Essay on The Economic Quandary The Uk

Essay on The Economic Quandary The Uk

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Imagine trying to solve a puzzle. You have assembled all of the constituent pieces and they fit together perfectly. But nevertheless, the image looks nothing like what it should do. Oh - and you’ve lost the box to help you.
This in essence describes the crux of the economic quandary the UK finds itself in – one of a “productivity puzzle”. Since the onset of the 2007-08 financial crisis, labour productivity has been remarkably weak, while unemployment has fallen. “Aha!” you say, this is clearly a case of underinvestment. That would seem the logical response. However, data from the UK from 2011 and 2012 suggest that net investment has remained positive. Unless there was some serious scrapping due to depreciation, it appears that the capital stock has been rising, albeit at a reduced rate. So therein lies the puzzle. Although labour productivity has recently started to improve, it is still some 16% behind the level implied by the pre-recession trend and 4% below its pre-crisis peak. So how did this shortfall come about?

Some will inevitably turn to measurement issues. Trend rates have been criticised as being overly optimistic. Granted, yet our labour productivity still lags behind our pre-recession level and has only recently shown a very modest increase despite output growth since 2013. The most promising outcome of measurement critique has been that of intangible assets (such as R&D). R&D is an input into the production process, but its output might not be evident immediately; for this reason, it is currently treated as intermediate consumption and not investment. This understates GDP and therefore productivity. This inaccuracy in data is said to account for 4-5% of the shortfall in productivity, according to the Bank of England...

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...cannot account for the full shortfall in productivity, it is still worth bearing in mind, since simple human explanations tend to be underestimated in macroeconomic methods.
Returning to our initial puzzle, it seems that we now have a clearer picture as to the range of problems given to explain the UK’s predicament. In short, we now have the picture on our box to help us solve the puzzle. However, we still have little evidence to shed light on which of our explanations is the most prominent and relevant. It is hard to think of policy to tackle a problem when we still have little idea of which cause is most significant. We now need to arrange the pieces of our puzzle to fit the picture. Once we establish a correlation between policy and effect, we can pursue this course of action. But it is hard to do so without some blind stabbing in the dark. That is our next step.

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