Fiscal Stabilization Policy and Fiscal Institutions

In this paper we analyse counter-cyclical fiscal policy withinthe context of a microfounded analysis of business-cycle stabilization.We show that tax and spending instruments can have a usefulcounter-cyclical role, even after allowing for the distortionarynature of the instruments and the need for debt sustainability.A critical barrier to the use of fiscal instruments may be politicaleconomy concerns, and we survey recent suggestions involvingalternative fiscal policy institutions. Footnotes ¹ E-mail addresses: c.b.leith{at}socsci.gla.ac.uk; s.wren-lewis{at}exeter.ac.uk     

Measuring and Understanding Productivity in UK Market Services

Many productivity studies, if they cover the service sector,commonly enter a caveat that the data are uncertain or justlook at manufacturing. This paper attempts to clarify what UKmarket-service-sector data are available, whether they shouldbe treated as inaccurate, and what conceptual problems mightmake measuring service-sector output so hard. Our overall conclusionis that most problems surround financial intermediation andbusiness services. In financial intermediation, national accountsconventions and adjustments make the output data very hard tointerpret. In business services many of the output measuresare employment based. Elsewhere, for example, retail and wholesaletrade, transport, and hotels and restaurants, the main problemis, in practice, lack of collected deflators. Footnotes ¹ E-mail addresses: g.a.crespi{at}sussex.ac.uk; chiara.criscuolo{at}ons.gsi.gov.uk;j.e.haskel{at}qmul.ac.uk; d.hawkes{at}ioe.ac.uk     

The Macroeconomic Role of Fiscal Policy

This article examines the new consensus that fiscal policy shouldhave no macroeconomic role in ‘flexible inflation targeting’regimes. There is little basis for this presumption. Fiscalpolicy remains important in setting the policy mix and in managingshocks and imbalances. The credibility of an inflation-targetingregime should be enhanced rather than reduced if fiscal policyplays its proper role. It is true, nevertheless, that the costsof focusing fiscal policy narrowly on public-sector concernsmay not be very great, most of the time. However, when interestrates cannot be used, the role of fiscal policy must be different.With interest rates at their lower bound of zero, there is noplausible alternative. For asymmetric shocks and adjustmentsin EMU, fiscal policy needs, ideally, to substitute for theinterest-rate policy reaction function of the consensus, butthe difficulties are very great. We suggest a policy focus onreal exchange rates as a way of resolving some of the dilemmas.There is a serious danger that orthodox views about fiscal policy,drawn from the consensus, will be inappropriately applied, especiallyin Europe. Footnotes ¹ E-mail addresses: christopher.allsopp{at}new.ox.ac.uk; david.vines{at}economics.oxford.ac.uk     

From Skills Revolution to Productivity Miracle--Not as easy as it Sounds?

This article surveys the potential impact of skill on productivity.It opens with a review of the utility of productivity as a measureof systemic economic performance, and then goes on to explorethe oft-assumed close and strong relationship between skillsand productivity. The importance of other factors and typesof investment is stressed. These complementary elements maybe at least as important as skill in boosting performance, andtheir absence may negate the impact of public investment ineducation and training. The ability of economic developmentpolicy, particularly as it relates to the Regional DevelopmentAgencies, to address skills and economic development is assessed,and questions are raised about what type and level of skillmight have the largest impact on economic performance. In conclusion,we discuss the demands that new policy approaches are makingupon the machinery and personnel of government. Footnotes ¹ E-mail addresses: keepej{at}cardiff.ac.uk; ken.mayhew{at}pmb.ox.ac.uk;paynej3{at}cardiff.ac.uk     

Why is Productivity so Dispersed?

Many papers have documented wide variations in productivityeven in narrowly defined industries. Some have argued that thisprimarily reflects measurement problems due, for example, tocomparing across different products. Others argue that thisreflects persistent differences in performance due, for example,to management. This paper looks at productivity differencesnot within an industry but within a firm. We use data on productivityof different branches within lines of business of a major UK-basedwholesaler. Using these productivity data for comparisons is,we argue, more likely to compare like with like than comparingbetween firms. We document sustained differences in productivityeven between branches within the same line of business. We alsodiscuss the extent to which they are correlated with differencesin management and find that such differences ‘account’for around 40 per cent of the difference in productivity. Footnotes ¹ E-mail addresses: r.griffith{at}ifs.org.uk; j.e.haskel{at}qmul.ac.uk;a.neely{at}cranfield.ac.uk     

The Economics of Pensions

This paper sets out the economic analytics of pensions. Afterintroductory discussion, successive sections consider the effectsof different pension arrangements on labour markets, on nationalsavings and growth, and on the distribution of burdens and benefits.These areas are controversial and politically highly salient.While we are open about expressing our own views, the main purposeof the paper is to set out the analytical process by which wereach them, to enable readers to form their own conclusions. Footnotes ¹ E-mail addresses: n.barr{at}lse.ac.uk; pdiamond{at}mit.edu     

Innovation and Productivity Across Four European Countries

This paper compares the role innovation plays in productivityacross four European countries, France, Germany, Spain, andthe UK, using firm-level data from the internationally harmonizedCommunity Innovation Surveys (CIS3). Despite a considerablenumber of national firm-level studies analysing this relationship,cross-country comparisons using micro data are still rare. Weapply a structural model that describes the link between R&Dexpenditure, innovation output, and productivity (CDM model).Our econometric results suggest that overall the systems drivinginnovation and productivity are remarkably similar across thesefour countries, although we also find interesting differences,particularly in the variation in productivity that is associatedwith more or less innovative activities. Footnotes ¹ E-mail addresses: rgriffith{at}ifs.org.uk; ehuergo{at}ccee.ucm.es;jacques.mairesse{at}ensae.fr; b.peters{at}zew.de     

Prudence or Profligacy: Deficits, Debt, and Fiscal Consolidation

Over the last quarter century, public finances have been underpressure in most OECD countries as deficits and debts rose underthe pressure of relatively slow growth and high interest rates.This, in turn, has affected the welfare state, since effortsat containing deficits have often been concentrated on publicexpenditure. Much of the literature argues that this is desirable,since curbing deficits via tax increases seldom succeeds. Amedium-term survey of OECD country experience suggests a lessclear-cut conclusion. In a number of countries which were ableto curb debt/GDP ratios, the bulk of the adjustment did, indeed,come from spending cuts (but was, also, in some cases helpedby rapid growth and/or currency depreciation). In several, however,tax increases also appear to have succeeded in reducing deficitsand debt. Footnotes ¹ E-mail addresses: andrea.boltho{at}magd.ox.ac.uk; andrew.glyn{at}economics.oxford.ac.uk     

Improving Productivity--Opening the Black Box

Hourly productivity levels in the UK still remain behind thosein some competitor countries. The government devotes much policyattention to enhancing productivity and continues to emphasiseits five drivers—investment, innovation, skills, enterprise,and competition. This article argues that it is investment broadlydefined that is the key to sustained productivity improvement.The emphasis should be on improving productivity simultaneouslywith improving the quality of production. Only thus will thegains be widely shared. In achieving these aims there are twoprerequisites for policy-makers. The first is to ensure bettercoordination of policy than appears to be currently achievedby the present departmental structures in Whitehall. The secondis to recognize fully the long and complex chain of causationthat can be triggered by pulling on one policy lever. Such complexitycan only be fully understood by more research on what actuallygoes on inside the black box of the organization. Footnotes ¹ E-mail addresses: ken.mayhew{at}ox.ac.uk; a.neely{at}cranfield.ac.uk     

Welfare States in Hard Times

Welfare states have been subject to a host of conflicting pressuresfrom high unemployment, rising income inequality, populationaging, tax competition, rising budget deficits and debts, slowgrowth, and fears that economic dynamism was being stifled byexcessive taxes and benefit levels. Nevertheless total spendingon welfare has edged up in many countries and cuts in ratesof benefit have generally been fairly modest. The generosityof the welfare state has an enormous influence on poverty andincome inequality and still appears to be popular in most ofEurope. Suggestions that society would benefit from reducedworking time must reckon with the fact that it is paid workwhich generates the tax revenue required to fund welfare spending. Footnotes ¹ E-mail addresses: donatella.gatti{at}cepremap.cnrs.fr; andrew.glyn{at}economics.oxford.ac.uk     

Retirement in the UK

In common with other OECD countries, the UK experienced morethan two decades of declining labour-market activity among oldermen from the 1970s to the early 1990s, a trend that has onlyrecently shown signs of being reversed. Retirement decisionsare heavily shaped by institutional context and in the UK thishas led to there being two distinct groups with very different‘retirement’ experiences. At the top of the wealthdistribution, early retirement has typically been influencedby private, occupational pensions; at the bottom of the wealthdistribution individuals are even more likely to be not workingin their 50s, but do not typically define themselves as retired,and draw on income support, or more usually, disability benefits.Policy-makers keen to increase effective retirement ages willneed to consider the very different circumstances of these twogroups. Footnotes ¹ E-mail addresses: j.banks{at}ifs.org.uk; sarah.smith{at}bristol.ac.uk     

Fiscal Policy in Emu: Towards a Sustainability and Growth Pact?

This paper takes stock of the academic and policy discussionson the fiscal institutions of EMU, confronts the framework inplace with what is known of the desirable properties of fiscalpolicy in a monetary union, and discusses possible improvements.We start with a discussion of three requirements for the fiscalframework of a monetary union: it should be conducive to publicfinance sustainability, leave room for stabilization at thenational level, and encourage structural reform. We then examinehow the Stability and Growth Pact (SGP) measures up to theserequirements and find that it has mostly failed on all threeaccounts. Whether the 2005 reform of the SGP fixes those deficienciesremains an open issue. To this end, we propose five buildingblocks towards an effective SGP: a better concept of sustainability;harmonized general government balance sheets; appropriate targets;refined procedures; and better institutions. Footnotes ¹ E-mail addresses: benoit.coeure{at}free.fr; jpf{at}bruegel.org     

Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences

The fiscal theory of the price level (FTPL) has attracted muchattention but disagreement remains concerning its defining characteristics.Some writers have emphasized implications regarding interest-ratepegging and determinacy of rational expectations solutions,whereas others have stressed its capacity to generate equilibriain which price-level trajectories mimic those of bonds and differdrastically from those of money supplies. We argue that theFTPL attained prominence precisely because it appeared to providea theory whose implications differ greatly from conventionalmonetary analysis; accordingly we review monetarist writingsto identify the primary distinctions. In addition, we reviewrecent findings concerning learnability—and thereforeplausibility—of competing rational expectations equilibria.These indicate that when FTPL and monetarist equilibria differ,the latter are more plausible in the vast majority of cases.Under Ricardian assumptions, necessary for clear distinctions,theoretical analysis indicates that fiscal and monetary coordinationis not necessary for macroeconomic stability. Footnotes ¹ E-mail addresses: bmccallum{at}cmu.edu; edward.nelson{at}stls.frb.org     

Rethinking Fiscal Policy

The use of fiscal policy as a stabilization device has all butvanished, more or less explicitly in Europe and de facto inthe United States. The practical consequences have not beenentirely satisfactory, in either place. So it is important andtimely that the Oxford Review is devoting a special issue tothe macroeconomics of fiscal policy. In this paper I want todiscuss two underlying questions about the eclipse of fiscalpolicy. Why did this happen and was it a good idea? And if itwas not a good idea, then what follows? Footnotes ¹ E-mail address: jamu{at}mit.edu     

The Assessment: Gender and the Life Cycle

This assessment is an introduction to the Oxford Review of EconomicPolicy's issue on gender and the life cycle. It sets the stageby providing background information on various dimensions ofgender differences, pointing out differences across countriesas well as over time, and relates this evidence to the papersthat follow. It further briefly reviews the articles in theissue and puts them into context. Footnotes ¹ E-mail address: c.dustmann{at}ucl.ac.uk     

Gender and Ethnicity--Married Immigrants in Britain

In this paper we investigate the economic activity of marriedor cohabiting female immigrants in Britain. We distinguish betweentwo immigrant groups: foreign-born females who belong to anethnic-minority group and their husbands, and foreign-born whitefemales and their husbands. We compare these to native-bornwhite women and their husbands. Our analysis deviates from theusual mean analysis and investigates employment, hours workedand earnings for males and females, as well as their combinedfamily earnings, along the distribution of husbands' economicpotential. We analyse the extent to which economic disadvantagemay be reinforced at the household level and investigate theextent to which it can be explained by differences in observablecharacteristics. We find that white female immigrants and theirhusbands have an overall advantage in earnings over white nativeborn, both individually and at the household level. Minorityimmigrants do less well, in particular at the lower end of thehusbands' economic potential distribution. This is mainly dueto the low employment of both genders, which leads to a disadvantagein earnings, intensified at the household level. Only part ofthis differential can be explained by observable characteristics. Footnotes ¹ E-mail addresses: c.dustmann{at}ucl.ac.uk; francesca.fabbri{at}lrz.uni-muenchen.de     

Human Resource Management Policies and Productivity: New Evidence from An Econometric Case Study

First we distinguish various approaches used by economists toassess the impact of human resource management practices onproductivity and then we briefly review and illustrate studiesthat represent different approaches. In the main part of thepaper we illustrate the econometric case study method, by usingnew data to analyse a case from retail trade and by emulatingan approach used in an earlier study. Consistent with theorywe find that when employees have opportunities to participate,and to receive appropriate information and pertinent rewards,a one standard deviation increase of the first principal componentscore would increase productivity by 1 per cent. Our findingsimply that there are benefits to innovative work practices,even in settings where employees do simple tasks and employeesare relatively low-skilled. Since our findings are similar tothose contained in a previous study, our results also indicatethe value of replication studies. Footnotes ¹ E-mail addresses: djones{at}hamilton.edu; panu.kalmi{at}hse.fi; antti.kauhanen{at}hse.fi     

Gender and Student Achievement in English Schools

The widening gap between the average educational achievementof boys and girls has been the subject of much discussion. Thisgap is especially controversial for students taking nationalexams at the end of their compulsory education. However, thegender gap is also apparent at earlier and at later stages ofeducation. In this paper, we analyse changes over time in thegender achievement gap at the different stages of compulsoryeducation in English schools. We first use a combination ofdata sources to paint a picture of how gender gaps have evolvedover time and in what context they are most marked. Then weconsider possible explanations for the observed gender gaps.We look at the relevance of school inputs, teaching practice,and the examination system for explaining the gender gap. Wealso discuss the potential influence of wider social and economicchanges as reflected, for example, in the much higher educationlevels of mothers relative to those of previous generations.Analysis of this issue is important in the context of researchon the gender wage gap. However, it is also raises policy-relevantissues in relation to whether changes in the school system caneffect a change in the gender gap in educational achievement. Footnotes ¹ E-mail addresses: s.machin{at}ucl.ac.uk, s.mcnally1{at}lse.ac.uk     

Welfare-State Retrenchment: The Partisan Effect Revisited

This paper aims to shed light on the role of the ‘ideology’of political parties in shaping the evolution of the welfarestate in 18 developed democracies, by providing empirical findingson the determinants of social-programme entitlements and socialspending over the period 1981–99. The paper shows thatstructural change is a major determinant of the extent of socialprotection. Our results suggest that overall spending is drivenup by structural change. On the other hand, strong structuralchange has a negative influence on welfare entitlements measuredby the net rate of sickness insurance. Partisan influence playsan important role in the dynamics of the welfare state. Left-winggovernments strengthen the positive effect of shocks on aggregatesocial expenditure, while right-wing governments undertake evenstronger cutbacks in replacement rates as a reaction to structuralchange. Footnotes ¹ E-mail addresses: bruno.amable{at}ens.fr; donatella.gatti{at}cepremap.cnrs.fr;jan.schumacher{at}wiwi.uni-regensburg.de