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People in Britain may have to cut down on their afternoon tea

LEILA FADEL, HOST:

The U.K. will have a new prime minister in a few weeks, and that person will face a laundry list of economic issues, including high inflation and sluggish growth. The pandemic and the war in Ukraine are partly to blame, but there are other reasons the U.K. is having a particularly hard time of it. Paddy Hirsch and Darian Woods from our daily economics podcast The Indicator explain.

DARIAN WOODS, BYLINE: Diane Coyle is an economist and professor of public policy at Cambridge University. Diane points to a number of issues affecting the economy that are specific to the U.S. So first, the labor market. On the surface, things look pretty healthy, like in the U.S. Unemployment is low, and the labor market is hot, which should give workers the upper hand when it comes to negotiating pay. But wages in the U.K. have stagnated over the last decade.

DIANE COYLE: We've had a labor market that has created plentiful jobs, but a lot of them have been quite low-quality jobs, gig economy, warehouse-type jobs. And workers in those don't have a lot of bargaining power, so they can't bid up their wages.

PADDY HIRSCH, BYLINE: Part of the U.K.'s labor problem derives from the country's very expensive housing market. A desperate shortage of housing drives rent costs up, and it makes it hard for workers to move around the country.

COYLE: It means that the economy becomes much less flexible. So as new demands emerge or new areas of growth become possible, it's very hard to get the labor supply response that you would need to those.

HIRSCH: And breaking that impasse requires investment in different regions of the U.K. But Diane says that really hasn't happened enough. The result is that one part of the country's doing really well. That's London and the southeast. It attracts the lion's share of the money that's spent developing new businesses and building new houses. The rest of the country sees only a small fraction of that investment, which means that those areas are stagnating, and that's affecting the country's productivity.

WOODS: So if you take the G-7, the group of seven wealthy nations, the U.K.'s productivity growth rate is second to last.

COYLE: And it's a system problem. And I can give you a list of things that have gone wrong - low investment, very centralized government decision-making, really inadequate skills training, constant chopping and changing of policies, an economy that's much too weighted towards financial services and professional services at the expense of manufacturing.

WOODS: And this is key. The U.K. is overwhelmingly a service economy. More than 80% of the country's wealth is generated by services like finance and business and tourism. Less than 20% comes from industry and less than 1% from agriculture.

HIRSCH: Before Britain's departure from the European Union in 2020, also known as Brexit, there was a lot of talk about rebalancing the economy and developing industry. But as it turns out, Brexit has so far only hampered Britain's ability to grow.

COYLE: If you look at what's happened to trade for most of our comparative countries since the pandemic started easing, they've all seen that trade recover. And that hasn't happened here in the U.K.

WOODS: Diane says that the U.K. has had such a seesaw of economic policies over the last 20 years that businesses have been unable to plan effectively. Their inability to predict what the commercial landscape will look like has had a chilling effect on their operations and on the wider economy.

COYLE: I can't see how we get sensible policies in the economic and political environment in which we find ourselves.

WOODS: Boris Johnson's successor will be announced on September 5.

HIRSCH: Paddy Hirsch.

WOODS: Darian Woods, NPR News. Transcript provided by NPR, Copyright NPR.

Paddy Hirsch
Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.