Rhys McKendry: “Explaining Inequality via Trade and Productivity: The Case of the UK”

In Students by General Account

Following the 2022 cost-of-living crisis and the UK’s exit from the European Union, the already rising levels of inequality in the UK have increased dramatically. Understanding the underlying causes of rapidly rising inequality is of vital concern to UK policymakers. However, existing economic models could not anticipate nor explain this acceleration in the growth of inequality following the changes in trade barriers caused by Brexit, particularly given the backdrop of the persistent stagnation of UK productivity growth (known as the UK Productivity Puzzle), which has worsened since Brexit.

The proposed policy-oriented research sits at the nexus of international macroeconomics and household economics, addressing the dynamic interactions between inequality and two large interconnected economic forces: international trade and productivity, both of key importance in predicting the future of inequality in the UK.

The cutting-edge theoretical modelling framework proposed, incorporating stylised facts informed by disaggregated Big Data empirical analysis into a state-of-the-art dynamic macroeconomic model of international trade, allows quantifying the impact of trade deliberalisation on inequality, through changes in productivity. Additionally, the modelling framework will allow an examination of interaction between inequality and productivity, to explain both the long-running stagnation of UK productivity and structural trends in inequality.  By improving our understanding of the general equilibrium interactions that lead to increased inequality and slower productivity growth – especially important as the UK transforms its trading relationships post-Brexit, the proposed research not only has direct implications for policymakers, but could also offer another potential pertinent explanation for the UK Productivity Puzzle.