It appears the US and UK have more than a cultural attachment and heritage! Take a look at the evolution of their normalized NGDP and RGDP. The trends are essentially the same for both countries and it is hard to distinguish between them.
The next chart zooms in on the last 10 years for NGDP. Both countries appear to have very similar monetary policies, with both “suffering” a “Great Depression” of similar significance and both experiencing a very weak recovery!
The question that has baffled commentators: Why is the UK´s labor market so much more exuberant?
The chart shows the behavior of employment since their pre-crisis peak.
Elements of an explanation for the different employment behavior:
While the US experienced largely a negative demand shock (a shift to the left of the AD curve – a fall in the rate of growth of NGDP below the trend level growth rate), the UK experienced a mixture of negative AD and AS shocks. The negative AS shock in the UK is observed in the chart below which illustrates the behavior of productivity in the two countries.
The dynamic AS-AD model predicts that if you have a negative AS shock on top of your AD shock, real output growth will fall by more AND inflation by less than if you experience only an AD shock.
That pattern is clear in the charts showing real growth and inflation in the US and UK.
In a recent post, Scott Sumner writes:
If you use the MM model to compare countries, you sort of implicitly assume similar labor markets. Then the country with the faster NGDP growth will have more job creation. But of course labor markets are not all equal, and some of the inter-country differences in employment will be due to wages, and only a portion will be due to NGDP growth differentials.
The chart indicates that wages in the US have increased by significantly more than in the UK, Given the higher rate of inflation in the UK until recently, real wages have differed by even more. Since the NGDP path of both countries has been very similar, the differing labor market behavior must be mostly due to wage behavior in the two countries.
PS: The depressed state of productivity in the UK is reflected in the worse post crisis relative performance of RGDP. Structural reforms are needed!