Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

U.K. World War I and Interwar Data for Business Cycle and Growth Analysis

Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

U.K. World War I and Interwar Data for Business Cycle and Growth Analysis

Article excerpt

Abstract: This article contributes new time series for studying the U.K. economy during World War I and the interwar period. The time series are per capita hours worked and average tax rates of capital income, labor income, and consumption. Uninterrupted time series of these variables are provided for an annual sample that runs from 1913 to 1938. We highlight the usefulness of these time series with several empirical applications. We use per capita hours worked in a growth accounting exercise to measure the contributions of capital, labor, and productivity to output growth. The average tax rates are employed in a Bayesian model averaging experiment to reevaluate the Benjamin and Kochin (1979) regression.

JEL classification: E32, E62, N14, N34, N44

Key words: hours worked, average tax rates, growth accounting, Bayesian model averaging

Working Paper 2009-18

August 2009

1. INTRODUCTION

Macroeconomics arguably exists as a field of economics because the UK suffered two depressions between the world wars. Keynes (1964, pp. 2-3) acknowledges that The General Theory is his response to interwar UK economic outcomes and policies. Although Keynesian analysis of the Great Depression is sometimes criticised, it can be difficult to study alternative theories using quantitative methods. An obstacle confronting quantitative Keynesian and non-Keynesian analysis of the interwar UK economy is that several key time series are missing.

This paper contributes time series previously unavailable for the UK during the World War I and interwar periods. We compile per capita hours worked and average capital income, labour income, and consumption tax rates. Table 1 lists uninterrupted annual observations of per capita hours worked and average tax rates from 1913 to 1938. This data fills in several gaps that have inhibited quantitative research on UK labour markets and fiscal policy during the interwar period. For example with this data, quantitative methods can study the narratives of Dowie (1975) and Daunton (2002) that emphasise the impact on the UK economy of changes in labour markets and fiscal policy during and after World War I.

The first part of the paper discusses the data sources, construction, and additional assumptions needed to construct per capita hours worked and the average tax rates. Along with summary statistics of these variables, we report unit root tests of the average capital income, labour income, and consumption tax rates on a 1916-1938 sample. These tests indicate that the average capital income and consumption tax rates are observationally equivalent to unit root processes, while the average labour income tax rate is not. Thus, the average labour income tax rate is less persistent than the average capital income and consumption tax rates.

We also present two applications that exploit the World War I and interwar period per capita hours worked and average tax rates time series. The applications show that these series contain information useful for studying the interwar UK economy.

The first application employs per capita hours worked to construct annual observations of total factor productivity (TFP) series for the UK from 1916 to 1938. Our productivity accounting exercise identifies labour input with total hours worked that equals per capita hours worked multiplied by the employment rate. On the 1916-1938 and interwar samples, average capital and total factor productivity growth are nearly unchanged. There are changes in average total hours worked and output growth across these samples. In contrast once the World War I observations are dropped, the average growth rate of total hours worked shifts from negative to positive which helps drive average UK output growth higher during the interwar period. These results match Cole and Ohanian (2002a). They argue that a large drop in employment explains weak UK output growth during the interwar period. …

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