US & UK: Siamese twins? Up to a point

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.

Employm-USUK_1

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!

Employm-USUK_2

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.

Employm-USUK_3

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.

Employm-USUK_4

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.

Employm-USUK_5

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.

Employm-USUK_6

PS: The depressed state of productivity in the UK is reflected in the worse post crisis relative performance of RGDP. Structural reforms are needed!

6 thoughts on “US & UK: Siamese twins? Up to a point

  1. Pingback: What ARE the big UK supply side issues? | Freethinking Economist

  2. Good, challenging, post.

    I’m not sure about this supply-side shock thesis for the UK. It’s very, very hard to pin it down. Possibly, the banking sector over-regulation in response to the crisis is a factor – Tim Congdon would certainly agree! But it doesn’t sound like a big enough issue to cause such a big degree of differential performance.

    Our biggest state-owned industry by far is the National Health Service. It is surely ripe for much greater “marketisation”. However, studies of the NHS seem to suggest improving productivity there, but it is very hard very tell. If it is the NHS, at leas the US looks like it will now be somewhat dragged down like the UK thanks ot Obamacare.The state school system is number two, educating 93% of our kids, but that also seems quite “efficient” in terms of kids per teacher, even if the results are poor.

    I still suspect the data is screwy. The US is superior at measuring GDP, until recently maybe, and certainly keeps way more up to date with hedonic adjustments to CPI and PCE.

    • James, observe that while NGDP (monetary policy) is quite alike in both, RGDP in UK has evolved differently since the crisis, following the productivity shock. The data may (always?) be screwy, but there´s always some info in there.

  3. Marcus: good point, but it almost seems as if the employment gain “causes” the productivity shock, or rather is the same thing as the productivity shock. The newly employed workers are on average lower productivity ones, causing the average productivity of the labour force to decline. I think it wrong therefore to look for theoretical supply-side constraints causing our fall in productivity.

    Ben: Just back from listening to a Mexican banker say that their economy definitely slowed unexpectedly in 1q and probably 2q as welll. Mexico is well known to be highly leveraged to US economic conditions, giving plausiblity to the 1q US GDP number, less so to the 2q first reading.

  4. Pingback: US & UK: Siamese twins? Up to a point | The Corner

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