One of the biggest consequences of the recession has been a rise in unemployment. As the economy fell deeper into recession, unemployment began to soar and some believe that it could reach 3.5 million and remain high for the next decade.
But while many employees have lost their jobs or had they pay frozen, some of the biggest earners have received substantial pay rises! The bosses of the FTSE 100 companies have seen their average pay increase by 10% and have shared pay rises of more than £1 billion in the past year.
So as the economy plunged into recession and companies lost much of their value, we still saw an increase in the pay gap in the UK. The following articles look at the pay situation of some of the top bosses.
10% pay rise for the top bosses This is Money, Ryan Kisiel (14/9/09)
Guardian Executive Pay Survey 2009: Should pay be capped? Guardian (14/9/09)
What they make: The highest paid Chief Executives in Digital Media Guardian (20/3/09)
Executive pay jumps despite recession: Report Associated Press (14/9/09)
Unemployment could reach 3.5m and remain high for a decade, CIPD warns Telegraph, Martin Beckford (14/9/09
Questions
- How are wages determined in the labour market?
- Why do different people receive different wages? What should happen if two people receive different wages for doing the same job?
- What are the different (a) types (b) causes of inequality?
- Would a maximum price work if it was applied to wages?
- Discuss the advantages and disadvantages of different wages. If everyone was paid the same, would everyone be better off?
All nations are interdependent and few have escaped the recent economic turmoil that began with the collapse of the sub-prime mortgage market in America. Businesses have gone under; interest rates have been cut and then cut again; profits have fallen; unemployment has risen and expectations have remained gloomy.
But, what’s the latest? How is the British economy faring and what about the rest of the world? Some sources suggest that we are already in a recovery, whereas others suggest that the current downturn is not yet over. House prices recovered somewhat in July, but various sources suggest that they experienced their biggest fall in August. The following articles look at recent economic developments.
Job cuts at Vauxhall likely as GM agrees sale to Magna Telegraph (10/9/09)
A look at Economic developments around the globe The Associated Press (10/9/09)
BoE holds QE at 175 bln stg, rates at 0.5 pct Reuters (10/9/09)
Kesa’s UK recovery hit by European slowdown Times Online (10/9/09)
Top US banker criticises bonuses BBC News (9/9/09)
Austrian GDP contraction slowed in Q2 Reuters (10/9/09)
Europe and America’s economies to beat UK, OECD says Telegraph (4/9/09)
Britain will be behind rest of world in emerging from recession Times Online (3/9/09)
Bank of England holds rates at 0.5pc and QE at £175 bn The Telegraph (10/9/09)
Questions
- Do you think the evidence suggests that the outlook for the global economy is improving?
- Why will Britain probably take longer to recover from the recession than other major economies?
- What is the theory behind low interest rates helping the economic recovery?
- Which policies have the UK and other governments used to tackle this economic downturn? Would any others have been more successful?
- In what ways and for what reasons are countries economically interdependent?
Whilst some economists predicted the banking crisis of 2007/8 and the subsequent global recession, many did not. Was this a failure of macroeconomics, or at least of certain macroeconomic schools of thought, such as New Classical economics? Or was it a failure to apply the subject with sufficient wisdom? Should the subject be radically rethought, or can it simply be amended to take into account aspects of behavioural economics and a better understanding of systemic risk?
The four linked articles below from The Economist look at the debate and at the whole state of macroeconomics. The other articles pick up some of the issues.
Will the ‘crisis in macroeconomics’ lead to a stronger subject, more able to explain economies in crisis and not just when they are working well? Will a new consensus emerge or will economists remain divided, not only about the correct analysis of how economies work at a macro level, but also about how to tackle crises such as the present recession?
What went wrong with economics The Economist (16/7/09)
The other-worldly philosophers The Economist (16/7/09)
Efficiency and beyond The Economist (16/7/09)
In defence of the dismal science The Economist (6/8/09)
How to rebuild a shamed subject Financial Times (5/8/09)
What is the point of economists? Financial Times – Arena (28/7/09)
Macroeconomic Models Wall Street Pit (23/7/09)
Macroeconomics: Economics is in crisis – it is time for a profound revamp Business Day (27/7/09)
Questions
- Distinguish between ‘freshwater’, ‘saltwater’ and ‘brackish’ macroeconomics.
- Explain why economists differ over the efficacy of fiscal policy in times of recession. To what extent does the debate hinge on the size of the multiplier?
- Why is the potential for macroeconomics higher now than prior to the recession?
- What is meant by the ‘efficient market hypothesis’? How did inefficiencies in financial markets contribute to the banking crisis and recession?
- Should economists predict the future, or should they confine themselves to explaining the present and past?
Preliminary figures for Quarter 2 UK GDP suggest that the UK economy has been declining faster than many had expected. Does this mean that the recession in the UK will be more prolonged, or can we expect a return to growth by the end of the year? How much does the outcome depend on policy decisions taken now and what should be done in terms of quantitative easing and other policy measures?
The answers to these questions depend to some extent on the reliability of the figures, which, after all, are only preliminary estimates. Past estimates have tended to understate the level of output and growth, but could the latest estimates understate the depth of the recession? The following articles look at the figures and their implications for policy. The two articles from The Economist look at the global context.
UK economy continues to contract BBC News (24/7/09)
Recession Britain Guardian (24/7/09)
‘Shocking’ GDP figures raise fears of long road to recovery Herald (25/7/09)
Hopes of early end to recession dashed Independent (25/7/09)
Treasury defiant on growth despite gloom over GDP Times Online (26/7/09)
UK GDP: What the economists say Guardian (24/7/09)
Hamish McRae: The GDP figures were profoundly gloomy … but they were wrong Independent (26/7/09)
The shrinking economy BBC News, Stephanomics (24/7/09)
Here comes August, the cruellest month of all Observer (26/7/09)
Rebalancing global growth: a long way to go Economist (23/7/09)
Unpredictable tides Economist (23/7/09)
Gross domestic product, Preliminary estimate, 2nd quarter 2009 Office for National Statistics, Statistical Bulletin (24/7/09)
Gross domestic product, Preliminary estimate, 4th quarter 2008 Office for National Statistics, Statistical Bulletin (24/7/09)
Questions
- What factors will determine whether the UK economy starts to growth again by the end of 2009?
- Plot the quarterly growth rate of GDP from 2007 Q1. Plot two lines on the same graph: one from the 2008 Q4 estimates and one from the 2009 Q2 estimates (see last two links above). How would you explain the discrepancies between the figures?
- What policy measures would you recommend to the Bank of England and the government in the light of the GDP estimates?
- ’The deeper and longer the recession, the more will potential (as well as actual) output fall.’ Do you agree with this statement? Explain your answer.
- Referring to the two Economist articles, what conditions are necessary for sustained long-term economic growth?
The output gap is defined as ‘the difference between actual and potential output.’ When actual output exceeds potential output, the gap is positive. When actual output is less than potential output, the gap is negative. The size of the output gap traces the course of the business cycle. In the current recession, the output gap is negative in all major economies. The worry in recent months has been that a persistent large negative gap could lead to a downward deflationary spiral. Evidence is emerging, however, that the recession may be bottoming out and the danger of deflation easing. But just how big is the current negative output gap? As the article below from The Economist states, “Estimating how big the output gap is, and how much of a deflationary threat it still poses, is not easy.”
So how is the output gap measured in practice? How do we measure ‘potential output’? The two articles consider this issue of measurement and the relationship between the output gap and the rate of inflation. The last two links are to data sources giving estimates of the output gap. The first is from the European Commission and the second is from the OECD. As you will see, there are differences in their estimates.
Put out: Uncertainty over the size of the output gap complicates the task of central banks The Economist (2/7/09)
How big is the output gap? FRBSF Economic Letter (12/6/09)
See also:
Box 1.3.2 on page 31 and Table 13 on page 140 of European Economy: Economic Forecast, Spring 2009 European Commission, Economic and Financial Affairs (From the above link, click on the little ‘en’ symbol.)
and: Table 10 from OECD Economic Outlook No. 85, June 2009 OECD (From the above link, click on ‘Demand and output’. The first 10 tables then download as an Excel file.)
Questions
- Why is it difficult to measure potential output? (See both The Economist article and Box 1.3.2 from the European Economy: Economic Forecast, Spring 2009.)
- What is meant by the ‘NAIRU’? Why may it have risen during the recession? How would you set about estimating the value of the NAIRU?
- How might you infer the size of the output gap from the behaviour of inflation?
- Plot the output gap for two countries of your choice using data from both the European Economy and the OECD Economic Outlook for the years 2004 to 2010. Discuss the differences between (a) the two plots for each country and (b) the two countries.