Will a tight labour market lead to companies investing more?
The theory goes that a scarcity of workers might help solve Britain’s productivity problem as businesses are forced to replace cheap labour with machines, helping Britain to move away from a low wage and low productivity economy.
Those in favour of the argument have pointed to the work of the economic historian Robert C Allen who argued that the industrial revolution began in Britain because of its relatively high wages compared with the rest of Europe and Asia, as well as the relative cheapness of machines and easy access to abundant coal. The expense of hiring workers meant it was worthwhile to invest in labour-saving devices, he argued, raising productivity.
Now a number of new research papers are challenging this theory. Judy Stephenson, an economist at the University of Oxford, has questioned the data on construction workers’ wages while a paper by Jane Humphries and Benjamin Schneider in the Economic History Review finds that the wages of workers in Britain’s spinning industry — especially women and children — were generally pretty low before the introduction of the spinning jenny.
The economic historians are still debating the research, and it is not clear how much we can apply the lessons of the 18th century to the modern UK economy but so far there’s little evidence of labour shortages leading to more capital spending in modern Britain: wages are only rising modestly and business investment looks pretty sluggish.
There are other lessons you can learn from the industrial revolution too. In a speech last week Andy Haldane, chief economist of the Bank of England, threw his lot in with Joel Mokyr, an American historian who argues that the industrial revolution was caused by a “culture of growth” that emerged in Europe by the 18th century. New ideas for labour-saving technology grew from this fertile bed of scientific enquiry.
Mr Haldane argued, however, that good ideas were not enough. As well as ideas you needed institutions that helped disseminate know-how to tinkerers and entrepreneurs — some question whether France was ahead of the UK in terms of engineering on the eve of Britain’s industrial revolution. For this reason Mr Haldane said universities needed to reconfigure themselves for a fourth industrial revolution and get better at spreading ideas.
This week’s calendar
9.30: Public sector finances (May)
The government kicked off the year by borrowing the lowest amount in April for a decade. Attention will be on the tax receipts on Thursday, both for what they tell us about the general health of the economy as well as public borrowing.
Tax receipts were marginally below the Office for Budget Responsibility’s 3.6 per cent forecast for full-year growth in April but the fiscal watchdog warned that they were mostly just predictions at this stage.
12.00: Bank of England meeting
Last week’s data were mostly lower than expected. Manufacturing output contracted sharply, wage growth slowed and higher petrol prices failed to lift inflation, the one exception was retail sales data, which were helped by the royal wedding and sunshine to post a much higher than expected increase.
This mixed bag of data are likely to reinforce the Monetary Policy Committee’s belief that they need to wait and see before raising interest rates. Instead the focus will mostly be on the language used and what hints the central bank drops about the timing of any rate increase.
Evening: Mansion House dinner
Philip Hammond, the chancellor, and Mark Carney, governor of the Bank of England, will both be giving their annual speeches to City grandees about the state of the British economy at the annual Mansion House dinner.
Last year’s event was cancelled after the Grenfell Tower disaster. The chancellor concluded it would be insensitive for bankers, fund managers and policymakers to host a black-tie dinner so soon after the fire.
Last week’s highlights
RPI bye bye? Britain’s top statistics regulator on Tuesday told the House of Lords Economic Affairs Committee that he would abolish the Retail Price Index if he had the power. Jonathan Athow, director-general at the ONS for economic statistics, compared short-term fixes to putting new wheels on a broken down car.
NHS cash boost The National Health Service will receive an additional £20bn in funding by 2023-24 but experts are not happy, seeing it as a missed opportunity to find a new settlement on how to fund healthcare. Claims the funding will come from a ‘Brexit dividend’ have also been attacked by economists.
Tightening time The US Federal Reserve increased interest rates and projected four more rises in 2018 at its meeting on Wednesday while the European Central Bank the next day set an end date for its bond-buying programme. Investors withdrew from bond funds in response.
Tariff-ic On Friday, China and the US took another step closer to launching a trade war as the US unveiled tariffs on $50bn on imports with China promising retaliation in kind.