Alan Budd

Long-term unemployment and the shifting U-V curve : A multi-country study

One of the most worrying aspects of the rise in unemployment in the OECD countries since 1980 has been the even more rapid rise in long-term unemployment. In this paper we investigate this phenomenon in four countries the U.K., West Germany, the Netherlands and the U.S.A. Fig. 1 shows recent trends in the ratio of long-term to total unemployment for these four countries, where long-term unemployment is defined as unemployment for more than twelve months. In the U.K. the ratio was only 0.1 in the 1960s and since then there have been three periods when this ratio was in an approximate steady state; in 1969-72 around 0.16, 0.23 from 1977-79 and 0.4 from 1984 to the present. For West Germany similar trends have been observed, especially since 1975, but with a consistently lower ratio. For the Netherlands (males only) the pattern is again similar but with consistently higher ratios which are possibly due to excluding females. For the U.S.A. the ratio has been very much lower than the three European countries; nevertheless the U.S.A. has, in common with the others, experienced the same recent dramatic rise. In Budd, Levine and Smith (1985) a model is presented to explain the duration profile of unemployment. In this model a key parameter is the outflow rate from unemployment, which can be thought of as the average probability of leaving the register. Flow data for the U.K. indicate that this average probability of finding a job within a given quarter is considerably less for the long-term than for the short-term unemployed. The model shows that this differential is crucial for explaining the recent sharp rise in the ratio of long-term to total unemployment. We believe that this fall in probability is associated with both a reduction

The London Business School econometric model of the UK

Abstract This paper describes the London Business School econometric model — the first fully computerized model of the UK — which has been used for regular public forecasting since 1966. The model, estimated on quarterly data, is organized around the income expenditure accounts with a fully integrated flow of funds sector which ensures consistency between portfolio decisions and income, savings and investment decisions. Aggregate demand is built up from its individual components so that demand influences are important for the short- and medium-term behaviour of the model. But there are important supply-side effects which work through the real exchange rate and real wages. Monetary conditions have a powerfull effect on the model through the exchange rate, personal sector wealth and interest rates. Wages and employment are determined in a labour market in which employment decisions depend on the level of demand and real wages while real wages depend on the level of unemployment, real benefits and direct and indirect taxes as well as underlying trends in productivity. Asset prices move in any period to clear both the spot and the future market in assets so that current asset prices in the equity, gilt-edged and foreign exchange markets reflect all current information about the expected state of the economy. In contrast, goods prices adjust sluggishly. The combination of continuously clearing asset markets and sluggish wages and prices gives the model many of the theoretical characteristics associated with the open-economy models of Dornbusch and Buiter and Miller.

The Effect of Fiscal Reflation Upon Employment

The first part of the chapter discusses Keynes’s theory of prolonged involuntary unemployment and the role of fiscal policy in cutting it. The second part describes the labour market sector of the LBS model and compares it with the Keynesian approach. The third part uses the LBS model to explore the effects on unemployment of types of fiscal expansion.

Does Monetarism fit the UK Facts

This paper is arranged as follows. Section I discusses definitions of ‘monetarism’ and proposes a very general meaning which can be derived, with minimal restrictions from a widely accepted model of the economy. We suggest that the two principle propositions to be tested are (a) that there is a stable demand for money and (b) that changes in the money supply have been an independent source of changes in prices. Section II examines the long-run relationship between money and nominal income. It reports previous empirical studies and also presents long-run graphical evidence. Section III examines in more detail the question of ‘causality’. The conclusions are summarised in the final section.

The Share Price Collapse—Analysing the Wealth Effect

Alan Budd and Geoffrey Dicks, of the London Business School, analyse the importance of the‘Wealth Effect’and conclude that the decline in stock market prices should have little effect on the rate of economic growth.

Is the Economy Overheating

In the last year total output has risen 4 per cent and manufacturing is up 6 per cent. Unemployment has fallen by 400,000. The current account, which was in surplus in the first half of the year, has moved back into deficit. Does this mean that the economy is “over- heating”? In the context of our forecast we examine this issue; we consider how rapidly supply can increase and how fast demand is increasing. We conclude that the growth of output in the last year was initially driven by supply and that, more recently, domestic demand has been growing very rapidly. The emergence of a current account deficit is evidence of excess domestic demand but from now on we expect demand to grow less rapidly. With non-oil supply expanding at a rate in excess of 3 per cent, we forecast steady output growth and little change in either inflation or the current account. In our judgement, the economy, though hot, is not overheating.

The peacock committee and the BBC: Liberal values versus regulation

Despite the Governments enthusiasm for privatisation, the Peacock Committee did not propose it as a means of financing the BBC. However, it came up with a novel regulatory solution for improving efficiency, but found itself on shakier economic ground when discussing the future of public service broadcasting.

Government Borrowing and Financial Markets

This paper considers two questions related to fiscal and monetary policy in the United Kingdom. The questions are as follows: (i) How do shocks to the economy affect monetary growth? (ii) What effects do changes in the debt/income ratio have on the returns to financial assets? The first question has been studied previously in relation to the LBS model. The second question has become particularly relevant now that attention is being directed to the possible long-run constraints on fiscal policy. We take the opportunity to study ques tion (i) again in response to recent developments of the LBS model. The most significant developments are firstly the incorporation of a detailed model of the financial sector in the LBS model and secondly the ability to incorporate rational expectations into the determination of asset prices in financial markets. In this new financial system, the non-bank private sector (which is subdivided into persons, companies and various financial institutions) makes a portfolio choice among a wide range of financial assets, sub ject to the budget constraint implied by the income and expenditure equations in other parts of the LBS model. The portfolio decision depends on the expected return on each asset and on parameters which represent the perceived risk and non-mone tary benefits from holding each type of asset. The non-bank private sector holds money in the form of cash, sight deposits and time deposits, as well as gilts and foreign currency. It holds liabilities such as bank loans and mortgage loans, which are treated as negative assets and chosen as part of the overall portfolio allocation decision. Equities, which are an asset for persons and long-term institutions and a liability for companies, are also included in the model.

Short-term Models and Long-term Problems

Consider an economy of which the following statements are true: 1. Between 1955 and 1960 the average rate of unemployment was 1.2 per cent. Between 1975 and 1980 it was 5.5 per cent. 2. Between 1955 and 1960 the average annual rate of inflation was 3 per cent. Between 1975 and 1980 it was 16 per cent. 3. In 1960 the ratio of manufacturing output to GDP was 35 per cent. In 1980 it was 25 per cent. 4. In 1960 the ratio of imports to GDP was 25 per cent. In 1980 it was 30 per cent. 5. Between 1955 and 1960 the average annual growth of GDP was 2.6 per cent. Between 1975 and 1980 it was 1.1 per cent.

Economic Viewpoint: The real wage debate

Why is unemployment so high in Britain? Is it because demand is too weak or is it because real wages are too high? Many participants in the debate are trying to insist that it must be one or the other. In practice it is perfectly sensible to believe that both causes are involved, so that a fall in unemployment will require both a rise in demand and a fall in real wages. In this Economic Viewpoint we discuss the economic analysis involved; we investigate some of the relevant evidence and we explore some policy options.