This chapter is in two parts. The first part contains discussion of the current situation and a short-term forecast to end-1986. The second part looks at the medium term. It begins with an analysis of probable trends in public expenditure over the next five years. The NIESR econometric model is then used to analyse medium-term prospects for the home economy. The medium-term outlook for the rest of the world is discussed in chapter II.

In Western Europe GDP appears to have fallen in the second quarter, mainly because of the strikes in West Germany and the UK. Growth in North America and to a lesser extent in Japan was slowing down but still fast enough to keep the total output of the OECD area on its upward course. For the first half of the year this was probably about 2½ per cent up on the second half of 1983 and 5 per cent up on the first half.

The recovery of industrial activity in the UK from its trough in 1981 stopped early this year. The rise, as recorded by the index of production industries, was considerable: about 8 per cent from the first quarter of 1981—its lowest point—to the first quarter of this year. It was then followed by a fall of almost 2½ per cent to the second quarter and a further marginal decline in the summer. At present there is little indication of any immediate major recovery, though according to our forecast output of the production industries is likely to turn up next year.

The rapid fall in unemployment in the United States since 1982 has been in sharp contrast to constant or rising rates of unemployment in Britain and other European countries. Is this contrast attributable to a greater ‘flexibility’ of labour markets in America? Are there important differences in the structure of employment or unemployment? Does the greater scope in the United States for regional variation in wages and employment opportunities help adjustment? The debate over these questions may continue for some time. In this note we look at some of the evidence and sketch in the historical background.

In 1972, this Review contained an international comparison of industrial labour costs; that first report covered a ten year period to 1970. A second similar article in 1976 brought this more up to date to 1974. Meanwhile, users of this kind of information have become better served by the development of national and international statistics in this are. Nevertheless, there appears to be interest in the approach of our two previous reports because they presented wage and labour cost data in greater detail than generally available—that is, by industry—and in actual figures that are comparable across countries, instead of national indices. We are therefore repeating the exercise for the period 1971-1981 supplemented by provisional estimates for 1983.

The comparison of events in Britain with the experience of other major industrial countries can make an important contribution to debate about policy alternatives. Within Western Europe such comparisons are especially apt since a number of countries of similar size, at broadly the same level of economic development, face many of the same problems and opportunities. The main purpose of the study reported here is to draw lessons for Britain from the experience of France, and to see to what extent the lessons one might be tempted to draw are the right ones bearing in mind the differences between the two countries as well as their similarities.

Britain, like any other open economy, is linked through exports and imports to the movements of prices and production in the world at large. But the emergence of the City of London as a major international financial centre forged an extra link between the fortunes of the British and world economies, which was still very strong in the inter-war period. It is appropriate, therefore, to preface this account of the economic recovery in Britain after the Depression with a brief reminder of the circumstances prevailing in the world economy at that time.

There was a wide measure of agreement that unemployment in Britain during the 1920s was aggravated by lack of international competitiveness. This was the basic issue underlying the debate over the return to the gold standard. The experience of the restored gold standard did much to confirm the arguments of those like Keynes who had claimed that sterling was overvalued at $4.86. This view of the problems of adjustment to an overvalued exchange rate has been endorsed by both Johnson (1975) and Friedman and Schwartz (1963). A major element in competitiveness was the level of real wages. Britain's difficulties in the inter-war period were made more acute by the increase in the cost of labour between 1913 and 1924. This reflected the sharp rise in wages in the First World War and the post-war boom of 1919-20, which was only partly corrected in the recession of 1921-2. The reduction in working hours in 1919, when normal weekly hours were reduced from 53 hours to 47, also raised the cost of employing labour. As a result hourly real wages in 1924 were 28 per cent higher than in 1913 and real wages measured in terms of own product were increased by 20 per cent, while output per head had risen by only 5 per cent over the same period. The increased cost of employing labour was particularly noted and emphasised by Clay (1929).

Ever since its beginning, the Review has devoted attention to the development of commodity prices in world markets. In both our statistics (at present in table 26 of the Statistical Appendix) and our forecasts in the World Economy section we have been focusing on price indices reflecting the importance of major commodities in the exports of primary producing countries.