NATIONAL INSTITUTE OF ECONOMIC AND SOCIAL RESEARCH COUNCIL OF MANAGEMENT President Director Lord Burns Martin Weale Appointed November 2003; Appointed October 1995 Chairman of Abbey plc; formerly Economics Fellow, Chairman of Welsh Water; Clare College Chairman (designate) Channel 4 Television Chairman of Council Secretary Professor Timothy Besley Gill Clisham Appointed November 2008; Appointed January 2001 Kuwait Professor of Economics and Political Science, London School of Economics; Director of STICERD; Member, Bank of England Monetary Policy Committee NICHOLAS BARBER PROFESSOR JOHN ERMISCH Chairman, Bolero International Ltd Institute for Social and Economic Research, KATE BARKER University of Essex Member, Bank of England Monetary Policy Committee PROFESSOR JOHN HILLS PROFESSOR CHARLES BEAN Director of CASE, Professor of Social Policy, Deputy Governor, Bank of England London School of Economics PROFESSOR TIMOTHY BESLEY PROFESSOR HEATHER JOSHI Professor of Economics and Political Science, London Centre for Longitudinal Studies, Institute of Education, School of Economics; Director of STICERD; Member, University of London Bank of England Monetary Policy Committee HANS LIESNER COLETTE BOWE Former Deputy Chairman, Monopolies and Mergers Ofcom Commission PROFESSOR WILLEM H BUITER DR JOHN LLEWELLYN Professor of European Political Economy, Llewellyn Consulting London School of Economics SIR NICHOLAS MONCK LORD BURNS Former Permanent Secretary, Employment Department Chairman, Abbey plc, Welsh Water, and DR SUSHIL WADHWANI Chairman (designate), Channel 4 Television Wadhwani Asset Management BRONWYN CURTIS MARTIN WEALE Head of Global Research, HSBC Bank plc Institute Director The Institute is an independent non-profit-making body, incorported under the Companies Acts, limited by guarantee and registered under the Charities Act 1960 (Registered Charity Number 306083). 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Fax: 020 7654 1900 E-mail: [email protected] or to any of the following on specific topics: WORLD ECONOMIC MODEL (NIGEM) AND NIGEM WEB Ray Barrell • 020 7222 7665 Dawn Holland • 020 7654 1921 Ian Hurst • 020 7654 1947 National Institute Economic Review SUBMISSION OF ARTICLES: Fran Robinson • 01341 440609 SUBSCRIPTIONS AND OTHER ENQUIRIES: Sage Publications • 020 7324 8500 EVENTS: Pat Shaw • 020 7222 7665 PUBLICATIONS AND WEBSITE: Goran Stankov • 020 7654 1931 RESEARCH PROGRAMMES COVERED IN THIS REPORT Ray Barrell • 020 7222 7665 Helen Bewley • 020 7654 1927 Alex Bryson • 020 7654 1901 John Forth • 020 7654 1954 Dawn Holland • 020 7654 1921 Simon Kirby • 020 7654 1916 Geoff Mason • 020 7654 1936 James Mitchell • 020 7654 1926 Rebecca Riley • 020 7654 1941 Heather Rolfe • 020 7654 1937 Justin van de Ven • 020 7654 1924 David Wilkinson • 020 7654 1917 Printed in London by Further information on Institute activities can also Printflow Limited be found on our website: http://www.niesr.ac.uk CONTENTS page DIRECTOR’S REPORT 2 NIESR in the news 4 RESEARCH IN 2009 Reflections on not forecasting the recession by Martin Weale 6 The Euro Area recession and nowcasting GDP growth by James Mitchell 7 Optimal regulation of bank capital and liquidity by Ray Barrell 8 Financial fragility in the EU’s New Member States by Dawn Holland 9 Extending working lives and paying for the crisis by Simon Kirby 10 Employer-provided training in the recession by Geoff Mason 11 An empirical investigation of quasi-hyperbolic discounting by Justin van de Ven 12 Employment and the rising minimum wage by Rebecca Riley 13 Pathways to Work by Helen Bewley and Richard Dorsett 14 Effective workplace union representation by John Forth 15 Students’ awareness and knowledge of institutional bursaries by David Wilkinson 16 Perceptions of discrimination in employment by Heather Rolfe 17 The benefits of cataract surgery by Martin Weale 18 Wage returns to scarce talent: the case of professional football players by Alex Bryson 19 NATIONAL INSTITUTE GLOBAL ECONOMETRIC MODEL (NiGEM) 20 NiGEM WEB and Monthly GDP 21 PUBLICISING INSTITUTE RESEARCH National Institute Economic Review 22 National Institute Discussion Papers 23 Other published reports and articles and papers presented 24 Our events programme 2009 27 SUPPORTERS OF THE INSTITUTE 29 FINANCIAL SUMMARY 30 PEOPLE AT THE INSTITUTE Institute governors 31 Institute staff and visitors 32 1 DIRECTOR’S REPORT The past year has obviously been a difficult £2.7 million, and are on course for a similar or time for the economy and the reputations of slightly larger surplus in 2009/10. Looking economic forecasters such as the National further ahead, we monitor our finances by Institute have suffered from their failure to keeping track of the business already contracted forecast the recession and, in particular, the for 2010/11 relative, of course, to our expected sharp downturn which took place in the fourth costs. We are closer to meeting our costs in quarter of 2008 and the first quarter of 2009. 2010/11 than we had been for the current year The rate of contraction in 2009 is likely to turn at a similar time in 2008. Thus, while we have out to have been similar to that of 1931, the much further work to do in bringing in finance year of the sharpest contraction of the Great for the next financial year, the position at the Depression, and to have been exceeded only in present time seems manageable. Usage of our the slump which followed the First World War; macroeconomic model was affected as some of forecasters can reasonably make the point that the financial institutions in our user group cut such outlying events are likely to be associated their expenditure very sharply or simply with unusually large forecast errors and that, of disappeared. However I am glad to say that course, has been our experience. A complaint these losses have been made good in the past that forecasts are ‘wrong’ of course is few months. completely beside the point. The more relevant issue is whether better forecasts could have been There are, nevertheless, grounds for concern produced using methods different from those further in the future. We are reasonably we employ. This question can, of course, never diversified in our sources of finance and this has be answered definitively from a single observation enabled the Institute to avoid, so far, the but no work we have found suggests that difficulties which have befallen other similar forecasting methods and models different from organizations from time to time. Thus we have, those we use are superior. There are, nevertheless, in the course of the past year, competed important lessons to be drawn from recent successfully for substantial contracts from the experience about the way in which we represent European Commission which will provide the errors surrounding our economic forecasts, income spread over several years. The income and these are discussed on page 6. from our model user group, which finances our macroeconomic modelling and analysis, is also In any case it is important to remember that an provided by a reasonably large number of important feature of the UK’s economic model users. But research, by its nature, is a problems is the dire state of the public finances. public good which tends to be predominantly The National Institute has been giving firm funded by public money in one form or warnings of this problem since 2002 and its another. A long period of restrained public analysis has turned out to be more accurate than spending is likely to make funding of our work that of most other commentators, although, more difficult and the problems will be with hindsight, not gloomy enough. accentuated if spending on research is subject to a more than proportionate squeeze. The economic crisis has inevitably affected the Institute although I am pleased to report that, One change which has occurred since I took up so far, it has not given rise to unmanageable my current post in 1995 has been an increasing problems. As a charity we are a non-profit proportion of senior researchers. This reflects making body. We made a surplus of £23,830 in the reality of our economic environment. In the the financial year 2008/9 with a turnover of past it was possible for Senior Research Fellows 2 to run large teams of more junior staff and the In the rest of this report you will find Institute had been structured in this way. But, summaries of work on specific issues. These for a variety of reasons, it has grown increasing provide a flavour of the full breadth of topics difficult for any individual to bring in the on which we have worked in the past year and volume of work and sums of money needed to serve to give a good indication of the spread of finance a large group. Thus, to remain viable, our research activities. the Institute has needed a larger number of people with the reputation and experience needed to bring in work and this change has obviously required an increase in the number and proportion of senior research staff working at the Institute. It has proven possible to do this while developing a flat management structure which offers the flexibility we need to take advantage of opportunities as they arise. Any summary of our financial circumstances would be incomplete without thanking both our research sponsors and our corporate donors. Without their financial support, it would not, of course, be possible to function at all. My thanks are also due to the members of the Institute’s Council of Management. They take overall responsibility for our affairs and give up their time so as to support the National Institute’s staff in our work; their involvement is a crucial component of our continuing success.