 7. Vocational qualifications of the manufacturing workforce, UK and Germany, 1987

Note: Definitions of levels differ from those of Table 7. Source: Oulton (1995).

However, recent years have seen some dramatic changes. The proportion of the population with essentially no qualifications has fallen from 70 per cent in 1975 to 44 per cent in 1993 and is set to decline further (Table 6). Partly this reflects the steady process of demographic change: the exit from the labour force of older, less qualified workers and their replacement by younger, more qualified ones. But it is also starting to reflect a very sharp rise in enrolment rates in both further and higher education. The proportion of 16 year olds enrolled in full time, post-compulsory education was flat during the first half of the 1980s and then started moving sharply upwards. It rose from 47 per cent in 1986 to 73 per cent in 1993. The proportion of young people enrolled in full time university education was 13 per cent in 1982 but had become 28 per cent by 1992, rising particularly sharply after 1990. (Department for Education, Statistical Bulletin, 10/94 and 13/94). This expansion has been primarily demand led: young people have voted with their feet. But it was facilitated by an important policy change, the replacement of O-level, one of the traditional stages of elite selection, with GCSE which has enabled a much higher proportion to achieve an adequate level and so qualify for further education (Green and Steedman 1995).(15)

How much of the gap between the UK and comparable countries has been closed? International comparisons of educational attainments are fraught with difficulties of inconsistent data collection and inconsistent definitions (Steedman 1995) and there are so far no studies which take account of these recent changes. Although other countries have not stood still, it seems likely that there has been some closing of the gap, if only because the UK was previously so far behind. But it would certainly be a mistake to assume that all problems have been solved, since there are continuing questions about the quality of basic education. Although over 40 per cent of pupils gained 5 or more GCSE A grades in 1994, far fewer did so in basic subjects. Only a third of pupils gained a GCSE grade A-C in all three of English, Maths and a science subject (National Foundation for Educational Research 1995).

A further and more difficult question is, how much of an effect on economic growth can be expected from the increase in the proportion of qualified people? Theory suggests two ways in which human capital may influence growth. The traditional, `old growth theory' view as well as that of the growth accounting literature is that a higher growth rate of human capital is associated with a higher growth rate of output. According to old growth theory, the ultimate sources of output and productivity growth lie elsewhere but nevertheless growth in human capital just like in physical capital is an essential accompaniment, a necessary though not a sufficient condition (Mankiw et al. 1992).

According to `new growth theory' on the other hand, a higher level of human capital causes a higher growth rate of output, either because the rate of growth of new, useful knowledge depends on the level of human capital (Lucas 1988) or because in a follower country a higher level of human capital makes for a faster rate of absorption of innovations generated in leading countries, i.e. faster convergence (Nelson and Phelps 1966).

A difficulty with both old and new growth theory is that `human capital' is an empty box. Nothing in the theory tells us whether what matters is high level skills (Ph.D.s), vocational training or basic literacy and numeracy. Still less does it tells us the answer to finer questions such as whether we should be encouraging first degrees in engineering rather than in media studies.

Empirically, human capital has been identified with various measures of educational attainment and some support has been found for both old and new growth theory views (Mankiw et al. 1992; Barro and Sala-i-Martin 1995, chapter 12), though sometime the results are embarrassing. For example, Barro and Sala-i-Martin find that the higher the initial level of education of men, the higher the subsequent growth rate. But the higher the initial level of women, the lower the subsequent growth rate. They then struggle to resist the conclusion that growth can be accelerated by educating fewer women and more men. However, the main results come from cross section regressions of countries at very different levels of development. Even if it is found that poor countries can raise growth by increasing the proportion of their populations with primary and secondary education, nothing much seems to follow for the policies of countries like the UK which already have 100 per cent primary and secondary education.

A further, major difficulty in the way of quantifying the effect of education on growth is the quality of the data on educational attainments. These may be adequate for drawing broad brush conclusions comparing poor with rich countries, but are much less satisfactory for comparisons amongst developed countries. The Barro-Lee dataset is the best currently available (Barro and Lee 1993) but examination of some of the numbers raises many doubts. According to this dataset, the percentage of the population in 1985 reckoned to have `attained secondary' education was 38.0 per cent in the UK but only 19.5 per cent in (Western) Germany; by contrast neighbouring Austria had 30.2 per cent., France 26.3 per cent and Italy 30.7 per cent. On a different measure, average years of total schooling embodied in the population in 1985, Germany does much better than Austria (8.54 years compared to 6.64) but still just worse than the UK (8.65). However Germany and the UK are substantially ahead of France and Italy (6.52 and 6.28 years respectively). Even if we ignore the issue of quality of education, uncritical reliance on these figures would be unwise.(16)

5. UK macroeconomic performance

The UK has experienced three major (and two minor) recessions since 1973. Table 8 compares the length of the three major ones. The length of a recession is defined as the number of quarters it takes for output to regain its previous peak level (more on this measure below). From this table we can see that the recent recession lasted almost as long as the one which started in 1979 and longer than the 1973 one. It took 4 years for output to regain its previous level. The previous two recessions coincided with major shocks to the world economy. This was not the case for the 1990 recession, even though there were some common features such as preceding asset price booms in a number of countries. The depth and severity of the 1990 recession, greater than in almost any other OECD country, were home-grown, and must therefore have been largely due to domestic policy errors.(17)

Table 8. Recessions compared: UK quarterly GDP

Note: Time to recover is number of quarters before previous peak output is regained. Source: Economic Trends Annual Supplement 1995.

The most likely explanation is a double policy error: first, an overexpansion of demand in the Lawson boom, and second, the decision to enter the ERM at a greatly overvalued exchange rate (Wren-Lewis et al. 1991; Barrell et al. 1994). Financial liberalisation, which is often blamed for the Lawson boom, caused difficulties in other countries but need not have led to such severe results. For example, it took only 7 quarters for output to regain its previous peak level in the US. We do not need to decide which was the more important error, the Lawson boom or ERM entry, only to note that these errors may have severely affected UK growth.(18)

Macroeconomic policy: a comparison across the OECD

If the UK's record turns out to be substantially the same as that of other countries, there would be little reason for optimism that the record in the future would be any better. So there is an interest in seeing whether in fact other countries have been more successful. The best way to assess the UK's record is to compute the optimal policy using a model of the UK economy, and calculate the deviation between the present value of the utility stream under the optimal policy and the present value under the policy actually followed. The same operation must be repeated for every other country in the comparison. This is obviously a mammoth undertaking. In any case, the results will be dependent on the models chosen and on the form of the assumed utility function. A less demanding but still complex approach is the computation of output gaps which employs a production function to estimate trend output levels (Barrell and Sefton 1995).

Instead a cruder approach will be employed, by looking at various summary measures of the growth of GDP. in order to assess success or failure in macroeconomic management, it seems essential to look at quarterly data. The OECD transmits quarterly GDP data for 20 countries. Five of these only have data from 1980Q1 or later: Mexico, New Zealand, Norway, Sweden and Turkey, while Portugal's stops in 1993Q4. 14 countries have data from 1977Q1 to the present (1994Q4 except for the US which is 1995Q1). Of these 14, 11 including the UK have data from 1970Q1 to the present.

There is a surprising amount of variety in the experience of these 20, mostly very similar, countries. Thus Canada and Australia largely escaped the first oil shock, whereas in Switzerland the effect was severe. Finland has yet to recover from the current world recession, but this is the exception that proves the rule, since unlike Britain Finland has suffered a severe external shock in the collapse of its major trading partner, the Soviet Union. The UK, France, Germany, Italy and the US all show a similar pattern over this period, with the three major recessions all being clearly visible. Japan's progress appears much smoother until the most recent recession since when stagnation has prevailed.

The mean, variance and skewness of the quarterly growth rate of GDP(19) for the 11 and the 14 countries are shown in Tables 9 and 10 respectively. The range of growth rates is not very great. Over the longer period, japan comes top with 3.71 per cent per annum and Switzerland bottom with 1.52 per cent per annum The UK comes tenth out of the 11 and also tenth out of the 14.

Table 9. Quarterly growth rates of GDP, 1970Q1-1994Q4: 11 countries

Note: Austria, not seasonally adjusted in the source, has been seasonally adjusted. Source: OECD Quarterly National Accounts (May 1995 diskette).

Table 10. Quarterly growth rates of GDP, 1977Q2-1994Q4: 14 countries

Note: Austria, Denmark and Finland, not seasonally adjusted in the source, have been seasonally adjusted. Source: OECD Quarterly National Accounts (May 1995 diskette).

The most obvious measure of macroeconomic stability is the variance of the growth rate. Here the UK has the third highest variance out of 11 and the 6th highest out of 14, suggesting a poor to moderate performance.(20) However, the variance suffers from two drawbacks. First, it is symmetrical as between deviations above and below the mean. But it is surely reasonable to score deviations below the mean more heavily, since booms are generally seen as good times, their only drawback being that they may require policy to be tightened in order to prevent inflation taking off.(21) Second, the variance does not distinguish between short period fluctuations with little social cost, and long lasting recessions.

Asymmetry as between booms and slumps can be captured by the skewness. A positive value means that the distribution of growth rates is characterised by a relatively small number of values considerably above the mean and a relatively large number a bit below the mean. In more intuitive terms, positive skewness means that booms tend to be short and sharp while recessions tend to be long and shallow.(22) Over the longer period (Table 10), 7 countries out of 11 have negative skewness and 4 positive. The UK is the most positively skewed. Over the shorter period, skewness is negative for 12 of the 14 countries and only for the Netherlands and the UK is it positive.

These results could be criticised as misleading since the variance and the skewness are both measured relative to the mean which may not be a good measure of the trend growth rate. The analysis has therefore been repeated after detrending the data (in log level form) using the Hodrick-Prescott (HP) filter. The HP filter, which is designed to be applied to an original series in log form, divides the series into two components, a trend and a cyclical component, such that the original series is the sum of the two. By construction, the cyclical component has mean zero over the sample period. The HP filter is a fairly flexible and objective method of trend extraction but can also be criticised as being, along with other, similar methods, essentially a smoothing operator. A prolonged recession will show up as a fall in the trend rate of growth followed by a subsequent rise.(23)

The variance and skewness of the cyclical components of GDP for the 14 countries appear in Table 11. The UK has the second highest level of skewness with Japan now coming top. To test whether growth is affected by skewness, Chart 3 plots skewness against the trend rate of growth (calculated as a loglinear trend for the same observations as the skewness). It is clear that a strongly negative relationship exists for 13 of the 14 countries with Japan being the odd man out (r = -0.72). Japan's growth record is most unusual since progress was very steady right up till the 1990s. For these 13 countries, a parsimonious explanation of their trend growth is provided by the following regression (robust t statistics in brackets):

Trend growth = 0.0212 - 0.0101 Skewness

(23.4) (7.1)

+ 0.0119GAPUS

(3.5) N = 13; [R.sup.2] = 0.67

Here GAPUS is the gap with the US as defined in section 2. The investment ratio was also tried but was not significant (its inclusion did not affect the coefficient on skewness). The variance was also insignificant whether included on its own or together with the skewness.

Table 11. Hodrick-Prescott detrended quarterly GDP: characteristics of cyclical component

Note: Cyclical component calculated with A set to 1600 in HP filter. Source: OECD Quarterly National Accounts, May 1995 diskette.

This result shows that a cyclical pattern like the UK's -- short, sharp booms followed by long, shallow recessions -- is associated with a lower trend growth rate. It is possible that long recessions damage confidence and so reduce investment and R&D expenditure. Moreover the effect is economically significant. If the UK had had the average skewness of this sample, its growth rate would be predicted to have been 0.57 percentage points higher. Since macroeconomic policy is usually thought capable of affecting output over business cycle frequencies, this suggests that greater success in stabilising the economy would increase the trend growth rate.

An alternative measure of asymmetry

An alternative measure capturing the intuitive notion that recessions are socially costly is the proportion of time which the economy spends in recession. But here we must be precise. The economy will be defined as being in recession when output is below its previous peak level. If output is actually below what has been previously achieved, it suggests an obvious malfunction of the economic system. The economy will be said to recover in the quarter when output first surpasses its previous peak level. The length of a recession is then the number of quarters before recovery occurs.

To implement this measure, we need also to define what is meant by a peak. Two measures will be used. Under measure 1, a peak occurs if output is higher than in the preceding quarter and output falls for at least the next two quarters (i.e. y(t)>[is greater than]y(t-1), y(t)[is greater than]y(t+1) and y(t+1)>[is greater than]y(t+2), where y is GDP). We add the rider that each potential peak, to qualify, must be higher than its predecessor. Measure 2 is very similar, except that we only require output in the next two quarters to be lower than at the potential peak (i.e. y(t)[is greater than]y(t-1), y(t)[is greater than]y(t+1) and y(t)[is greater than]y(t+2)). Measure 1 corresponds to the official US definition of a recession. These measures differ from the one commonly used, which says that a recession ends when output regains its trend level. This of course presupposes that we can define what is meant by the trend level of output.

Table 12 shows the proportion of time that these 14 economies have spent in recession. On measure 1, the UK comes second, with 48 out of 100 quarters spent in recession. Switzerland is top; however this is due almost entirely to the depth of the Swiss recession following the first oil shock. Under measure 2, the UK is pushed down into 3rd place by Denmark and Austria. So on either of these two measures, the UK's performance is amongst the worst. By contrast, even on the more pessimistic measure 2, France has spent only 23 per cent of the period in recession, Germany 35 per cent and the US 26 per cent.

[TABULAR DATA NOT REPRODUCIBLE IN ASCII]

There is also a negative correlation between the mean growth rate and the proportion of time spent in recession for these 14 countries. For measure 1, the correlation is [0.74 and for measure 2, it is [0.66, suggesting that comparatively poor macroeconomic performance may have reduced the average growth rate. A sceptic could argue that countries which have a low average growth rate for some other reason will also be more likely to have actual falls in output levels (rather than just falls in growth rates) and so will spend longer in recession as defined here. This is true but the present finding is in accordance with the earlier, negative correlation between skewness and trend growth which is not vulnerable to this criticism.

Macroeconomic policy errors and UK prospects

As we have seen, the UK's growth may have been damaged by macroeconomic policies leading to short booms and long recessions. Even if this analysis is not accepted, any method of trend fitting which includes the recent recession is likely to produce a relatively pessimistic forecast for the UK's medium to long term growth rate. It is a sound statistical principle not to throw information away. However, if poor UK performance primarily reflects macroeconomic policy errors, then it may be correct to ignore or at least downgrade the evidence of recessions -- provided of course that the errors are not likely to be repeated! This point is illustrated with reference to an extreme case, the Great Depression in the US.

Consider the problem of someone trying in 1937 to forecast US economic growth over the long term. As it turned out, though this hypothetical individual was not to know this, 1937 was a cyclical peak. In fact, the US economy was not to regain the 1929 level of output till 1939 after recovering from another recession, a full ten years after the onset of the Great Depression.

Table 13 sets out average peak-to-peak growth rates over selected periods. The problem for the 1937 forecaster is how much weight to give to the Depression. The average annual growth rate over 1919-29 was 3.48 per cent, but from 1919 to 1937 was only 1.80 per cent and was negative from 1929 to 1937. In 1937 it might have seemed absurdly optimistic to discard the whole experience of the Depression which we know caused deep gloom about the future of the capitalist system itself. More sophisticated methods such as the HP filter would also have suggested a pessimistic view of US prospects. However, as things turned out, our forecaster would have done best by simply ignoring the Great Depression as if it had never happened. Even then he would have underestimated the growth which actually occurred (e.g. 4.63 per cent per annum over 1937-53).

Table 13. Average annual growth rates of US GNP, selected periods, 1913-73

Note: 1913, 1929, 1937, 1953, 1962 and 1973 were cyclical peaks. 1919 and 1948 were first -- normal' years after WW1 and WW2 respectively. 1937 output was still below 1929 (1939 was recovery year). 1941 was last year of peace before WW2. Source: 1913-28: Romer's revision of official Commerce Department series (Romer 1988, Table 6). 1929-73: U.S. Dept. of Commerce, National Income and Product Accounts of the United States, 1929-82, Table 1.2 (1986).

The explanation of this paradox came much later. As Friedman and Schwartz (1963) showed, it was a gross policy error which turned what would otherwise have been a normal recession into a major slump. The failure of the Federal Reserve to perform the function for which it had been set up, namely to act as a lender of last resort, caused the catastrophic collapse of the US banking system and a massive decline in the money stock. Though debate continues about the transmission mechanism from money to output, the Friedman-Schwartz argument has received wide acceptance (Eichengreen 1992). If our 1937 forecaster had had access to their analysis, he might have reasoned that the Fed was unlikely (to be allowed) to make the same mistake twice, hence he could ignore the Depression experience as a one-off. And he would have been right.(24)

By analogy, if we could be confident that recent macroeconomic policy errors will not be repeated in the future, it would be better to ignore UK performance since 1990 and base a judgement about long-run prospects on the performance from 1979 to 1990.

6. Conclusions

The introduction identified two major institutions as inimical to productivity growth: industrial relations and education. The failings of both, it was argued, have been substantially alleviated though in the case of education the payoff has perhaps yet to appear. This does not of course mean that all problems have been solved and there is certainly still room for many detailed policies to is certainly still room for many detailed policies to address remaining weaknesses (see Eltis and Higham 1995 for more on the latter). However, the assessment here is much more optimistic than the conclusions reached by others.(25)

It must be admitted that much about the growth process remains mysterious and few empirical regularities are robust (Levine and Renelt 1992). It may be that the UK's relative economic decline was due to some quite different cause from the ones discussed here. If so, we must wait for this factor X to be identified since in my judgement no other plausible factors which are also amenable to change by policy have been identified. For example, the UK's decline might have been due to the loss of the entrepreneurial spirit or the absence of Asian values, but it is hard to think of any policies to remedy these deficiencies. Again, the UK might have fared better with German or Swedish trade unions or with Japanese managers, but it is not clear how this transformation could have been achieved in practice (except partially in the latter case by foreign investment).

Finally, what of the prospects for better macroeconomic policies? Since our ignominious exit from the ERM in September 1992, UK macroeconomic policy has regained a measure of credibility. The Bank of England has acquired greater de facto independence, though it is still a long way short of the de jure independence enjoyed by the Bundesbank. The `Wise Men' have injected an element of independent thinking into the policy formation process. It is true that under the present framework policy remains subject to manipulation for short term political gains. Nonetheless, left to itself it might be hoped that the new arrangements would continue to develop and that the lessons of the past would be learnt.(26) Unfortunately however, the present framework may well only be temporary. A majority of the British political class together with their continental counterparts seems determined to embark on (or at least not to be left out of) the great adventure of European Monetary Union, currently scheduled to begin in 1999. The characteristics and performance of a new, post-EMU system of macroeconomic control are as yet impossible to predict.

REFERENCES

Arrow, K.J. and Nerlove, M. (1962), `Optimal advertising policy under dynamic conditions', Economica, 29, pp. 129-142.

Auerbach, A.J., Hassett, K.A., and Oliner. S.D. (1994), `Reassessing the return to equipment investment', Quarterly Journal of Economics, 109, pp. 789-802.

Barrell, R., Britton, A., and Pain, N. (1994), `When the time was right? The UK experience of the ERM', In D. Cobham (ed.), European Monetary Upheavals, Manchester University Press.

Barrell, R. and Sefton, J. (1995) `Output gaps. Some evidence from the UK, France and Germany', National Institute Economic Review, No. 15,1 (February), pp. 65-73.

Barro, R.J. and Lee, J-W. (1993), `International comparisons of educational attainment', Journal of Monetary Economics, 32, pp. 363-394.

Barro, R.J. and Sala-i-Martin, X. (1995), Economic Growth, McGraw-Hill.

Bean, C. and Crafts, N.F.R. (1995), `British economic growth since 1945: relative economic decline ... and renaissance?', CEPR Discussion Paper No. 1092, London.

Bean, C. and Symons, J. (1989), `Ten years of Mrs T', CEPR Discussion Paper No. 316, London.

Blanchflower, D. and Freeman, R.B. (1994), `Did the Thatcher reforms change British labour market performance?', In R. Barrell (ed.), The UK Labour Market, Cambridge: Cambridge University Press.

Broadberry, S. (1994), `Employment and unemployment', In Floud and McCloskey (1994).

Brown, W. and Wadhwani, S. (1990), `The economic effects of industrial relations legislation since 1979', National Institute Economic Review, No. 131 (February), pp. 57-70.

Bureau of Labor Statistics. (1993), International Comparisons of Labor Productivity and Unit Labor Costs, US Department of Labor.

Crafts, N.F.R. and Toniolo, G. (1995), `Post-war growth: an overview', CEPR Discussion Paper No. 1095. London.

Daniel, W.W. and Millward, N. (1983), Workplace Industrial Relations in Britain: the DE/PSI/ESRC Survey, Heinemann.

DeLong, J.B. and Summers, L. (1991), `Equipment investment and economic growth', Quarterly Journal of Economics, 106, pp. 445-502.

Denny, K. and Nickell, S.J. (1992), `Unions and investment in British industry', Economic Journal, 102, pp. 874-87.

Dowrick, S. and Nguyen, D-T. (1989), `OECD comparative economic growth 1950-85: catch-up and convergence', American Economic Review, 79, pp. 1010-1030.

Eichengreen, B. (1992), `The origins and nature of the Great Slump revisited', Economic History Review, 45, pp. 213-239.

Eltis, W. and Higham, D. (1995), `Closing the UK competitiveness gap', National Institute Economic Review, No. 154 (November), pp. 00-00.

Floud, I.R. and McCloskey, D. eds. (1994), The Economic History of Britain since 1700. Volume 3: 1939-92(2nd edition), Cambridge University Press.

Freeman, R.B. and Medoff, J.L. (1984), What Do Unions Do? New York: Basic Books, Inc.

Friedman, M. and Schwartz, A.J. (1963), A Monetary History of the United States, 1867-1960, Princeton University Press.

Green, A. and Steedman, H. (1995), Widening Participation In Further Education And Training: Literature And Issues Survey, Further Education Funding Council (forthcoming).

Gregg, P., Machin, S. and Metcalf, D. (1993), `Signals and cycles: productivity growth and changes in union status in UK companies, 1984-89', Economic Journal, 103, pp. 894-907.

Grout, P. (1984), `Investment and wages in the absence of binding contracts: a Nash bargaining approach', Econometrica, 52, pp. 449-460.

Haskel, J. and Martin, C. (1993), `Do skill shortages reduce productivity? Theory and evidence from the United Kingdom', Economic Journal, 103, pp. 386-394.

Layard, R. and Nickell, S. (1989), `The Thatcher miracle?', CEPR Discussion Paper No. 315, London.

Levine, R. and Renelt, D. (1992), `A sensitivity analysis of cross-country growth regressions', American Economic Review, 82, pp. 942-963.

Lucas, R.E. (1967), `Adjustment costs and the theory of supply', Journal of Political Economy, 75, pp. 321-334.

Lucas, R.E. (1987), Models of business cycles. Blackwell.

Lucas, R.E. (1988), `On the mechanics of economic development', Journal of Monetary Economics, 22, pp. 3-42.

Lynch, L.M. (1993), `The economics of youth training in the U.S', Economic Journal, 103, pp. 1292-1302.

Machin, S. and Stewart, M. (1995), `Unions and financial performance', Centre for Economic Performance, Discussion Paper No. 242. London.

Machin, S. and Wadhwani, S. (1989), `The effects of unions on organisational change, investment and employment: evidence form WIRS', Centre for Labour Economics Discussion Paper No. 355.

Mankiw, N. G., Romer, D., and Weil, D.N. (1992), `A contribution to the empirics of economic growth', Quarterly Journal of Economics, 107, pp. 407-437.

Metcalf, D. (1994), `Transformation of British industrial relations? Institutions, conduct and outcomes', In R. Barrell (ed.), The UK Labour Market, Cambridge University Press.

Millward, R. (1994), `Industrial and commercial performance since 1950', In Floud and McCloskey (1994),

National Foundation for Educational Research (1994), Standards in Literacy and Numeracy 1948-94. London.

Nickell, S., Wadhwani, S. and Wall, M. (1989), `Unions and productivity growth in Britain 1974-86: evidence from UK company accounts data', Centre for Labour Economics Discussion Paper No. 353. London.

North, D.C. and Thomas, R.P. (1973), The Rise of the Western World: A New Economic History. Cambridge University Press. OECD (1995), Education At a Glance: OECD Indicators. OECD.

O'Mahony, M. (1995), `International differences in manufacturing unit labour costs', National Institute Economic Review, No. 154 (November), pp. 00-00.

Oulton, N. (1987), `Plant closures and the productivity `miracle' in manufacturing', National Institute Economic Review, No. 121 (August), pp. 53-59.

Oulton (1989a), `Trade unions, product quality and the structure of international trade', In J. Black and A. I. MacBean (eds.), Causes of Changes in the Structure of International Trade, 1960-1985, Macmillan.

Oulton, N. (1989b), `Productivity growth in manufacturing: the roles of new investment and scrapping', National Institute Economic Review, No. 127 (February), pp. 64-75.

Oulton, N. (1990), `Labour productivity in UK manufacturing in the 1970s and the 1980s', National Institute Economic Review, No. 132 (May), pp. 71-91.

Oulton, N. (1992), `Investment and productivity growth', in A. Britton (ed.) Industrial Investment As A Policy Objective, National Institute of Economic and Social Research, Report Series No. 3. London.

Oulton, N. (1994), `Labour productivity and unit labour costs in manufacturing: the UK and its competitors', National Institute Economic Review, No. 148 (May), pp. 49-60.

Oulton, N. (1995), `Work force skills and export competitiveness: an Anglo-German comparison', Forthcoming in A.L. Booth and D. Snower (eds.), Acquiring Skills: Market Failures, Their Symptoms, and Policy Responses, Cambridge University Press.

Oulton, N. and O'Mahony, M. (1994), Productivity and Growth: A Disaggregated Study of British Industry, 1954-86, Cambridge University Press.

Perron, P. (1989), `The Great Crash, the oil price shock, and the unit root hypothesis', Econometrica, 57, pp. 1361-1401.

Prais, S.J. (ed.) (1995), Productivity, education and training. Britain and other countries compared (volumes 1 and 2), National Institute of Economic and Social Research. London.

Romer, C.D. (1988), `World War I and the post war depression. A reinterpretation based on alternative estimates of GNP', Journal of Monetary Economics, 22, pp. 91-116.

Sichel, D.E. (1993), `Business cycle asymmetry: a deeper look', Economic Inquiry, XXXI, pp. 224-236.

Steedman, H. (1995), `Limitations of current systems of educational classification: the challenge of measuring quality of educational outputs', LSE, Centre for Economic Performance. mimeo.

Ullman, L. (1968), `Collective bargaining and industrial efficiency', In R.E. Caves et al., Britain's Economic Prospects, Allen and Unwin.

Wiener, M.J. (1981), English Culture and the Decline of the Industrial Spirit 1850-1980, Cambridge University Press.

Wren-Lewis, S., Westaway, P., Soteri, S. and Barrell, R. (1991), `Evaluating the UK's choice of entry rate into the ERM', Manchester School, 54 (Supplement).

NOTES

(1) To forestall misunderstanding, I do not attempt a full scale `audit of Thatcherism' (or of Majorism) for which see for example Bean and Symons (1989) and Layard and Nickell (1989). Neither the desirability of economic growth, nor unemployment, nor the distributional implications of the supply side reforms will be discussed.

(2) See Wiener (1981) for a comprehensive catalogue of the anti-growth views of the British political and intellectual establishment in the twentieth century.

(3) These figures differ slightly from similar ones in Oulton (1994) due to the use of more recent data from the U.S. Department of Labor, Bureau of Labor Statistics.

(4) Similar results have been reported by Crafts and Toniolo (1995).

(5) Delong and Summers (1991) have argued that it is investment in plant and machinery not investment in general which is crucial for growth. Some doubt has been cast on this view for the currently rich countries by Oulton (1992); see also Auerbach et al. (1994). In any case, the gap between the UK and other countries in plant and machinery investment is much smaller than for total investment.

(6) See Metcalf (1994) for a recent overview and Ullman (1968) for an evaluation of the system as it stood in the late 1960s.

(7) However, Broadberry (1994) does consider the relationship between trade unions and productivity while discussing the improvement of the 1980s.

(8) The general point being made here is widely accepted in fields outside economics. For example, it is generally held that the unanimity rule of the Polish Diet was an important cause of the collapse and partition of Poland in the eighteenth century.

(9) Let the cost of adjusting the capital stock by one unit be a homogeneous of degree one function C(I, K), where I is investment and K is capital stock. The marginal cost of investment is [C.sub.I](I/K), a function only of the ratio I/K, and this is assumed to be increasing, [C.sub.II](I/K) [is greater than] 0. The optimal policy for the firm is to equate the marginal cost of investment to the marginal return, which depends on input and output prices. The result in the text then follows if for example the firm takes prices as given.

(10) This argument was demonstrated rigorously by Arrow and Nerlove (1962) in the context of advertising expenditure. Oulton (1989a) argues that it applies more widely to any expenditure of an overhead character which has the effect of shifting the marginal revenue curve to the right. In an international setting, if product improving expenditure requires skilled workers, and if unions push up the real wages of less skilled production workers, then in equilibrium there will be a lower ratio of skilled workers than in other countries where unions are less powerful.

(11) See Blanchflower and Freeman (1994) for an up-to-date survey of the main measures. The legislation has not just reduced union power, though this is the aspect relevant here. It has also increased the accountability of unions to their members, a feature which made the reforms more politically acceptable at the time and which may one day, somewhat ironically, be the basis for a revival of union power.

(12) Some but not all of this decline in density and recognition might be ascribed to the fall in employment in heavily unionised sectors of the economy. But as Metcalf (1994) asks, why was it that unions were unsuccessful in recruiting in expanding areas of the economy?

(13) It is sometimes claimed that the example of the United States throws doubt on the need to achieve a high average level of educational or vocational attainment. It is true that most of the non-college educated receive no further formal training after leaving high school, though there is a very large proportion of college educated people. However currently about four fifths of young Americans complete high school, which ends at age 18 (Lynch 1993).

(14) These studies by various authors are collected together in two volumes edited by Prais (1995). In addition, Haskel and Martin argue that skill shortages reduced labour productivity growth over the period 1980-86 by as much as 0.7 percentage points per annum.

(15) The propensity to enrol in further education is higher the higher the GCSE grade. But the propensity to enrol has also risen at any given grade, following the introduction of GCSE.

(16) One reason that Germany shows up poorly on the `attained secondary' measure is probably that the dataset only covers educational not vocational qualifications, so that German apprentices are not included. Apprenticeship is now nearly universal for those not following the academic route. In OECD (1995) apprenticeships are included in the definition of attained upper secondary education giving a figure of 60 per cent for Germany in 1992. But this just illustrates the difficulties. There is no reason to think that this is the only adjustment which needs to be made.

(17) According to the Bank of England Quarterly Bulletin (February 1995, p. 17), the recession in the UK was deeper than in any other G7 country. On a different measure of length (number of quarters from peak to trough), the UK's recession was also (with Japan's) the longest.

(18) Policy during the 1979 recession has been widely criticised as being too tight. Surprisingly, the conduct of policy during the 1990 recession has attracted far less criticism. In defence of the 1979 recession, we can note that it coincided with a major oil shock at a time when the UK had just become an important oil producer itself. Criticism has focused on the appreciation of the exchange rate but at the time many people argued that the high pound was due to Britain's new status as an oil producer and not to tight monetary policy. To be fair to the Bank and the Treasury, the twin policy errors identified here may also have been more obvious ex post than ex ante.

(19) The quarterly growth rate of GDP is defined as [400xlog.sub.e](GDP(t)/GDP(t-1)).

(20) Spain has the lowest variance. Examination of the Spanish series shows that it is implausibly smooth, probably because the quarterly series is basically an interpolation of the annual one.

(21) If the economy could be adequately described by a representative, risk averse consumer, then reducing the variance of the level of GDP might be a reasonable objective. In practice it seems plausible that the people who lose in recessions are not identical to the ones who gain in booms. The assumption of a representative consumer produces estimates of the loss from macroeconomic instability which are negligibly small (Lucas 1987). If this assumption is valid, one wonders why anyone bothers about macroeconomic policy at all.

(22) Positive skewness is the opposite of what Sichel (1993) calls `deepness'.

(23) The HP filter is linear and therefore cannot induce asymmetry in a series which is originally symmetric, and it makes stationary a series which is trend or difference stationary (that is, I(1)); see Sichel 1993. The HP filter has one free parameter, denoted by [Lambda], which is usually set to 1600 for quarterly data.

(24) His confidence in his judgement would have been increased by the advent of deposit insurance in 1933. That the Great Depression really was a one-off is confirmed by Perron (1989) who shows on the basis of a time series model that it had a permanent effect on the level of US GDP but not on its growth rate.

(25) Bean and Crafts (1995) are only cautiously optimistic while Brown and Wadhwani (1990) and Blanchflower and Freeman (1994) are almost unrelievedly negative. However, on a close reading the latter two do accept the existence of a productivity improvement.

(26) One might certainly hope so, given that entry into the ERM at an overvalued exchange rate was a rerun of the return to gold in 1925.
percent per annum

                      1960-73    1973-79    1979-89    1979-94

United States         3.28       1.41       2.34       2.47
Canada                4.44       2.03       1.45       1.81
Japan                 9.59       5.15       4.58       4.18
Belgium               6.69       5.83       4.16       3.73(a)
Denmark               6.22       4.09       1.28       1.68
France                6.55       4.39       3.28       3.04
Germany               5.71       4.21       1.83       2.22
Italy                 6.14       5.60       3.86       3.91
Netherlands           7.15       5.32       3.40       3.04
Norway                4.69       2.21       2.03       2.06
Sweden                6.25       2.65       2.53       2.87
United Kingdom        4.14       1.01       4.13       3.95


Table 2. UK output per person employed

                     growth rates, per cent per annum

            Manu-        Private      Whole
            facturing    services     economy

1960-68     3.43         NA           2.80
1968-73     3.88         NA           3.10
1973-79     0.62         1.68         1.21
1979-89     3.98         2.50         2.00
1979-93     3.66         2.29         1.85


Table 3. Productivity growth in UK manufacturing
                                 percent per annum

                        Labour       Total factor
                  productivity      productivity

Period
1954-73                   4.60              1.18
1973-86                   2.23             -0.54
_______

1973-79                   1.66             -1.53
1979-86                   2.73              0.30
_______

1979-82                   1.36             -0.95
1982-86                   3.75              1.24


Table 4. UK output growth

                                        per cent per annum

Period                        Manufacturing           GDP

1960-68                       3.19                    3.15
1968-73                       2.82                    3.26
1973-79                      -0.72                    1.40
1979-89                       0.91                    2.39
1979-94                       0.67                    1.85
___________________

1989-94                       0.20                    0.79


Country        1960-73           1973-89          Change:
               % per annum       % per annum      1973-89 minus
                                                  1960-73

Australia       2.75             1.11             -1.64
Austria         5.02             1.31             -3.71
Belgium         4.15             1.01             -3.14
Canada          2.70             1.40             -1.30
Denmark         2.75             1,18             -1.57
Finland         3.67             2.22             -1.45
France          4.48             1.20             -3.28
Germany         4.22             1.20             -3.03
Greece          7.35             1.60             -5.75
Hong Kong       6.75             5.12             -1.63
Ireland         4.35             2.10             -2.25
Israel          5.22             1.24             -3.98
Italy           4.92             2.09             -2.82
Japan           7.73             3.13             -4.61
Netherlands     3.85             0.33             -3.52
New Zealand     1.42             0.02             -1.40
Norway          2.90             2.26             -0.64
Portugal        6.08             1.36             -4.71
Singapore       6.91             3.71             -3.20
Spain           6.32             0.92             -5.40
Sweden          2.38             1.00             -1.39
Switzerland     2.64             0.84             -1.80
Turkey          4.51             1.59             -2.91
UK              2.41             1.66             -0.75
us              2.25             0.87             -1.39


persons aged 16-69, not in full time education, per cent

                                1975     1985     1993

Highest qualification level

Degree and above                 5        8       10
Higher intermediate             11       16       23
Lower intermediate              14       19       23
Low or no qualifications        70       57       44


per cent

                                         UK       Germany

Highest qualification level

Degree and above                          7.2      6.0
Higher intermediate                       4.4      8.2
Lower intermediate                       28.1     57.2
No vocational qualifications             60.3     28.6


Period       Peak           Trough         Recovery       Time to
             quarter        quarter        quarter        recover
                                                          (quarters)

1973-76      1973Q3         1975Q3         1976Q4         13
1979-83      1979Q2         1981Q1         1983Q2         16
1990-94      1990Q2         1992Q1         1994Q1         15


per cent per annum at annual rate, seasonally adjusted

Country             Mean            Variance          Skewness

                Rank    Value    Rank      Value    Rank     Value

Australia       3.15      3      26.35       2      -0.47      7
Austria         2.83      5      43.84       1       0.06      4
Canada          3.29      2      15.89       4       0.07      3
France          2.53      8       7.78      10      -0.78     10
Germany         2.39      9      10.55       9      -0.31      6
Italy           2.57      7      13.94       6       0.09      5
Japan           3.71      1      12.41       7      -0.48      8
Spain           2.84      4       6.20      11       0.30      2
Switzerland     1.52     11      10.62       8      -1.89     11
UK              2.10     10      20.78       3       0.36      1
US              2.58      6      14.05       5      -0.55      9


per cent per annum at annual rate, seasonally adjusted

Country             Mean            Variance          Skewness

                Rank    Value    Rank      Value    Rank     Value

Rank
Australia       3.01      2      24.99       5      -0.74     14
Austria         2.13      7      31.38       3      -0.11      4
Canada          2.64      3      13.29       7      -0.33     10
Denmark         1.97     11      26.11       4      -0.20      6
Finland         1.94     12      69.74       1      -0.14      5
France          2.04      9       6.86      12      -0.48     11
Germany         2.20      5       9.90       9      -0.22      8
Italy           2.13      6       9.26      10      -0.20      6
Japan           3.42      1       8.26      11      -0.49     12
Netherlands     1.91     13      40.60       2       0.35      1
Spain           2.12      8       3.84      13      -0.05      3
Switzerland     1.69     14       3.74      14      -0.24      9
UK              2.01     10      14.45       6       0.10      2
US              2.53      4      12.07       8      -0.55     13


Country                   N          Skewness         Variance

Australia                100          -0.5060         0.000259
Austria                  100          -0.0643         0.000236
Canada                   100          -0.5135         0.000289
Denmark                   72           0.1906         0.000218
Finland                   80           0.4408         0.000693
France                   100           0.0431         0.000115
Germany                  100           0.2923         0.000221
Italy                    100           0.4585         0.000256
Japan                    100           0.9680         0.000193
Netherlands               72           0.0738         0.000241
Spain                    100           0.2353         0.000136
Switzerland              100           0.7037         0.000336
UK                       100           0.6946         0.000336
US                       101          -0.4012         0.000309


Period           % per annum           Period           % per annum

1913-29                 3.26           1937-62                 3.88
1919-29                 3.48           1941-53                 3.88
1929-37                -0.25           1941-62                 3.30
1929-41                 2.09           1948-62                 3.52
1919-37                 1.80           1953-62                 2.54
1937-53                 4.63           1948-73                 3.69
Gale Copyright:
Copyright 1995 Gale, Cengage Learning. All rights reserved.