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The pre-1979 UK economy suffered from supply-side failures which neither market forces nor government policy could eradicate, Nicholas Crafts told a lunchtime meeting on 12 December. While the Conservative governments of the 1980s have achieved substantial gains in reforming the supply side earlier failings persist, notably in training and R&D, while changes in labour market behaviour may prove to be fragile. Crafts is Co-Director of CEPR's research programme in Human Resources since 1900. Financial assistance for his talk, based on research reported in Discussion Paper No. 292, was provided by the Economic and Social Research Council, as part of its support for the Centre's dissemination programme.The years between 1945 and 1979 saw much slower economic growth in the UK than in other countries, resulting in much lower levels of output per person. During the 1980s this relative economic decline has ceased; the UK has significantly reduced the productivity gap; and profitability has returned to its 1960s levels, though the UK's improvement relative to other European countries is to a large extent the result of their slowdown. Crafts described how changes in output and productivity can be analysed using `growth accounting', a technique that decomposes the rate of growth into contributions from the inputs of capital and labour and those from growth of `total factor productivity' (TFP). If changes in the quality of capital and labour are measured accurately, TFP growth will reflect improvements in technology and the elimination of inefficiencies in the use of resources. Applying the TFP technique to compare UK growth between 1950 and 1973 with that in France, Germany and Japan reveals that slower TFP growth accounted for 52, 75 and 29% respectively of the gap in growth rates, and capital accumulation for 31, 7 and 31%. Britain's competitors, especially Japan, had more scope to increase productivity after the War by reallocating resources away from agriculture and catching up with US technology. It was often argued in the 1970s that Britain's growth problems were rooted in `macro-structural' aspects of the economy, but evidence now available, according to Crafts, suggests that such explanations are invalid. It was asserted, for example, that Britain exported goods for which the income elasticity of demand was low, so as world incomes rose UK exports failed to keep pace; but it now appears that the income elasticity of demand for British exports was not unusually low. Following Verdoorn's Law, which suggests a positive long-run relationship between the growth rates of manufacturing employment and of manufacturing productivity, Kaldor maintained that Britain's early industrialization exhausted the economy's ability to expand manufacturing employment any further. Recent time-series estimates have, however, rejected Verdoorn's Law in the case of Britain. Bacon and Eltis suggested that the rapid growth of the public sector crowded out investment and growth, but data presented by Crafts showed that the growth of the non-marketed sector in Britain has come at the expense of marketed sector consumption, rather than investment. Having rejected the `macro-structural' explanations, research suggests that the chief obstacles to faster growth appear to have been supply-side failures such as inappropriate plant size, problems with the structure and conduct of industrial relations (which led to inflexible working arrangements and over- staffing), inadequate education and training, and a shortfall of research and development. To a significant extent the failure of market forces or government policy to remedy these shortcomings, which were well documented at the time, seems to have lain in the realm of political economy. In particular the commitment to full employment and to cooperative strategies with the trade unions precluded effective action on many of these fronts. It was always likely, Crafts argued, that if a window of political opportunity arose Britain could, through faster growth, catch up with productivity levels abroad. The Conservative governments of the 1980s have achieved some substantial gains on the supply side, notably through weaker trade unions, tighter controls in nationalized/privatized industries, large reductions in over-staffing and a new flexibility in working arrangements. Surveys of working arrangements and industrial relations in the 1980s have confirmed a very considerable increase in flexibility and success in eliminating restrictive practices. Other earlier failings seem to persist. There has been little progress in reducing the UK's training lag, and there is widespread concern about continuing decline in its R&D position. These features, Crafts concluded, suggested that Britain has not yet transformed itself into an economy which was capable of rapid growth in the long term. Moreover, there is an element of fragility about some recent gains. The industrial relations research indicates that fear of unemployment accounts for a good part of the productivity gains from better working practices, which have changed the conduct of wage bargaining. Most of the structure of the old industrial relations system is little changed, however, and it remains to be seen whether changes in labour market behaviour will survive tighter labour markets, renewed inflationary shocks or a change of government. Responding to questions, Crafts agreed that industry should have much to gain from increased training. But that did not mean industry would want to bear the costs, and the conflict of social and private benefit caused problems in ensuring that training focused on transferable skills. Inadequate data on the service sector had restricted Crafts's analysis to manufacturing, but it is known that Britain's productivity lag was less severe in the tertiary sector up to 1979 than in manufacturing. Evidence from the 1950s and 1960s suggested that industrial mergers and changes of management contributed virtually nothing to productivity increases. |