Fehr, E., Herz, H., & Wilkening, T. (2013). The Lure of Authority: Motivation and Incentive Effects of Power American Economic Review, 103 (4), 1325-1359 DOI: 10.1257/aer.103.4.1325
Wednesday, June 12, 2013
The fall in wages has allowed unemployment to remain at much lower levels than might have been expected given the severity of the recession. The IFS attribute this flexibility of wages in part to a continued high level of labour supply - with many workers who would, in previous recessions, have quit the labour market as 'discouraged workers' opting instead to remain in the labour market this time - and in part to the effect of union legislation.
As the economy recovers, it would not be surprising to see wage pressure increase, as workers seek to recapture some of the losses they have made over the last few years. Unless such demands can be rigourously controlled, this could lead to an escalation of wages that feeds through into price inflation, and at the same time the braking force on unemployment could wither. While we now appear to be witnessing the beginnings of recovery, this could be frustrated by stagflation if discipline is not maintained.
Tuesday, May 07, 2013
Monday, March 18, 2013
The legitimacy of any tax rests on the idea that people understand that they will be liable to pay the tax if they do certain things. If I earn income, I expect to pay income tax; if I purchase goods and services, I expect to pay value added tax, excise duties and the like. It is not usual, or fair, to introduce new taxes where the payments are made by people who can reasonably be supposed to have behaved differently had they known the tax was on the way. One might describe the tax as legalised (but not legitimate) theft.
The proposed Cypriot tax is being imposed on all deposits - including those below €100K which are supposedly protected from bank collapses. It is not, therefore, a tax primarily aimed at big Russian depositors, as has been claimed (although many of the large deposits do of course come from Russia). One might describe it as theft from the poor.
The tax sends a signal to all savers in Europe that their savings are, quite simply, not safe. One hopes that the furore that this has attracted will prompt a rethink and that small depositors will be protected. Otherwise, the authorities may well have triggered bank runs throughout southern Europe. It is not a smart move.
Wednesday, February 13, 2013
The latest results of my neural network forecaster (based on growth of industrial output) paint a similar picture of eventual recovery, although the prognosis for growth is more modest. The red line below shows the forecast to the end of next year - and suggests that growth during 2014 will be around 1.5%.
Friday, February 01, 2013
Tuesday, January 22, 2013
-student tuition fees raised to £3000 - and Conservative party plans to scrap tuition fees
-the congestion charge introduced in London (at a daily rate of £5) and the first motorway toll road opened
-the five economic tests for UK membership of the euro assessed
Inevitably, though, in looking back over the last decade, it is the Great Recession that stands out as an economic event of magnitude. The crisis, presaged in the UK by Northern Rock and reaching a climax with the collapse of Lehmans, has lasted over 5 years and output is still well below pre-crisis levels. The 6 September 2012 policy change by the European Central Bank has been instrumental in reducing interest rate spreads across the continent, and offers some hope that we may finally enter a period of sustained recovery. Nevertheless policymakers are still walking a tightrope - they must encourage growth while still attending to the fiscal deficit and guarding against inflation. The impact of deficit reduction policies, alongside the still fragile international economic environment, will mean that recovery is a slow process. So economics is, for better or worse, likely to remain interesting well into the next ten years.
Friday, January 04, 2013
Essentially, the method proposed by Gilhooly, Weale and Wieladek is designed to compensate for biases that result from the fact that the fortunes of different sectors of the economy are intertwined at any point in time. Traditional methods that are used in this context do not work well when the time period under consideration is short, but these authors finesse this problem by adopting Bayesian methods. They argue that superior forecasting properties of their model suggest that its results should be taken more seriously than those of exercises based on other methodologies.
An important question then remains: if as much as half of the drop in output has been due to a fall-off in productivity, how can this fall-off have happened? If the findings imply that, over the course of the recession, we have unlearned the lessons of how to produce efficiently, then it is reasonable to question how such amnesia can occur.
To some extent, the decline in real wages may have allowed firms to retain labour while tolerating a fall in productivity - a fall that in itself reflects a drop in demand for the firms' output. Labour hoarding of this kind is readily explained in a context where firms expect a rapid return to growth and anticipate future labour shortages. It is not clear that this is the case now.
Another explanation may be that high productivity sectors have declined for secular reasons - for example, as natural resources have been depleted, the output of the extractive industries has fallen. This might suggest that there is a more permanent element to the decline in productivity, and that we should not output to grow rapidly to its previous high level.
It is possible, therefore, to put a rationale on the findings of Gilhooly et al. that productivity decline has been an important driver of recession. More work is probably needed before it is safe to conclude that this explains as much of the drop in output as the authors suggest. But their research certainly serves a purpose in reminding us that there is work to be done on the supply side of the economy as well as on the demand side as we seek to climb out of recession.