The United Kingdom:
I. Relative Economic
Decline - U.K. was the economic/military superpower
of the nineteenth century. It was the first country to
have an Industrial Revolution and it built an empire that, by
1900, controlled over one-fifth of the world's land surface
and ruled one-quarter of the world's population. In the
mic-19th century, Britain produced half the world's coal and
iron, half the world's cotton goods, and almost half its
steel, and it dominated international trade. The international
monetary system was centered on the gold standard and the
pound sterling. Now, none of that is still true, and more than
20 countries have higher per-capita GDPs and higher HDIs. The
UK didn't decline absolutely, but relative to the growth of
However, the relative decline may have ended. British economic
performance during 2000-2015 better than the average for the
Euro area or other OECD economies (but, of course, the global
market share of the US, UK, and other OECD countries is
declining relative to China, India, and other emerging
II. Possible Reasons for
A. Disadvantages of a head
start - After Industrial Revolution, Britain
saddled with an outdated capital stock.
B. Policy of laissez faire - In 19th C.,
U.S. and others protected key industries and pursued
C. Foreign policy -
Domestic policy goals sometimes sacrificed for foreign
policy. Empire required heavy military spending (habits
die hard) and reduced competitive pressure. Loss of empire had
D. Stop-go fiscal policy
- Alternating unemployment and balance of payments crises.
Hansen found the British government was the only one that
destabilized the domestic economy.
E. High marginal tax
rates - Before Thatcher (in 1976), had 41% avg.
rate (32% in U.S. and 21% in Japan).
F. Sociological problems-
Entrepreneurial spirit dwindled with successive
generations. Labor productivity was stifled by the trade
union establishment. The educational system served upper
classes and de-emphasized natural science, engineering, and
business. Again, the UK has made great progress in those areas
in recent years.
III. The Labor Market and Labor Relations
A. Labor Unions
1. Cover about 24% of the labor force in 2016,
down from a peak of 52% in 1980. That's much larger than the
10% share in the U.S. and much smaller than 67% in Sweden.
2. Traditionally, strong political role through
the Labor Party.
3. A strong democratic socialist tradition.
4. All major unions are members of the Trades
5. Antiquated union structure. Not organized
by industry; labor negotiations are complicated.
B. Labor Legislation and Union
1. Before 19th century,
Britain maintained strict regulations against union
2. After 1825,
the unions were given more rights and membership grew
rapidly. The inflation rate, unemployment rate, and
growth of money wages influenced union growth.
administration caused reduction in union
membership. Tight monetary policy decreased inflation
and increased unemployment; both discourage unionism.
New legislation required secret ballot elections to approve
closed shops or to approve union action, removal of legal
immunity of union leaders, and reelection of executive
committees every five years.
4. Trade Union Reform
and Employment Bill of 1993 gave workers more
freedom of choice in membership, tightened controls on
elections before strikes, abolished wage councils
(institutions that administered the minimum wage), and gave
women 14 weeks maternity leave and protection from dismissal.
5. Tony Blair, who became Labor PM in 1997,
praised Thatcher “modernization,” but supported return of the
This was initially controversial, but now the minimum wage
system is supported by the Conservatives and all of the
major parties. Next
month (April 2022) the wage will be adjusted to £9.50
($12.54) for adults aged 25 and over, £9.18 ($12.12) for ages
21-24, £6.83 ($9.02) for ages 18-20, and £4.81 ($6.34) for
ages under 18 and apprentices, and these have been changed
every year. The U.S. federal minimum wage is $7.25 for covered
non-exempt employees, and has been unchanged since 2009
states have set minimum wages as high as $15/hour).
IV. Financial Sector - London has
been the world's most important center for international
lending, insurance, shipping contracts, and trading of gold
bullion, Eurocurrencies, and Eurobonds, and has the third
largest stock market. Bank of England independence was
granted by Labour (opposed by Tories) in 1997.
There's considerable concern that Brexit will damage the UK's
position as a financial center. According to our assigned
reading by Perri, "The financial sector will be the most
damaged in the case of Hard Brexit because it is easy to leave
for financial institutions, insurances, banks, and
multinationals that are operating in London (until now) to
take advantage of the low taxation rate." Between the 2016
Brexit vote and the end of 2021, EY
reports that 44% (97 out of 222) of British financial
services firms had moved or planned to move operations and/or
staff to the EU. Dublin, Luxembourg, and Paris were the most
popular destinations. Also since the Referendum, 24 financial
services firms declared they will transfer just over £1.3trn
of UK assets to the EU. More recently, the Bank
of England reported that 7,500 jobs have been lost in
the financial sector and the fallout may continue for several
V. Governmental Sector
A. Before World War II, government played small economic
role. During the war, Beveridge Committee recommended
welfare state. The Attlee government established
National Health Service and nationalized Bank of England,
steel, public utilities, and transport. Some programs
terminated by Thatcher, but some remain, such as the National
Health Service and allowances for children.
B. The Nationalized Industries
1. Reasons for
nationalization: ideology, national security,
maintain employment, regulate natural monopolies, provide for
external benefits in industries such as health care
2. Problems - Many
of the nationalized industries failed to turn a profit and
required subsidies. However, they were often
nationalized to pursue goals other than profit maximization.
3. Privatization - Beginning
with Thatcher, several industries sold to stockholders.
Some have become profitable. Raised revenue for budget
and created new group of stockholders. Intended to improve
efficiency, reduce costs, and strengthen competitiveness.
Weakened the position of trade unions, because industries were
removed from politics. Critics say that the government sold
the assets too cheaply, that profits are excessive, and that
firms should not be allowed to exercise monopoly power.
Started a revolution of privatizations all over the world.
C. Redistribution of Income and
Wealth - The British tax system is relatively
progressive, and social welfare programs have been accompanied
by a decline in inequality of income and wealth since World
War II. However, the distribution of income after taxes and
transfers is barely more equal than our in the U.S. and is far
more unequal than most of Western Europe..
- Created in 1948, the NHS is the oldest and largest
single-payer health care system in the world. Doctors paid on
capitation basis. Patient and doctor choice.
Recent reforms are designed to separate public funding from
public control; allow doctors to handle own budgets and
contract with hospitals. In a 2016
survey, the NHS was at the top of the list of "things
that make us proud to be British (50%), ahead of "our history"
(43%) and the Royal Family (31%).
Now that it is happening, what will be its significance? Time
will tell, but here are some of the early indications:
According to a recent
report from the UK government, imports of goods
from the EU were down 18% in the
fourth quarter of 2021, compared to 2019
levels, and exports to the EU were down 9%.
Potentially, trade in services may be a bigger problem
than trade in goods, because they are not covered by the
so-called "trade and co-operation agreement" (TCA), and they
represent the faster-growing part of British exports. The
impact on financial services was already noted above - 44% of
British financial services firms had moved or planned to move
operations and/or staff to the EU. According to The Economist,
"Musicians, actors, fashion designers and professional-service
firms are griping about expensive red tape and travel
scandal involves P&O Ferries, a British company that
operates ferries from the UK to Ireland and the European
continent. On March 17, 2022, P&O laid off 800 of its
workers (and removed some of them forcefully from the ships),
telling them that the ships would now be “primarily crewed by
a third-party crew provider.” Critics have charged that
Brexit, which was supposed to protect the UK from requirements
to accept European workers, has instead weakened enforcement
of UK labor laws, making it easier to replace British P&O
workers with “cheap agency workers from eastern Europe.”
The UK has an opportunity to review its regulations,
and end some of those that were imposed by the EU. However,
The Economist predicts that divergence from EU structures will
be minimal, because (a) the trade deal that was reached in
December 2020 requires the UK to stay close to European norms
in order to stay in the free-trade area, (b) "Britain shaped
European law" and "EU rules have become de facto
global standards" in many sectors and (c) divergence from EU
norms in England while Northern Ireland is forced to follow
them would exacerbate the England/Ireland divide. According to
Philip Hammond, a former Conservative chancellor, "Britain has
paid a fantastically high price for an autonomy it won’t use."