Patrick Minford's picture
Affiliation: 
Cardiff Business School
Credentials: 
Professor of economics

Voting history

The UK Productivity Puzzle

Question 2: Which of the following was the second most important cause for the slowdown in UK productivity growth?

Answer:
Labour market factors
Confidence level:
Confident
Comment:
There has been a sharp rise in labour supply in the UK over the past decade, particularly among the self-employed, older workers and women. With such rises in marginal supply, marginal productivity will be lower than average. This factor puts downward pressure on both productivity and wages in the UK's flexible labour market..

Question 1: Which of the following was the most important cause for the slowdown in UK productivity growth?

Answer:
Productivity mis-measurement
Confidence level:
Confident
Comment:
We know that the CPI measure is vulnerable to quality change, the introduction of new products, and the provision of free goods/services. These features are particularly prominent in ICT-intensive industries which are especially important in the UK's service-dominated economy. If the CPI is overstated it undermines the measures of both productivity and real wages used in this work. I certainly find it odd to see widespread pessimism over productivity trends coexisting with equally widespread concerns over the job-destroying effects of ICT trends. I note that efforts are being made in recent research to improve price measures for the factors identified above- e.g Aghion at https://scholar.harvard.edu/files/aghion/files/firm_dynamics.pdf. But so far little progress seems to have been made by official statistical agencies. Aghion points out that what these agencies do is impute to the new products the same inflation as the old products, then assigning them their sales share weight in the total. However, plainly this disregards the price fall when the new product enters disruptively; think of Amazon shifting us from daily shopping travel to home delivery; or Google saving us the trip to the public library; or tele-commuting in place of distant meetings; or paying fines/taxes online instead of at some tax office. Aghion substitutes the price change from the old substitute to the new product. The result is startling: in France, rather close to the UK in shopping patterns, the inflation rate has been over-stated by 0.7% pa in recent years, and an average of 0.4% pa in the earlier years (vs 0.6% in the US throughout). Notice the increase over the recent past, offsetting a fair proportion of the official slowdown in productivity and real wage growth.

Labour Markets and Monetary Policy

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Question 2: Do you agree that, in a period of great uncertainty and after a prolonged period of weak real wage growth, monetary policy makers can afford to wait for greater certainty about real wage developments and building inflationary pressure before raising interest rates?

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Answer:
Strongly Disagree
Confidence level:
Extremely confident
Comment:
The UK economy is no longer in 'crisis' mode, justifying emergency low interest rates close to the zero bound, and also bank reserves, from QE operations, of around 25% of GDP. This situation creates large distortions in savings markets: on the one hand absurd incentives to lend on car loans and mortgages, while on the other denying credit to small businesses (which are risk-penalised). Ideally raising rates and reducing QE would be accompanied by an easing of bank regulation and 'macro-prudential controls'.

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Question 1: Do you agree that a strong labour market is a good indicator of building inflationary pressure?

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Answer:
Agree
Confidence level:
Confident
Comment:
The Phillips Curve error term is sensitive to the factors listed above: immigration, global competition and so on. Plainly these have been dampening the response to unemployment; however there is no reason to believe this response has gone away.

House Prices and the UK economy

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Question 2: Do you agree that a more widespread weakening of the UK housing market will slow UK GDP growth significantly?

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Answer:
Strongly disagree
Confidence level:
Confident
Comment:
Yes, there is some connection between the housing market and consumption but this is because both are driven by business cycle income effects; housing spending has a high income elasticity and so is highly correlated with consumption. Currently the UK is experiencing a steady business cycle expansion whose demand direction is being shifted by the Brexit devaluation of some 15%, away from consumption towards net exports, profits and business investment.

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