University of Strathclyde
The Fraser of Allander
Institute
FRASER of ALLANDER INSTITUTE
The Fraser of Allander Institute for Research on the Scottish Economy was established in the University of Strathclyde on 1 January 1975, as the result of a generous donation from the Hugh Fraser Foundation. I t s p r i n c i p a l function i s t o carry out research on the Scottish economy and i t s research programme includes the analysis of short term movements in economic a c t i v i t y . The r e s u l t s of t h i s work, carried out in conjunction with the Department of Economics, are published in the Institute's Quarterly Economic Commentary. The Institute also publishes a series of Research Monographs and a series of Discussion Papers to provide an outlet for original research on medium term and long term aspects of the Scottish economy.
Information for subscribers
The Quarterly Economic Commentary i s published in February, May, August and November. Subscription queries should be addressed to the Secretary, the Fraser of Allander I n s t i t u t e .
Notes to contributors
The e d i t o r welcomes c o n t r i b u t i o n s to the Briefing Paper, Feature A r t i c l e and Economic Perspective s e c t i o n s . Material submitted should be of i n t e r e s t t o a predominantly S c o t t i s h readership and w r i t t e n in a s t y l e i n t e l l i g i b l e to a n o n - s p e c i a l i s t audience. F o o t n o t e s and r e f e r e n c e s should conform t o r e c e n t i s s u e s of t h e Commentary. Contributions should be typed and two copies submitted to the Editor.
Editor:
Contributors:
Graphics:
Production:
James Love
Stephen Boyle, Paul Draper, Frank Harrigan, John Heeley, Jenkins, Cliff Lockyer, Jim H Love, Peter McGregor, McNicoll, David Simpson, and Jim Walker.
Iain Iain
Stephen Boyle
Sheelagh Blackhall and Isobel Sheppard
The Fraser of Allander Institute Curran Building
QUARTERLY ECONOMIC COMMENTARY
OUTLOOK AMD APPRAISAL 1
THE WORLD ECONOMY 3
THE BRITISH ECONOMY 9
M a c r o e c o n o m i c T r e n d s 9 L a b o u r M a r k e t 13
THE SCOTTISH ECONOMY
I n d u s t r i a l Performance 20 The S e r v i c e S e c t o r 40 Labour Market 45 Regional Review 52
ECONOMIC PERSPECTIVES
The Takeover Battle for British Sugar 57
Guinness and D i s t i l l e r s : Some Current Issues in
Mergers Policy 62
Opinions expressed in signed contributions are those of the authors and not necessarily those of the Fraser Institute
Outlook and Appraisal
The results of the July Scottish Business Survey suggest t h a t optimism about the general business c l i m a t e improved for r e t a i l e r s b u t d e t e r i o r a t e d f o r m a n u f a c t u r e r s , w h o l e s a l e r s and construction companies. Overall, the Survey suggests t h a t a c t i v i t y remains constrained by a shortage of s a l e s and orders and that there i s fairly widespread spare capacity. Prospects for employment are reported to be poor.
During 1985 there were signs of an ending t o 1 a b o u r - s h e d d i n g i n S c o t t i s h manufacturing. That p a t t e r n has been reversed this year with manufacturers now r e p o r t i n g c o n t i n u i n g a c t u a l and anticipated job losses among both male and female workers. Construction companies report further lay-offs. Total employment also continues to f a l l in wholesaling. Even in the r e l a t i v e l y buoyant r e t a i l i n g sector, job losses are now being reported. Retailing job losses over the l a s t quarter were s u b s t a n t i a l and were concentrated heavily on full-time employees with some l i m i t e d r e d u c t i o n s i n p a r t - t i m e employment. F u r t h e r job l o s s e s a r e a n t i c i p a t e d in r e t a i l i n g in the present quarter.
This p e s s i m i s t i c outlook for employment prospects comes when Scottish unemployment i s a t a h i s t o r i c a l l y high l e v e l . In July 1986 Scottish unemployment, seasonally adjusted and excluding school l e a v e r s , stood a t 3 ^ , 2 0 0 . Such unemployment represents an enormous waste of Scotland's economic p o t e n t i a l as well as imposing p r i v a t e c o s t s on t h o s e unemployed. Unemployment constitutes the single, major economic problem in Scotland.
Since 1979 Government policy has been based around the Medium Term Financial Strategy (MTFS), the primary objective of which i s the control of i n f l a t i o n . The MTFS seeks t o t a c k l e unemployment i n d i r e c t l y , t h e underlying argument, simply put, being t h a t lower i n f l a t i o n r e s u l t i n g from g r e a t e r monetary control w i l l improve t h e UK's i n t e r n a t i o n a l competitiveness which will in turn lead to an expansion in employment and, hence, a reduction in unemployment. Unemployment in Scotland i s now, however, greater than in 1979 by a factor of 2.3.
Much of the increase in unemployment in Scotland and in the r e s t of the UK took place during the period 1979/81 when the conjuncture of the high i n t e r e s t r a t e s required to achieve monetary contraction and of increasing North Sea o i l exports raised the s t e r l i n g exchange r a t e . The resulting contraction of manufacturing was r a t i o n a l i s e d i n o f f i c i a l c i r c l e s as necessary to place manufacturing industry on a " l e a n e r and f i t t e r " f o o t i n g . However, d e s p i t e decelerating i n f l a t i o n and a c y c l i c a l upswing in t h e world economy during the period 1981 to early 1985, Scottish manufacturing continued to shed labour. Increases in output which did take place were achieved by higher l e v e l s of productivity from a declining number of employees.
Despite manufacturing contraction and r i s i n g unemployment, i f has repeatedly been contended in o f f i c i a l c i r c l e s t h a t t o t a l employment has been expanding as a consequence of employment growth in the service s e c t o r . This ignores, however, the i m p l i c a t i o n s of the shifting balance of employment ( s e e November 1985 Commentary) and i s largely a s t a t i s t i c a l a r t i f a c t based on a simple head-count of numbers employed, a p r o c e d u r e which i m p l i c i t l y values a p a r t - t i m e job as equivalent to a full-time one. Employment growth in the service sector has been p r e d o m i n a n t l y p a r t - t i m e . Using t h e generous convention of equating part-time with h a l f - t i m e working, t o t a l f u l l - t i m e equivalent service sector employment i s l i t t l e changed from 1979 (for a f u l l discussion see the Labour Market section of t h i s and earlier Commentaries).
Against t h i s background, Government Ministers have increasingly advocated the need for wage r e s t r a i n t t o reduce unit labour costs and, thereby, to "price people into jobs". While moderation of wage s e t t l e m e n t s would undoubtedly help reduce c o s t s t h i s argument r e q u i r e s considerable q u a l i f i c a t i o n . First, unit labour costs are determined not only by wage costs but also by non-wage costs such a s E m p l o y e r s ' N a t i o n a l I n s u r a n c e C o n t r i b u t i o n s , and p r o v i s i o n f o r redundancy schemes and holiday payments.
Logically, as with moderation of wage costs, reductions in non-wage costs could help price people into jobs. Yet, despite beginning a r e s t r u c t u r i n g of National I n s u r a n c e C o n t r i b u t i o n s in t h e 1985 Budget, the Chancellor, favouring his commitment to r e s t r a i n i n g the PSBR, did not take the opportunity of t h i s year's Budget t o reduce t h i s component of non-wage c o s t s which i s under h i s d i r e c t control.
Secondly, and p a r t i c u l a r l y since the Chancellor has placed such emphasis on the need for wage moderation, lower wage s e t t l e m e n t s m i g h t w e l l i n d u c e an appreciation of s t e r l i n g , o f f s e t t i n g , a t l e a s t p a r t i a l l y , any competitive gain. T h i r d l y , wage n e g o t i a t i o n s a r e not conducted by i n d i v i d u a l s but by unions whose b a r g a i n i n g i s l i k e l y t o be i n f l u e n c e d by t h e going r a t e . In addition, there i s no indication that the Chancellor i s prepared to provide a fiscal boost t o the economy to counteract any short-run contraction in demand resulting from lower wage settlements
In t h i s y e a r ' s Budget t h e C h a n c e l l o r asserted that responsibility for achieving lower wage settlements now rests squarely with management. I t i s d i f f i c u l t to see how such e x h o r t a t i o n can d e l i v e r a r e d u c t i o n in wage i n f l a t i o n . The Chancellor has sought, however, t o exert i n d i r e c t pressure on management. Since early 1985 the exchange r a t e has been elevated t o an important r o l e in the conduct of policy. Following the sterling c r i s i s of February 1985, UK interest rates were raised s u b s t a n t i a l l y inducing an a p p r e c i a t i o n of s t e r l i n g . S t e r l i n g a p p r e c i a t i o n o p e r a t e s t o r e d u c e inflationary pressures in two ways: by reducing import costs; and by subjecting UK p r o d u c e r s t o g r e a t e r c o m p e t i t i v e pressure in both domestic and foreign markets, thereby increasing the need for management t o s e c u r e l o w e r wage settlements. However, i t also diminishes c o m p e t i t i v e n e s s and, t h u s , damages p r o s p e c t s f o r o u t p u t and employment expansion.
Of the three s e t s of key p r i c e s in the economy, namely, labour c o s t s , exchange rates against the currencies of our major trading partners and i n t e r e s t r a t e s , the Chancellor has l a i d t h e burden of achieving improved competitiveness on the f i r s t , and there, squarely on wages. With l i t t l e sign of s u f f i c i e n t l y low wage
s e t t l e m e n t s , the Chancellor should now look more closely a t policy with respect to exchange rates and interest rates.
Given p r e s e n t c i r c u m s t a n c e s , i t i s unlikely that s t e r l i n g depreciation from p r e s e n t l e v e l s would g e n e r a t e much inflationary pressure. F i r s t , i n f l a t i o n r a t e s in important suppliers of imports into the UK such as West Germany and Japan a r e a l r e a d y lower than in the UK. Secondly, much of t h e r e d u c t i o n in i n d u s t r i a l costs r e s u l t i n g from recent l o w e r p r i c e s f o r o i l and n o n - o i l commodities have yet to feed through into output p r i c e s .
Thirdly, the p r i c e s of many important imports and raw materials are denominated in US dollars in international markets and the continuing weakness of the dollar will offset any impact on t h e i r UK p r i c e s of s t e r l i n g depreciation. Fourthly, as has been happening in the US, exporters to the UK may be able to absorb much of the s t e r l i n g depreciation in lower p r o f i t margins rather than by raising prices.
F i f t h l y , many s e c t o r s of industry could increase output without encountering the p o t e n t i a l l y i n f l a t i o n a r y consequences of capacity c o n s t r a i n t s . The r e s u l t s of r e c e n t Surveys, i n c l u d i n g t h e July Scottish Business Survey, indicate spare c a p a c i t y a c r o s s a range of s e c t o r s . Sixthly, lower interest rates would reduce costs for householders holding mortgages and o t h e r forms of d e b t , f o r t h o s e b o r r o w i n g f o r i n v e s t m e n t and for Government borrowing. Lower mortgage rates would lower the Retail Price Index.
Sterling has been depreciating gradually against major currencies other than the US d o l l a r during the f i r s t p a r t of 1986. Over the past two months that depreciation has gained momentum in response to slowing UK growth, increasing pessimism about prospects for the non-oil v i s i b l e trade balance and uncertainty about developments in the oil market. The Chancellor should now permit fuller exchange rate adjustment to market r e a l i t i e s through downward movements in i n t e r e s t r a t e s . Failure to do so w i l l postpone a d j u s t m e n t to a perhaps l e s s favourable i n t e r n a t i o n a l climate with r e s p e c t t o i n f l a t i o n a r y p r e s s u r e s and w i l l not improve the prospects for output and employment in a small, open economy like Scotland's.
18 August 1986
