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Articles for the ‘Economics for Business 6e: Ch 18’ Category

The rise of the machines

What will production look like in 20 years time? Will familiar jobs in both manufacturing and the services be taken over by robots? And if so, which ones? What will be the effect on wages and on unemployment? Will most people be better off, or will just a few gain while others get by with minimum-wage jobs or no jobs at all?

The BBC has been running a series looking at new uses for robots and whether they will take people’s jobs? This complements three reports: one by Boston Consulting one by Deloitte and an earlier one by Deloitte and Michael Osborne and Carl Frey from Oxford University’s Martin School. As Jane Wakefield, the BBC’s technology reporter states:

Boston Consulting Group predicts that by 2025, up to a quarter of jobs will be replaced by either smart software or robots, while a study from Oxford University has suggested that 35% of existing UK jobs are at risk of automation in the next 20 years.

Jobs at threat from machines include factory work, office work, work in the leisure sector, work in medicine, law, education and other professions, train drivers and even taxi and lorry drivers. At present, in many of these jobs machines work alongside humans. For example, robots on production lines are common, and robots help doctors perform surgery and provide other back-up services in medicine.

A robot may not yet have a good bedside manner but it is pretty good at wading through huge reams of data to find possible treatments for diseases.

Even if robots don’t take over all jobs in these fields, they are likely to replace an increasing proportion of many of these jobs, leaving humans to concentrate on the areas that require judgement, creativity, human empathy and finesse.

These developments raise a number of questions. If robots have a higher marginal revenue product/marginal cost ratio than humans, will employers choose to replace humans by robots, wholly or in part? How are investment costs factored into the decision? And what about industrial relations? Will employers risk disputes with employees? Will they simply be concerned with maximising profit or will they take wider social concerns into account?

Then there is the question of what new jobs would be created for those who lose their jobs to machines. According to the earlier Deloitte study, which focused on London, over 80% of companies in London say that over the next 10 years they will be most likely to take on people with skills in ‘digital know-how’, ‘management’ and ‘creativity’.

But even if new jobs are created through the extra spending power generated by the extra production – and this has been the pattern since the start of the industrial revolution some 250 years ago – will these new jobs be open largely to those with high levels of transferable skills? Will the result be an ever widening of the income gap between rich and poor? Or will there be plenty of new jobs throughout the economy in a wide variety of areas where humans are valued for the special qualities they bring? As the authors of the later Deloitte paper state:

The dominant trend is of contracting employment in agriculture and manufacturing being more than offset by rapid growth in the caring, creative, technology and business services sectors.

The issues of job replacement and job creation, and of the effects on income distribution and the balance between work and leisure, are considered in the following videos and articles, and in the three reports.

What is artificial intelligence? BBC News, Valery Eremenko (13/9/15)
What jobs will robots take over? BBC News, David Botti (15/8/14)
Could a robot do your job? BBC News, Rory Cellan-Jones (14/9/15)
Intelligent machines: The robots that work alongside humans BBC News, Rory Cellan-Jones (14/9/15)
Intelligent machines: Will you be replaced by a robot? BBC News, John Maguire (14/9/15)
Will our emotions change the way adverts work? BBC News, Dan Simmons (24/7/15)
Could A Robot Do My Job? BBC Panorama, Rohan Silva (14/9/15)

Technology has created more jobs in the last 144 years than it has destroyed, Deloitte study finds Independent, Doug Bolton (18/8/15)
Technology has created more jobs than it has destroyed, says 140 years of data The Guardian, Katie Allen (18/8/15)
Will a robot take your job? BBC News (11/9/15)
Intelligent Machines: The jobs robots will steal first BBC News, Jane Wakefield (14/9/15)
Robots Could Take 35 Per Cent Of UK Jobs In The Next 20 Years Says New Study Huffington Post, Thomas Tamblyn (14/9/15)
The new white-collar fear: will robots take your job? The Telegraph, Rohan Silva (12/9/15)
Does technology destroy jobs? Data from 140 years says no Catch news, Sourjya Bhowmick (11/9/15)

Takeoff in Robotics Will Power the Next Productivity Surge in Manufacturing Boston Consulting Group (10/2/15)
Agiletown: the relentless march of technology and London’s response Deloitte (November 2014)
Technology and people: The great job-creating machine Deloitte, Ian Stewart, Debapratim De and Alex Cole (August 2015)


  1. Which are the fastest growing and fastest declining occupations? To what extent can these changes be explained by changes in technology?
  2. What type of unemployment is caused by rapid technological change?
  3. Why, if automation replaces jobs, have jobs increased over the past 250 years?
  4. In what occupations is artificial intelligence (AI) most likely to replace humans?
  5. To what extent are robots and humans complementary rather than substitute inputs into production?
  6. “Our analysis of more recent employment data also reveals a clear pattern to the way in which technology has affected work.” What is this pattern? Explain.
  7. Why might AI make work more interesting for workers?
  8. Using a diagram, show how an increase in workers’ marginal productivity from working alongside robots can result in an increase in employment. Is this necessarily the case? Explain.
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Productivity: should we be optimistic?

Productivity has been a bit of a problem for the UK economy for a number of years. Earlier posts from 2015 have discussed the trend in Tackling the UK’s poor productivity and The UK’s poor productivity record. Although the so-called ‘productivity gap’ has been targeted by the government, with George Osborne promising to take steps to encourage more long-term investment in infrastructure and create better incentives for businesses to improve productivity, the latest data suggest that the problem remains.

The ONS has found that the UK continues to lag behind the other members of the G7, but perhaps more concerning is that the gap has grown to its biggest since 1991. The data showed that output per hour worked was 20 percentage points lower in the UK than the average for the other G7 countries. The economic downturn did cause falls in productivity, but the UK has not recovered as much as other advanced nations. One of the reasons, according to the Howard Archer, chief UK economist at IHS Global Insight is that it ‘had been held back since the financial crisis by the creation of lots of low-skilled, low-paid jobs’. These are the jobs where productivity is lowest and this may be causing the productivity gap to expand. Other cited reasons include the lack of investment which Osborne is attempting to address, fewer innovations and problems of finance.

Despite these rather dis-heartening data, there are some signs that things have begun to turn around. In the first quarter of 2015, output per hour worked did increase at the fastest annual growth rate in 3 years and Howard Archer confirmed that this did show ‘clear sign that UK productivity is now seeing much-needed improvement.’ There are other signs that we should be optimistic, delivered by the Bank of England. Sir John Cunliffe, Deputy Governor for financial stability said:

“firms have a greater incentive to find efficiency gains and to switch away from more labour-intensive forms of production. This should boost productivity.”

The reason given for this optimism is the increase in the real cost of labour relative to the cost of investment. So, a bit of a mixed picture here. UK productivity remains a cause for concern and given its importance in improving living standards, the Conservative government will be keen to demonstrate that its policies are closing the productivity gap. The latest data is more promising, but that still leaves a long way to go. The following articles consider this data and news.

UK productivity shortfall at record high Financial Times, Emily Cadman (18/9/15)
UK productivity lags behind rest of 7 BBC News (17/9/15)
UK’s poor productivity figures show challenge for the government The Guardian, Katie Allen (18/9/15)
UK productivity lags G7 peers in 2014-ONS Reuters (18/9/15)
UK productivity second lowest in G7 Fresh Business Thinking, Jonathan Davies (18/9/15)
UK is 33% less productive than Germany Economia (18/9/15)
UK productivity is in the G7 ‘slow lane’ Sky News (18/9/15)

AMECO Database European Commission, Economic and Financial Affairs
Labour Productivity, Q1 2015 ONS (1/7/15)
International Comparisons of Productivity, 2014 – First Estimates ONS (18/9/15)


  1. How could we measure productivity?
  2. Why should we be optimistic about productivity if the real cost of labour is rising?
  3. If jobs are being created at slower rate and the economy is still expanding, why does this suggest that productivity is rising? What does it suggest about pay?
  4. Why is a rise in productivity needed to improve living standards?
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Zer0-hours: still rising

Labour markets can be a key indicator of the strength of an economy, with emphasis placed on measures including the unemployment rate and the rate of job creation. Over the past few decades, we have seen many changes in the UK labour market, with more women, more part-time jobs, flexible hours and a shift towards services. After the financial crisis, unemployment declined and more and more people were entering the labour market. But one criticism of this was zero-hours contracts. They are nothing new and were considered in earlier blogs.

Zero hours contracts are essentially what they say: a contract where you are guaranteed to work for zero hours. This means that under such a contract, there is no guarantee that you will have employment on any given day/week and hence this creates uncertainty. However, on the other side, there can be more flexibility with such a contract and with growth in female participation and part-time work, flexibility is essential for many people. James Sproule, Director of Policy at the Institute of Directors said:

“Zero hours contracts offer businesses and employees an important degree of flexibility. For skilled professionals, a degree of flexibility can boost their earning power, while flexibility also suits students and older people – the main users of zero-hours contracts – who cannot commit to a set number of hours each and every week.”

The ONS has found that businesses are using more zero-hours contracts, with a 6% rise. This reflects a growth in January from 1.4 million to 1.5 million zero-hours contracts, though this increase was not statistically significant. Over the past year, the use of these contracts has increased by 19%, from 624,000 people employed on them in 2014 to 744,000 people in 2015.

Although there has undoubtedly been an increase in the number of people employed on zero-hours contracts, there is also more recognition of these contracts. Therefore, part of the increase in the numbers could be down to this recognition and not just due to more and more people moving onto these contracts. With this greater flexibility, comes more opportunities for more people to enter the labour market. While this is a good thing, it can hide some other aspects. For example, if more people are working, it may suggest a fall in the rate of unemployment and a rise in employment, but perhaps this is misleading if some of those in employment are under-employed. The data revealed that:

On average, someone on a zero-hours contract usually works 25 hours a week, with around 40% of them wanting more hours, most from their current job, rather than in a different or additional one.

Furthermore, for some people there may be very few other options. However, there was also evidence that the possibility of zero-hours contracts has created opportunities for those who may otherwise not have entered the labour market: perhaps women re-entering the labour market and students in full time education. They also offer businesses greater flexibility and this may be a key way for the UK to improve efficiency and productivity. Jon Ingham from Glassdoor, an employment analyst said:

“It’s no great surprise to see the number of people on these contracts is on the up … It’s safe to say that employees who accept a zero hours contract do not do so as a career choice. For most it’s because they have limited options. For some it might be beneficial to have the flexibility to fit around their lifestyle but for others it’s a substandard contract which offers little in the way of benefits or security.”

The change in the structure of the labour market has been on-going and this may be a small change in amongst a much larger structural change. As the economy continues its recovery, we may see a return to the more typical working contract, but it appears that there will always be this greater demand for flexibility in working patterns and hence perhaps the zero-hours contracts do have a place in Britain. The following articles consider the implications of this data.

ONS Report
Employee contracts that do not guarantee a minimum number of hours: 2015 udpate Office for National Statistics September 2015

Number of workers on zero-hours contracts up by 19% The Guardian, Phillip Inman (2/9/15)
Zero-hours contracts hold their place in UK labour market Financial Times, Sarah O’Connor (2/9/15)
Zero-hours contracts jump 19% in a year Sky News (2/9/15)
19 per cent rise in people on zero hours contracts recorded across Britain over the last year Independent (2/9/15)
Use of zero-hours contracts rises by 6% BBC News (2/9/15)
Insecure ‘zero-hours’ jobs on the rise in Britain – ONS Reuters (2/9/15)


  1. What is a zero-hours contract?
  2. Outline the main advantages and disadvantages of zero-hours contracts to both workers and businesses. You should think about different types of workers in your answer.
  3. How do you think the increase in zero-hours contracts has affected the unemployment rate in the UK?
  4. What is meant by under-employment? Would you class this as inefficient?
  5. What other changes have we seen in the UK labour market over the past 30 years? Have these changes made the labour market more or less flexible?
  6. Zero-hours contracts create greater flexibility. Do you think that they create greater functional, numerical of financial flexibility?
  7. If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
  8. Using the ONS data, find out how the use of zero-hours contracts varies by occupation and explain why.
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Stiglitz, Hilton and Gessen

You may be used to these types of blogs by now … On my commute to work on the 18th May, I listened to Start the Week on BBC radio 4 and happened upon a fascinating discussion on inequality.

Of those discussing the issue, one certainly needs no introduction: Joseph Stiglitz, a prominent economist, author and commentator on economics, in particular on inequality. He was joined by Steve Hilton, who has worked for David Cameron for many years in providing advice on a range of issues, including inequality and strategy and has written on existing institutions and their effectiveness. The final panellist was Masha Gessen, who has written extensively on Russia and in particular on the journey of the infamous Boston Bomber.

Though the discussion covers a variety of areas relevant to economics, one key area that is addressed is inequality and the policies that are being used to address the causes and the symptoms. You can access the 45-minute discussion at the link below.

Joseph Stiglitz and Steve Hilton on inequality BBC Radio 4 (18/5/15)


  1. How would you measure inequality?
  2. Why is it important to distinguish between the causes and symptoms of poverty when designing government policy?
  3. To what extent do you believe that education is an essential requirement for growth and development?
  4. Why has inequality grown in some of the most developed nations?
  5. How is it possible that inequality in the developed world has grown, while global inequality has fallen?
  6. Why does the report argue that the reforms they suggest would help boost growth?
  7. Do you agree that existing institutions are not suitable for society today?
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The UK’s poor productivity record

Real GDP depends on two things: output per hour worked and the number of hours worked. On the surface, the UK economy is currently doing relatively well, with growth in 2014 of 2.8%. After several years of poor economic growth following the financial crisis of 2007/8, growth of 2.8% represents a return to the long-run average for the 20 years prior to the crisis.

But growth since 2010 has been entirely due to an increase in hours worked. On the one hand, this is good, as it has meant an increase in employment. In this respect, the UK is doing better than other major economies. But productivity has not grown and on this front, the UK is doing worse than other countries.

The first chart shows UK output per hour worked (click here for a PowerPoint). It is based on figures released by the ONS on 1 April 2015. Average annual growth in output per hour worked was 2.3% from 2000 to 2008. Since then, productivity growth has stalled and output per hour is now lower than at the peak in 2008.

The green line projects from 2008 what output per hour would have been if its growth had remained at 2.3%. It shows that by the end of 2014 output per hour would have been nearly 18% higher if productivity growth had been maintained.

The second chart compares UK productivity growth with other countries (click here for a PowerPoint). Up to 2008, UK productivity was rising slightly faster than in the other five countries illustrated. Since then, it has performed worse than the other five countries, especially since 2011.

Productivity growth increases potential GDP. It also increases actual GDP if the productivity increase is not offset by a fall in hours worked. A rise in hours worked without a rise in productivity, however, even though it results in an increase in actual output, does not increase potential output. If real GDP growth is to be sustained over the long term, there must be an increase in productivity and not just in hours worked.

The articles below examines this poor productivity performance and looks at reasons why it has been so bad.

UK’s sluggish productivity worsened in late 2014 – ONS Reuters (1/4/15)
UK productivity growth is weakest since second world war, says ONS The Guardian, Larry Elliott (1/4/15)
UK productivity weakness worsening, says ONS Financial Times, Chris Giles (1/4/15)
Is the UK’s sluggish productivity a problem? Financial Times comment (1/4/15)
UK manufacturing hits eight-month high but productivity slump raises fears over sustainability of economic recovery This is Money, Camilla Canocchi (1/4/15)
Weak UK productivity unprecedented, ONS says BBC News (1/4/15)
Weep for falling productivity Robert Peston (1/4/15)
UK’s Falling Productivity Prevented A Massive Rise In Unemployment Forbes, Tim Worstall (2/4/15)

Labour Productivity, Q4 2014 ONS (1/4/15)
AMECO database European Commission, Economic and Financial Affairs


  1. How can productivity be measured? What are the advantages and disadvantages of using specific measures?
  2. Draw a diagram to show the effects on equilibrium national income of (a) a productivity increase, but offset by a fall in the number of hours worked; (b) a productivity increase with hours worked remaining the same; (c) a rise in hours worked with no increase in productivity. Assume that actual output depends on aggregate demand.
  3. Is poor productivity growth good for employment? Explain.
  4. Why is productivity in the UK lower now than in 2008?
  5. What policies can be pursued to increase productivity in the UK?
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House price variations: a regional story

House prices are always a good signal for the strength or direction of the economy. While there will always be certain areas that are more sought after than others and such differences will be reflected in relative house prices, the regional divide that we currently see in the UK is quite astonishing.

Prior to the financial crisis, house prices had been rising across the county, but in the year following the financial crisis, they declined by 19 per cent. It was only in 2013, when prices began to increase and, perhaps more importantly, when the variation in regional house prices began to increase significantly. In mid-2014, the UK’s annual house price inflation rate was 11.7 per cent, but the rates in London and the South East were 19.1 and 12.2 per cent, respectively. Elsewhere in the UK, the average rate was 7.9 per cent.

These regional differences have continued and figures show that the current differential between the cheapest and most expensive regional average house price is now over £350,000. In particular, data from the Land Registry shows that the average house price in London is £458,283, while in the North East, it is only £97,974.

Those people who own a house in London have benefited from such high house prices, in many cases finding that their equity in their house has grown significantly. Furthermore, any home-owners selling their house in London and moving elsewhere are benefiting from lower house prices outside London.

However, most first-time buyers looking for a house in London are being competed out of the market, finding themselves unable to gain a mortgage and deposit for the amount that they require. The opposite is, of course, happening in other parts of the country. First-time buyers are more able to enter the property market, but home-owners are finding that they have much less equity in their house.

This has also caused other problems, in particular in the labour market. Workers who are moving to jobs in London are finding the house price differentials problematic. Although wage rates are often higher in London than in other parts of the country, the house price differential is significantly bigger. This means that if someone is offered a job in London, they may find it impossible to find a house of similar size in London compared to where they had been. After all, an average family home in the North East can be purchased for under £100,000, whereas an average family home in London will cost almost £500,000.

The housing market is problematic because of particular characteristics.

Supply tends to be relatively fixed, as it can take a long time to build new houses and hence to boost supply. Furthermore, the UK has a relatively dense population, with limited available land, and so planning restrictions have to be kept quite tight, which is another reason why supply can be difficult to increase.

On the demand-side, we are seeing a change in demographics, with more single-person households; people living longer; second home purchases and many other factors. These things tend to push up demand and, with restricted supply, house prices rise. Furthermore, with certain areas being particularly sought after, perhaps due to greater job availability, ease of commuting, schools, etc., house price differentials can be significant.

The Conservatives, together with the other main parties, have promised to build more houses to help ease the problem, but this really is a long-run solution.

The Bank of England will undoubtedly have a role to play in the future of the housing market. The affordability of mortgages is very dependent on interest rate changes by the Bank’s Monetary Policy Committee.

Although house prices in London have recently fallen a little, the housing cost gap between living in London and other areas is unlikely to close by much as long as people continue to want to live in the capital. The following articles consider the housing market and its regional variations.

London’s homeowners have made £144,000 on average since 2009 International Business Times, Sean Martin (20/2/15)
Wide gap in regional house prices, Land Registry figures show BBC News, Kevin Peachey (27/2/15)
Mapped: 10 years of Britain’s house price boom (and bust) The Telegraph, Anna White (27/2/15)
Oxford houses less affordable than London Financial Times, Kate Allen (26/2/15)
January’s UK house prices show unexpected climb The Guardian (5/2/15)
House prices since 2008: best and worst regions The Telegraph, Tom Brooks-Pollock (22/8/14)
House prices hit new record high of £274k with six regions now past pre-crisis peak – but the North lags behind This is Money, Lee Boyce (14/10/14)

House price indices: Data Tables ONS
Links to sites with data on UK house prices Economic Data freely available online, The Economics Network
Regional House Prices Q4 2014 Lloyds Banking Group


  1. What are the main factors that determine the demand for housing? In each case, explain what change would shift the demand curve for housing to the right or the left.
  2. Which factors determine supply? Which way will they shift the supply curve?
  3. Put the demand and supply for housing together and use that to explain the recent trends we have seen in house prices.
  4. Use your answers to question 1 – 3 to explain why house prices in London are so much higher than those in the North East of England.
  5. Why are interest rates such an important factor in the housing market?
  6. Explain the link between house prices and the labour market.
  7. Do you think government policy should focus on reducing regional variations in house prices? What types of policies could be used?
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UK productivity: a constraint on long-term growth

‘Employment has been strong, but productivity and real wages have been flat.’ This is one of the key observations in a new OECD report on the state of the UK economy. If real incomes for the majority of people are to be raised, then labour productivity must rise.

For many years, the UK has had a lower productivity (in terms of output per hour worked) than most other developed countries, with the exception of Japan. But from 1980 to the mid 2000s, the gap was gradually narrowing. Since then, however, the gap has been widening again. This is illustrated in Chart 1, which shows countries’ productivity relative to the UK’s (with the UK set at 100). (Click here for a PowerPoint.)

Compared with the UK, GDP per hour worked in 2013 (the latest data available) was 28% higher in France, 29% higher in Germany and 30% higher in the USA. What is more, GDP per hour worked and GDP per capita in the UK fell by 3.8% and 6.1% respectively after the financial crisis of 2007/8 (see the green and grey lines in Chart 2). And while both indicators began rising after 2009, they were still both below their 2007 levels in 2013. Average real wages also fell after 2007 but, unlike the other two indicators, kept on falling and by 2013 were 4% below their 2007 levels, as the red line in Chart 2 shows. (Click here for a PowerPoint.)

Although productivity and even real wages are rising again, the rate of increase is slow. If productivity is to rise, there must be investment. This could be in physical capital, human capital or, preferably, both. But for many years the UK has had a lower rate of investment than other countries, as Chart 3 shows. (Click here for a PowerPoint.) This chart measures investment in fixed capital as a percentage of GDP.

So how can investment be encouraged? Faster growth will encourage greater investment through the accelerator effect, but such an effect could well be short-lived as firms seek to re-equip but may be cautious about committing to increasing capacity. What is crucial here is maintaining high degrees of business confidence over an extended period of time.

More fundamentally, there are structural problems that need tackling. One is the poor state of infrastructure. This is a problem not just in the UK, but in many developed countries, which cut back on public and private investment in transport, communications and energy infrastructure in an attempt to reduce government deficits after the financial crisis. Another is the low level of skills of many workers. Greater investment in training and apprenticeships would help here.

Then there is the question of access to finance. Although interest rates are very low, banks are cautious about granting long-term loans to business. Since the financial crisis banks have become much more risk averse and long-term loans, by their nature, are relatively risky. Government initiatives to provide finance to private companies may help here. For example the government has just announced a Help to Grow scheme which will provide support for 500 small firms each year through the new British Business Bank, which will provide investment loans and also grants on a match funding basis for new investment.

OECD: UK must fix productivity Economia, Oliver Griffin (25/2/15)
The UK’s productivity puzzle BBC News, Lina Yueh (24/2/15)
OECD warns UK must fix productivity problem to raise living standards The Guardian, Katie Allen (24/2/15)
Britain must boost productivity to complete post-crisis recovery, says OECD International Business Times, Ian Silvera (24/2/15)
OECD urges UK to loosen immigration controls on skilled workers Financial Times, Emily Cadman and Helen Warrell (24/2/15)

OECD Economic Surveys, United Kingdom: Overview OECD (February 2015)
OECD Economic Surveys, United Kingdom: Full report OECD (February 2015)


  1. In what ways can productivity be measured? What are the relative merits of using the different measures?
  2. Why has the UK’s productivity lagged behind other industrialised countries?
  3. What is the relationship between income inequality and labour productivity?
  4. Why has UK investment been lower than in other industrialised countries?
  5. What are zombie firms? How does the problem of zombie firms in the UK compare with that in other countries? Explain the differences.
  6. What policies can be pursued to increased labour productivity?
  7. What difficulties are there in introducing effective policies to tackle low productivity?
  8. Should immigration controls be lifted to tackle the problem of a shortage of skilled workers?
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More and more zeros

In a post last August we looked at the rising number of workers employed on ‘zero-hours’ contracts. These are contracts where there are no guaranteed minimum hours. Such contracts give employers the flexibility to employ workers as much or as little as suits the business. Sometimes it benefits workers, who might be given the flexibility to request the hours that suit them, but usually workers simply have to take the hours on offer.

Latest figures published by the Office for National Statistics show that zero-hours contracts are on the increase. In 2014 quarter 4, 697,000 workers were recorded as being on zero-hours contracts. This represents 2.3% of people in employment. Ten years ago (2004, Q4) the figures were 108,000 or 0.4%: see chart. (Click here for a PowerPoint of the chart.)

Around one third of the 697,000 people on zero-hours contracts wanted more work if they could get it and most wanted it in their current job rather than having to move jobs. These people wanting more work can be classed as underemployed. They also include those not on a zero-hours contract who would like to work more if they could.

According to the ONS:

‘People on zero-hours contracts are more likely to be women, in full-time education or in young or older age groups when compared with other people in employment. On average, someone on a zero-hours contract usually works 25 hours a week.’ (See section 4 of the report for more details.)

As we saw in the earlier post, many public- and private-sector employers use such contracts, including many small and medium-sized enterprises and many well-known large companies, such as Sports Direct, Amazon, JD Wetherspoon and Cineworld. It gives them the flexibility to adjust the hours they employ people. It allows them to keep people in employment when demand is low. It also makes them more willing to take on staff when demand rises, as it removes the fear of being over-staffed if demand then falls back.

As we also saw, zero-hours contracts are not the only form of flexible working. Other examples include: ‘self-employed’ workers, contracted separately for each job they do for a company; people paid largely or wholly on commission; on-call working; part-time working, where the hours are specified in advance, but where these are periodically re-negotiated; overtime; people producing a product or service for a company (perhaps at home), where the company varies the amount paid per unit according to market conditions.

The extent of zero-hours contracts varies dramatically from one sector of the economy to another. Only 0.6% of workers in the Information, Finance and Professional sectors were on zero-hours contracts in 2014 Q4, whereas 10% in the Accommodation and Food sectors were.

The flexibility that such contracts give employers may make them more willing to keep on workers when demand is low – they can reduce workers’ hours rather than laying them off. It also may make them more willing to take on workers (or increase their hours) when demand is expanding, not having to worry about being over staffed later on.

However, many workers on such contracts find it hard to budget when their hours are not guaranteed and can vary significantly from week to week.

lmost 700,000 people in UK have zero-hours contract as main job The Guardian, Phillip Inman (25/2/15)
UK firms use 1.8m zero-hours contracts, says ONS BBC News (25/1/15)
Zero-hours contracts jump in UK Financial Times, Emily Cadman (25/2/15)
Zero-hours contracts ‘disturbingly’ hit 1.8 million in 2014 International Business Times, Ian Silvera (25/2/15)
Zero-hours contracts a reality for almost 700,000 UK workers, ONS figures show Independent, Antonia Molloy (25/1/15)

Contracts with No Guaranteed Hours, Zero Hour Contracts, 2014 ONS Release (25/1/15)
Supplementary LFS data on zero hours contracts – October to December 2014 ONS dataset (25/2/15)
Analysis of Employee Contracts that do not Guarantee a Minimum Number of Hours ONS Report (25/1/15)


  1. Distinguish between open unemployment, disguised unemployment and underemployment?
  2. Distinguish between functional, numerical and financial flexibility? Which type or types of flexibility do zero-hours contracts give the firm?
  3. In a ‘flexible’ labour market, what forms can that flexibility take?
  4. Why does the Accommodation and Food sector have a relatively high proportion of people employed on zero-hours contracts?
  5. What are the benefits and costs to employers of using zero-hours contracts?
  6. If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
  7. What are the benefits and costs to employees of working on zero-hours contracts?
  8. Why has the use of zero-hours contracts risen so rapidly?
  9. Using the ONS data, find out how the use of zero-hours contracts varies by occupation and explain why.
  10. Identify what forms of flexible contracts are used for staff in your university or educational establishment. Do they benefit (a) staff; (b) students?
  11. Consider the arguments for and against (a) banning and (b) regulating zero-hours contracts.
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Keeping it in the family

An article in the February 2015 issue of the Economic Journal, ‘Intergenerational Wealth Mobility in England, 1858–2012: Surnames and Social Mobility’ by Gregory Clark and Neil Cummins, looks at the persistence of wealth within British families across the generations. The article shows, ‘using rare surnames to track families, that wealth is much more persistent than standard one-generation estimates would suggest. There is still a significant correlation between the wealth of families five generations apart’.

It concludes that down the generations the main determinant of wealth is inheritance, despite all efforts to improve social mobility. The intergenerational elasticity of wealth inheritance is found to be 0.70–0.75 throughout the years 1858–2012. In other words, people’s wealth on average will be between 70% and 75% of that of their parents. Thus a large proportion of each person’s wealth depends on the wealth of their parents and a relatively small amount depends on other factors. As Clark and Cummins conclude:

The implications of this model are that wealth will be surprisingly persistent in families across multiple generations. This is what allows rich rare surnames to still remain rich on average even four generations later. It also implies that wealth differences between racial, religious and ethnic groups will also be highly persistent across generations.

So it is just inherited wealth in terms of money or property that gets passed from generation to generation? Or are their other factors, such as education, social class and social contacts, that cause people’s wealth to depend heavily on that of their parents? Clark and Cummins consider this question.

What is the latent variable that underlies the inheritance of wealth? Evidence in other work we have done on the inheritance of education status in England suggests that families can be conceived of as having an underlying social competence, which is highly persistent across generations. This social competence generates their outcomes on all dimensions of social status but with random components on each one. In this case, social mobility between generations measured on any single aspect of status will be much greater than mobility on a more general ranking of families’ overall social status, that averages earnings, wealth, occupation, education, health and longevity.

So does this mean that attempts to create greater social mobility and greater equality are futile? The authors maintain that although it is difficult to achieve greater social mobility, income and wealth can nevertheless be redistributed through the tax and benefits system.

News articles
Inheritance: how Britain’s wealthy still keep it in the family The Observer, Jamie Doward (1/2/15)
How the rich stay rich: social status is more inheritable than height ZME Science (25/11/14)
This is the proof that the 1% have been running the show for 800 years Quartz (23/11/14)

Journal article
Intergenerational Wealth Mobility in England, 1858–2012: Surnames and Social Mobility The Economic Journal, Gregory Clark and Neil Cummins (February 2015) (To read this article you will need to log in via Shibboleth using your university username and password.)


  1. What would be the implication of an intergenerational wealth elasticity (a) of 1; (b) of 0; (c) >1; (d) <0?
  2. For what reasons might there be a high intergenerational wealth elasticity?
  3. What is the likely relationship between the intergenerational distribution of wealth and the intergenerational distribution of income?
  4. What difficulties are there is using rare surnames as a means of establishing the intergenerational distribution of wealth?
  5. Discuss the advantages and disadvantages of (a) a much higher rate of inheritance tax (in the UK it’s currently 40% on the value of a person’s estate above £325,000 when they die); (b) capping the amount that can be left to any individual from an estate, with anything above this taxed at 100%; (c) capping the total amount that can be left (other than to charity), with the rest taxed at 100%.
  6. What measures could be adopted to increase social mobility?
  7. What problems would arise from using the tax and benefit system to reduce inequality? (In 2012/13 the gini coefficient of original income was 0.52 and that of both gross income (i.e. income after benefits but before tax) and post-tax-and-benefit income in the UK was 0.37: see Table 27 of The Effects of Taxes and Benefits on Household Income, 2012/13.)
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The rich discuss poverty

The World Economic Forum has been holding its annual meeting in the up-market Swiss ski resort of Davos. Many of the world’s richest and most powerful people attend these meetings, including political leaders, business leaders and representatives of various interest groups.

This year, one of the major topics has been the growth in inequality across the globe and how to reverse it. According to a report by Oxfam, Wealth: Having it all and wanting more:

The richest 1 per cent have seen their share of global wealth increase from 44 per cent in 2009 to 48 per cent in 2014 and at this rate will be more than 50 per cent in 2016. Members of this global elite had an average wealth of $2.7m per adult in 2014.

Of the remaining 52 per cent of global wealth, almost all (46 per cent) is owned by the rest of the richest fifth of the world’s population. The other 80 per cent share just 5.5 per cent and had an average wealth of $3851 per adult – that’s 1/700th of the average wealth of the 1 per cent.

Currently, the richest 85 people in the world have the same amount of wealth as the poorest 50% of the world’s population. It might seem odd that those with the wealth are talking about the problem of inequality. Indeed, some of those 85 richest people were at the conference: a conference that boasts extremely luxurious conditions. What is more, many delegates flew into the conference in private jets (at least 850 jets) to discuss not just poverty but also climate change!

Yet if the problem of global inequality is to be tackled, much of the power to do so lies in the hands of these rich and powerful people. They are largely the ones who will have to implement policies that will help to raise living standards of the poor.

But why should they want to? Part of the reason is a genuine concern to address the issues of increasingly divided societies. But part is the growing evidence that greater inequality reduces economic growth by reducing the development of skills of the lower income groups and reducing social mobility. We discussed this topic in the blog, Inequality and economic growth.

So what policies could be adopted to tackle the problem. Oxfam identifies a seven-point plan:

Clamp down on tax dodging by corporations and rich individuals;
Invest in universal, free public services such as health and education;
Share the tax burden fairly, shifting taxation from labour and consumption towards capital and wealth;
Introduce minimum wages and move towards a living wage for all workers;
Ensure adequate safety-nets for the poorest, including a minimum income guarantee;
Introduce equal pay legislation and promote economic policies to give women a fair deal;
Agree a global goal to tackle inequality.

But how realistic are these policies? Is it really in the interests of governments to reduce inequality? Indeed, some of the policies that have been adopted since 2008, such as bailing out the banks and quantitative easing, have had the effect of worsening inequality. QE drives up asset prices, particularly bond, share and property prices. This has provided a windfall to the rich: the more of such assets you own, the greater the absolute gain.

The following videos and articles look at the problem of growing inequality and how realistic it is to expect leaders to do anything significant about it.

Videos and podcasts
Income inequality is ‘brake on growth’, Oxfam chief warns Davos France 24, Winnie Byanyima (22/1/15)
Davos dilemma: Can the 1% cure income inequality? Yahoo Finance, Lizzie O’Leary and Shawna Ohm (21/1/15)
Richest 1% ‘Will Own Half The World’s Wealth By 2016′ ITN on YouTube, Sarah Kerr (19/1/15)
The Price of Inequality BBC Radio 4, Robert Peston (3/2/15 and 10/2/15)

Richest 1% will own more than all the rest by 2016 Oxfam blogs, Jon Slater (19/1/15)
Global tax system can cut inequality The Scotsman, Jamie Livingstone (23/1/15)
A new framework for a new age Financial Times, Tony Elumelu (23/1/15)
The global elite in Davos must give the world a pay rise New Statesman, Frances O’Grady (22/1/15)
New Oxfam report says half of global wealth held by the 1% The Guardian, Larry Elliott and Ed Pilkington (19/1/15)
Davos is starting to get it – inequality is the root cause of stagnation The Guardian, Larry Elliott (25/1/15)
Inequality isn’t inevitable, it’s engineered. That’s how the 1% have taken over The Guardian, Suzanne Moore (19/1/15)
Why extreme inequality hurts the rich BBC News, Robert Peston (19/1/15)
Eurozone stimulus ‘reinforces inequality’, warns Soros BBC News, Joe Miller (22/1/15)
Hot topic for the 1 percent at Davos: Inequality CNBC, Lawrence Delevingne (21/1/15)
Global inequality: The wrong yardstick The Economist (24/1/15)
A Richer World (a compendium of articles) BBC News (27/1/15)

OECD Income Distribution Database: Gini, poverty, income, Methods and Concepts OECD
The effects of taxes and benefits on household income ONS


  1. Why has inequality increased in most countries in recent years?
  2. For what reasons might it be difficult to measure the distribution of wealth?
  3. Which gives a better indication of differences in living standards: the distribution of wealth or the distribution of income?
  4. Discuss the benefits and costs of using the tax system to redistribute (a) income and (b) wealth from rich to poor
  5. Go through each of the seven policies advocated by Oxfam and consider how practical they are and what possible objections to them might be raised by political leaders.
  6. Why is tax avoidance/tax evasion by multinational companies difficult to tackle?
  7. Does universal access to education provide the key to reducing income inequality within and between countries?
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