British Economy L2: UK Business Cycle and Demand for Labour
- Created by: issyh
- Created on: 29-12-20 14:30
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- UK Business Cycle and Demand for Labour
- business cycle
- describes the variation of economic activity around the path of trend growth
- recession
- a period of negative economic growth for two consecutive quarters of more
- amplitude
- the % change in real GDP from peak to trough (recession) or trough to peak (expansion)
- impulse - propagation mechanism
- may be used to explain what causes actual output to deviate from the trend output
- impulses = the source of shocks hitting the economy
- propagation mechanisms = the channels through which the shocks affect economic outcomes
- Slutsky and Frisch suggested that economies are constantly subject to random shocks / impulses which constantly buffet the economy
- 1) shocks change the D/S conditions in the economy
- 2) once disturbed, the economy begins a deterministic adjustment until next shock occurs
- 3) I-P M transforms these random impulses into irregular cyclical oscillations
- 4) response to individual shocks are reduced, old oscillations are constantly being supplemented by new ones corresponding to more recent shocks
- 5) economy is regularly buffeted by endless series of shocks, and never really settles down to stationary state
- may be used to explain what causes actual output to deviate from the trend output
- British Economy is difficult
- data measurement issues: GDP is measured with an error
- key policy variables and shocks are unobserved: observe GDP but with a lag
- economy is highly complicated environment - implying the transmission of the shock isn't fully understood
- UK is small open economy and variables such as exchange rate and world demand- beyond influence of domestic authorities
- demand for labour
- labour: derived demand - stemming from the demand for the products that the labour produces
- exogenous shock: falling D for product - fall D for labour (fired or reduced hours)
- 'productivity puzzle'
- employment exceeded the pre-recession peak well before GDP did so, but this implies a fall in labour productivity since labour employed were not producing as much output as before
- perhaps due to falling real wages allowing businesses to hold onto (unproductive?) labour
- employment exceeded the pre-recession peak well before GDP did so, but this implies a fall in labour productivity since labour employed were not producing as much output as before
- reasons for poor UK productivity pose recession
- ONS reasoning
- low levels of business investment
- higher number of people working beyond normal retirement age
- impact of financial crisis on banks willing to lend
- fall in productive potential in North Sea oil/gas
- BoE reasoning
- firms unwilling or unable to layoff workers - 'hoarding labour'
- business cycle 2016 - in expansion phase but productivity was an inssue and wage growth was modest
- ONS reasoning
- predicting and forecasting
- composite leading indicator (CLI's) - a set of component series selected from a wide range of key short-term economic indicators
- turning point occurs in a series when the deviation from trend series reached a local max/min
- growth cycle peaks (end of expansion) occur when activity is furthest above trend level
- growth cycle troughs (end of recession) occur when activity is furthest below trend level
- business cycle
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