Costas Milas's picture
Affiliation: 
University of Liverpool
Credentials: 
Professor of Economics

Voting history

National Living Wage and the UK economy

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Question 2: Do you agree that the new NLW will have a muted effect on wages and prices?

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Answer:
Agree
Confidence level:
Confident
Comment:
In the current environment of "low" unemployment, the rest of the workers (who form the majority as they are not on the minimum wage) will respond to the NLW developments by bargaining more lively in order to restore part of their “wage differentials”. Therefore, the NLW will put upward pressure on wages and prices. Notice, however, that the BoE’s Inflation Report expects CPI inflation to hit the target only in 2018q1! With this in mind, gradual and very mild interest rate hikes will occur in the medium-term. It has been suggested that low interest rates have contributed to over-investment in other risky assets (e.g. stocks and housing) therefore adding to bubble pressures which, of course, are setting the scene for yet another financial crisis. If the increase in the minimum wage is able to put an upward pressure on UK inflation sooner than later, the MPC will be forced to respond by hiking earlier and perhaps more aggressively. Such an increase in the interest rate (in response to stronger price pressures stemming from the very increase in the minimum wage) will be more than welcome as it will also counteract UK bubble risks!

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Question 1: Do you agree that the new National Living Wage is likely to lead to significantly lower employment?

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Answer:
Disagree
Confidence level:
Confident
Comment:
An increase in the minimum wage should bring into the picture the impact on (un)employment through competitiveness issues. So let us consider some international comparisons using the OECD database. For 2015, UK's real hourly minimum wage (2014 constant prices and 2014 USD Purchasing Power Parities) stood at $8.17. This was higher than OECD's median real minimum wage (which stood at $5.45). In fact, since 2000, UK's real minimum wage has been consistently higher than OECD’s median real minimum wage. This, in my view, has not paused a significant threat to our competitiveness and therefore has not led to a significantly lower employment. I remain cautiously optimistic that the new NLW will not undermine our employment prospects.

Brexit and financial market volatility

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Question 2: Do you agree that the possibility of Brexit significantly increases uncertainty and volatility in financial markets and the economy in general?

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Answer:
Strongly Agree
Confidence level:
Very confident
Comment:
Brexit worries feed back into higher financial and economic uncertainty. This is because BREXIT supporters have not explained to the rest of us what is going to happen after a possible BREXIT. We currently have in place trade agreements with the whole of the EU. How feasible/fast will it be to put in place individual agreements with the remaining 27 countries? In other words, we currently have a season ticket in Europe. Why, on earth, would we want to switch to individual (and much more expensive) tickets?

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Question 1: The value of the pound fell sharply this week. Do you agree that the public debate on Brexit can be expected to (continue to) lead to a substantially higher level of exchange rate volatility in the upcoming months?

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Answer:
Agree
Confidence level:
Confident
Comment:
The exchange rate volatility we are currently experiencing is due to a "systematic component" and an "idiosyncratic component". Systematic component: It makes sense to expect a turbulent period for the exchange rate because not even BREXIT supporters are able to explain to the rest of us what the new "status quo" is going to be. This source of exchange rate volatility will persist in the coming months and is "non-diversifiable". Idiosyncratic component: This has to do with how our government is handling (so far) the referendum issue. Mr Cameron, and rightly so, is putting "heart and soul" into staying in the EU. Fair enough. At the same time, however, senior cabinet members (and prominent members of the Conservative party) are also putting "heart and soul" into exiting the EU. Basically, BREXIT supporters within the conservative party are challenging all arguments made by Mr Cameron and, at the end of the day, his very authority as prime minister. This "pluralistic cacophony" makes the rest of us wonder the obvious: How long will it take before ministers realise that they have to put aside their ideological differences on Europe and get back into dealing with the country's problems? If this does not happen any time soon, exchange rate volatility, driven by this very idiosyncratic component, will turn even nastier.

Market Turbulence and Growth Prospects

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Question 2: Do you agree that the falls in share prices, low oil prices and the slowdown in some emerging market economies will have a significant negative impact on the UK’s economic recovery?

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Answer:
Disagree
Confidence level:
Confident
Comment:
Ir is more likely than not that we will see an annual GDP growth rate of less than 2.4% (which is what the OBR currently predicts) but still above 2%.

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