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The 1980s Recession in the UK: A Business Cycle Accounting Perspective

Author

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  • Erasmus Kersting

    (Texas A&M University)

Abstract

This paper applies 'Business Cycle Accounting' methodology introduced by Chari, Kehoe and McGrattan (2002a) to the UK economy. In particular, I examine the cyclical episode from 1979 to 1989. The chosen method enables me to decompose fluctuations in aggregates to isolate the effects corresponding to different distortions in the underlying model. I find distortions in the labor-leisure decision to play a significant role in both the recession in the early 1980s and the subsequent recovery of the UK economy. Furthermore, scenario simulations show that the improvement of the labor wedge was necessary for the recovery of the UK economy starting in 1984. After reviewing evidence on the effects of the new labor market policies introduced by the Conservative government under Margaret Thatcher on union density and collective bargaining, the results suggest that the reforms were essential for the improvement in economic performance. Future research on the period should therefore focus on modeling the labor market distortions and the reforms that were intended to reduce them. (Copyright: Elsevier)

Suggested Citation

  • Erasmus Kersting, 2008. "The 1980s Recession in the UK: A Business Cycle Accounting Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 179-191, January.
    • Handle: RePEc:red:issued:06-153
    DOI: 10.1016/j.red.2007.04.004
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Real business cycle; Unions; Growth model; Labor market reforms; UK;
    All these keywords.

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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