Thursday, 11 March 2010

questions for the UK

The Raven has spent some time over the last few days going over the specifics of UK recessions and recent economic figures and it strikes him that there are some questions he doesn't really have the answers to:

1) Why is unemployment so low?

He mentioned a few days ago that according to Okun's "law" (ie that unemployment is approx. proportional to change in GDP) that UK unemployment should be a lot higher. Looking at the last two recessions in the UK as calibration points we'd expect to see unemployment at more like 14%, which is vastly different from 8%, even with government massaging, that's a big difference!

2) Why given that unemployment is so low relatively, is UK labour so uncompetitive?

Looking at the trade data that came out on Tuesday; it shows that the UK's deficit in the trade of goods being way higher than expected, and on an increasingly negative trend, and running a deficit with every EU country apart from Ireland.

The UK does export a lot of services which tend to be high margin, high skill and specialization. Its hard to export much in terms of minimum wage services. So the question really is why are UK workers so uncompetitive at producing goods?

Although minimum wages are only a small part of the benefit/cost of working its illustrative to see that in France the minimum wage is €8.82 /h, whereas in the UK its £5.80 /h or €6.44 at current exchange rates, 36% lower. The Raven is going to dig around and work out a rough cost of employing a minimum wage worker to see whether Gordon Brown's NI taxes etc make that cost a lot higher in the UK.

The Raven has a few ideas as to what lies behind these two questions; the central thesis being that the UK has a larger service sector than it did in the early 90s and so there has been greater flexibility in the labour market (perhaps reflected in fewer hours worked and lower wages) but also that UK businesses haven't been caught in a viscous inventory cycle. That would agree with the lower number of business liquidations in this recession. Also that monetary policy has been far more responsive, which have really meant households haven't faced anywhere near the same level of repossessions (again a trend that we've seen), it also ties into why consumer spending has turned so bullish in the UK.

These questions struck the Raven as he's been shorting 10yr gilts, because he knows he'll get spanked if the BoE introduce another round of QE. As always its better to be playing defence and trying to work out why and how you'll get killed than looking to throw hail mary passes.

The Raven is short at 114.45.

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