Models of the UK Economy and the Real Wage-Employment Debate

Abstract

This article is an example of the type of exercise that is made possible by the existence of the set of UK models at Warwick. Using three quarterly models, those of the London Business School (LBS), the National Institute of Economic and Social Research (NIESR) and Her Majesty's Treasury (HMT), and two annual models, those of the City University Business School (CUBS) and the Liverpool University Research Group in Macroeconomics (LPL), it considers the use, and possible abuse, of such models of the UK economy to illustrate the real wage— employment debate.

In UK models real wages and employment are determined jointly and the article shows that the sign of the association between these two variables depends ore the nature of the shock which causes real wages to change. A common method of analysis is to perturb the endogenous real wage directly and although the results are quantitatively similar to those where the change to real wages results from a supply-side shock to the labour market, it is argued that such exercises are typically without foundation since no mechanism for achieving a direct reduction in real wages is put forward. Any implicit model which underpins the assumption of an exogenous shift in an endogenous variable needs to be stated clearly in order for the plausibility of the 'intervention' and resulting policy analysis to be assessed.