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Posts Tagged ‘marginal revenue product’

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.

Videos
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)

Articles
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)

Reports
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)

Questions

  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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Why did Manchester City fail to meet UEFA’s Financial Fair Play rules?

They may not have been happy about it but the executives of Manchester City have finally agreed a settlement with UEFA after it was judged that the club had broken Financial Fair Play (FFP) rules. The club had initially indicated that they might take their case to the Club Financial Control Body’s adjudicatory chamber. For details about FFP, see previous article on the website: What does ‘fair play’ mean for the big teams in Europe?They have also now accepted the sanctions for breaking these rules which appear to be very similar in magnitude to those imposed on Paris St-Germain. UEFA have also judged that seven other clubs have failed to meet their financial requirements.

Why did Manchester City fail the FFP rules when they appeared to be so confident that they would meet them? To understand this requires some discussion of a number of exemptions put in place by UEFA in the implementation of the FFP guidelines.

One of the key aims of FFP is to force the clubs who compete in European competitions to break even. However UEFA allow clubs to make some losses before any sanctions are applied. For the current monitoring period the clubs are allowed to make a cumulative loss of up to €45 million (approximately £37 million) over a two year period from 2011-2013 before any penalties are imposed. This permitted loss is referred to by UEFA as the ‘acceptable deviation’ from breaking even.

Manchester City reported losses in their financial accounts of £97million in 2011-12 and £51.6 million in 2012-13. At first sight this cumulative loss of nearly £149 million over the two year period would suggest that the club failed to meet the FFP regulations by a wide margin i.e. £112 million over the acceptable deviation. However the size of either the profit or loss reported in a club’s final accounts is different from the figure that is used by UEFA when assessing whether the teams have met the FFP criteria. UEFA exclude any costs incurred by the clubs on

- Youth development and community projects
- Building/developing their stadiums

Imagine a situation where after deducting these costs, Manchester City’s losses fell to £75 million in 2011-12 and £35 million in 2012-13. Once again it would still look as if they have failed to meet the FFP guidelines by a large margin. However there is another set of costs that can be excluded if a number of conditions are met. These are the wage costs in 2011-12 of those players who had signed contracts with the club before 1st June 2010. This exemption was introduced by UEFA because a number of clubs complained that they would struggle to meet the rules because of the nature of the players’ contracts. It is quite common for these to be of a 4 or 5 year duration. The teams argued that they were already committed to paying some players very large salaries in 2011-12 because of deals that were agreed long before the FFP rules were introduced. UEFA accepted this argument but only allowed the wage costs to be exempted from the FFP calculations on two conditions:

1. The club could show that the size of its losses were falling over time and that they had a clear strategy in place so that they would be able to comply with FFP regulations in future years.
2. The cumulative loss in excess of the acceptable deviation was caused by losses incurred in the 2011-12 period.

As there is a downward trend in the size of the losses being made by Manchester City they would appear to meet the first condition. It would also be important for them to convince UEFA that they had policies in place to reduce the losses below the permitted levels in the future. In the example above the second criterion is also met as the loss in 2012-13 of £35 million was lower than the acceptable deviation of £37 million. Therefore the reason why the cumulative permitted loss would be broken is because of the impact of the £75 million loss in 2011-12.

However there is another element to the second condition. The club also has to show that the sole reason for the loss in 2011-12 was because of the wage costs they were already committed to – i.e. from the contracts signed before the 1st June 2010. If these wage costs are smaller than the losses reported in that period then they cannot be exempted from the FFP calculations as they can only partly explain the loss.

Reports in the press have suggested that approximately £80 million of Manchester City’s wage bill in 2011-12 was caused by contracts that were signed with players before the 1st June 2010. If this was true then in the example above they would have met the FFP requirements as the £80 million of wages could fully account for the £75 million loss in the 2011-12 season. This would mean that the £80 million could be exempted from the FFP calculation and City would have made a cumulative loss of £35 million which was less than the acceptable deviation of £37 million.

If the wages paid to the players from the contracts signed prior to 1st June 2010 could not fully account for the losses in 2011-12 then they could not be deducted in the FFP calculations. For example imagine if after deducting the costs of youth/community projects and infrastructure spending that Manchester City’s loss had been £85 million in 2011-12 instead of £75 million. The wages bill of £80 million could not fully account for this loss of and hence the £80 million wage bill would be counted in the calculations. The cumulative loss would now be £120 million (£85 million + £35 million) and the acceptable deviation would have been exceeded by £83 million.

Unfortunately for Manchester City this appears to be more or less what happened. As part of the FFP process UEFA also examined deals struck between the club and other organisations in which the owner had an interest. These are referred to by UEFA as Related Party Transactions (RPTs). It would seem that the accountants at UEFA came to the conclusion that some of these RPTs were at above market prices. Interestingly some press reports have indicated that the £35 million a year deal with Etihad was judged to be fine. It was a number of secondary sponsorship deals which were considered to be above fair market values. Once adjustments were made to take account of this it looks as if the re-calculated losses for 2011-12 were greater than the £80 million of wages. With these wage costs not exempted from the calculation, Manchester City have been judged to have missed the FFP conditions by a wide margin.

The following quote is taken from a statement released by the club:

At the heart of the discussions is a fundamental disagreement between the club’s and UEFA’s respective interpretations of the FFP regulations on players purchased before 2010.

The following sanctions have been imposed:

- A £49 million fine to be withheld from UEFA prize money over the next three seasons. (£32 million is suspended and depends on their financial performance in future years)
- A limit on the squad size for the Champions League – 21 instead of 25 players
- Spending limited on transfers this summer to £49 million plus any revenue received in transfer fees from the sale of players
- A freeze on the wage bill of the Champions League squad for the next two seasons

It will be interesting to see if these penalties significantly constrain Manchester City’s ability to compete with the other big teams in Europe next season.

Articles

Manchester City accept world-record £50m fine for breach of Uefa Financial Fair Play rules The Telegraph, (16/5/14)
Manchester City facing £50m fine for breaching Uefa’s Financial Fair Play regulations The Telegraph, (6/5/14)
A beginner’s guide to UEFA’s financial fair play regulations SB Nation, (30/04/14)
Financial Fair Play Explained Financial Fair Play 2012
Man City to act swiftly in transfer market – Khaldoon Al Mubarak BBC Sport, (20/5/14)
Manchester City fined and squad capped for FFP breach BBC Sport, (16/5/14)
Manchester City facing Uefa sanctions over finances BBC Sport, (6/5/14)
Paris St-Germain’s £167m deal fails Uefa financial fair play rules BBC Sport, (1/5/14)
Manchester City and PSG breach Uefa FFP rules BBC Sport, (28/4/14)
Financial Fair Play: What rules have Manchester City broken and what are the likely sanctions? The Mirror, (6/5/14)
We’re innocent! Manchester City on the attack over FFP penalties The Express, (21/5/14)
Man City facing double UEFA punishment for breaching financial fair play rules talkSPORT, (6/5/14) .

Questions

  1. What are barriers to entry? Give 4 examples.
  2. What impact do barriers to entry have on a market? Draw a diagram to illustrate your answer.
  3. To what extent do you think that the UEFA Fair Play Rules act as a barrier to entry?
  4. What impact do you think the FFP rules will have on the marginal revenue product of the most talented players? Draw a diagram to illustrate your answer.
  5. Can you think of any methods that a club might use to try and circumvent a rule that attempts to restrict the size of its wage bill.
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Recent challenges to the football transfer system

Most football fans will probably never have heard of an organisation called FIFPro but, if it is successful, the labour market for football players could change quite radically.

FIFPro represents over 65,000 players from around the world. It is effectively an international trade union whose main objective is to promote the interests and defend the rights of professional football players. Its president, Philippe Piat, has recently announced that the organisation will challenge the way the current transfer system operates and is prepared to take its case to the European Commission and the European Court of Justice.

FIFPro’s argument is that players are being exploited under the current system. This may seem difficult to believe in the week when Luis Suarez signed a new four-and-a-half-year contract at Liverpool with earnings of £200,000 per week. However, referring to the transfer system, Piat stated that:

These legal and monetary shackles binding footballers to their current clubs can no longer be accepted and upheld. Football players are workers and only when they are able to enjoy the rights enshrined in law and enjoyed by all other workers, will Fifpro be satisfied.

In order to understand this argument, it is important to understand how the transfer system has evolved and how it now operates.

When the Football Association (FA) first accepted professionalism in 1885 it introduced a registration system. Before this reform it was possible for players to play for different teams each week. The new system meant that players had to register with a club at the beginning of each season. If a player was not registered with a team he was not allowed to play. He could only change team mid-season if his current club and the FA agreed to the transfer of his registration details to a different team. However, a player was free at the beginning of each season to register with a different team. Therefore there were no constraints on his mobility between teams from one season to another.

Significant changes were made to the system in 1893 when the retain-and-transfer system was first introduced. The new scheme allowed teams to keep retaining players they had initially registered for another year. This effectively meant that when a player was signed by a team he was tied to that team for as long as they wanted him. The mobility between clubs from one season to another had been removed. This gave the clubs significant monopsony power in the labour market. If a player wanted to change teams, he had to make a transfer request but the team was under no obligation to put him on the transfer list and allow him to move. Teams could decide to put players on a transfer list and would only allow them to leave if an agreeable level of compensation (a transfer fee) was offered by another team. A maximum wage of £4 per week was also introduced in 1901.

The system was periodically challenged and a number of minor changes were made. In particular, the conditions under which a player could be retained by a club were gradually altered. Originally a player could be retained by a club even if his contract was not renewed. Effectively a team could stop a player moving to another club by holding onto his registration without having to pay him. This was changed so that a minimum wage had to be paid to a player if he was to be retained by the team that held his registration.

The first major change to the system came in 1963 from a player called George Eastham. In 1959 he failed to sign a new contract with Newcastle United and made a transfer request which the club promptly rejected. Although they did eventually allow him to leave and join Arsenal, he still took his case to the High Court and the judge concluded that the retain-and-transfer system was an unreasonable restraint of trade. Following this judgment the system was amended so that, in order to retain a player, a club would have to offer the player a new contract with terms and conditions which were at least as good as the previous one. If this was done, then a player could be retained by a club and his registration would only be released if an acceptable transfer fee was offered by another team.

Perhaps the biggest change to the system was made in 2001 following the famous Bosman ruling. Jean-Marc Bosman had wanted to move to the French side Dunkirk, but FC Liege, the club that held his registration, demanded a transfer fee that Dunkirk were unwilling to pay. Bosman took his case to the European Court of Justice and in 1995 a decision was made that the system was in breach of European Union law on the free movement of people. Following this ruling, an informal agreement was reached between the European Commission, FIFA and UEFA. From 2001 players over the age of 23 were free to leave their clubs once their contracts had expired. Transfer fees no longer needed to be paid for players who had reached the end of their contracts.

In September 2013, Mesut Özil joined Arsenal from Real Madrid on the deadline day of the transfer period for a reported fee of £42.5 million.

Although the ease with which players can change teams has significantly improved over the past 50 years, they still face constraints on their labour mobility that are unusual for employees. Most workers simply have to give a period of notice in order to change employer. These vary between jobs but are not usually longer than 3 months. FIFPro’s argument is that professional football players should have these same rights. This would allow Luis Suarez to leave Liverpool at any point in the next four and a half years without any transfer fee having to be agreed. He would simply have a serve out a short period
of notice and then he would be free to join any other club. Under the current system he would have to wait four and a half years until the
end of his contract before he could leave without a transfer fee having
to be paid.

Whenever the transfer system has been challenged the football authorities have always used the same defence – sport is different from other industries because of the importance of maintaining an appropriate level of competitive balance. It is argued that the ease with which players can change clubs needs to be restricted in order for this level to be maintained. Ultimately a judgment will have to be made between this argument and the principle of freedom of movement.

Articles
Fifpro to launch legal challenge against transfer system because it shackles players The Telegraph (17/12/13)
Who gains from Fifpros world without transfers? What a surprise the rich The Telegraph (18/12/13)
Fifpro’s tilt at the transfer market is to be welcomed The Guardian (18/12/13)
Players’ union Fifpro to take transfer system to European courts The Guardian (17/12/13)
The 1960s The PFA.COM (18/12/13)
Luis Suarez signs new long-term Liverpool deal BBC Sport (20/12/13) .

Questions

  1. Explain why the marginal revenue product of footballers is so much higher than it is for people in most other jobs. What impact do you think technology has had on the marginal revenue product of footballers over the past 20 years?
  2. Draw a diagram to illustrate how the wage rate for footballers would be determined if the labour market was perfectly competitive.
  3. What is monopsony? Explain how the retain-and-transfer system could give football clubs monopsony power in the labour market.
  4. Draw a diagram to illustrate the impact of monopsony on wages and employment in the labour market for professional footballers.
  5. Explain how limiting the mobility of players might help to maintain the level of competitive balance in a league.
  6. If the proposals by FIFPro were accepted, what impact do you think it will have on players’ wages?
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Will increasing competition for broadcasting rights reduce competitive balance in the English Premier League?

The enormous amounts of money broadcasters are willing to pay for the rights to show live football astonish most people. The figures have continued to rise despite the impact of a recession, slow economic growth and static or falling real incomes.

The deal to broadcast live games in the English Premier League (EPL) for the three seasons from 2007-10 was 65% higher than the agreement that ran from 2004-07. The recession did appear to slow growth down as the contract covering the seasons 2010-13 was only 5% higher than the previous one. However the total size of this deal was still a staggering £1.78billion or approximately £593 million per season. BSkyB was the most successful bidder in all of these auctions for live TV rights and successfully saw off competition from ITV Digital, ESPN and Setanta.

However in the last few years, BT Sport has entered the bidding process and has provided BSkyB with much stronger competition than its previous rivals. As a result, BskyB had to pay £2.3 billion in order to outbid BT Sport in the most recent auction. The three-year deal beginning in the 2013-14 season gives BSkyB the rights to show 116 lives matches each year. BT Sport also paid £738 million for the rights to show 38 live matches a season. In total this means that the EPL earns approximately £1billion per season from the sale of broadcasting rights in the domestic market – an increase of 70%!

The Champions and Europa League also auction the rights to broadcast live matches and there was a real shock when BT Sport recently announced that it had secured the exclusive rights to show all 350 live games in these competitions. Once again the figure it paid – just under £900 million for a three-year deal – took most people by surprise. It represented a 125% increase on the previous three-year deal with BSkyB and ITV. What was also surprising was that there was only one round in the sealed bid auction which suggests that BT Sport’s offer was well in excess of the one submitted by BSkyB.

Most of the initial reaction to this new deal has focused on its implications for the number of matches that will be available free to air: i.e. without having to pay for a subscription channel. The BT Sport contract does specify that the Champions League final and at least one match involving each British team will be shown free to air each season. However, this will be a significant reduction in the number of free to air games currently shown by ITV.

The new deal may also have implications for competitive balance in the EPL. This concept was discussed in a previous blog on this New Site Parachute payment problems for the English Football League and refers to how equally the most talented players are distributed amongst the teams in a league. This distribution will be heavily influenced by the degree to which the revenues of the teams in the league vary. Commenting on this latest contract Liverpool’s former managing director Christian Purslow stated that:

The fundamental effect of the BT deal will be additional wealth for England’s big teams. You will now have six teams (Manchester City, Chelsea and Manchester United, Arsenal, Liverpool and Spurs) playing for four Champions league places with the other 14 teams playing for survival. Never again will the likes of Everton, Newcastle or Villa get near the top – the difference in revenues will simply be too great.

To understand this statement one has to examine how the Champions League distributes the revenue it raises back to the teams that participate in the tournament. One part of the distribution mechanism is determined by the sporting performance of the teams in the competition. For example all 32 teams that make it to the group stages of the Champions League receive a minimum of €8.6 million. Each win in the group games earns a team an additional €1 million while a draw earns €500,000. The teams that make it to the last 16 receive an additional payment of €3.5 million, the quarter finalists earn an additional €3.9 million while the semi-finalists each receive €4.9 million. For example in the 2012-13 season, Manchester United received prize money of €16.1 million for reaching the last 16, whereas Bayern Munich received €35.9 million of prize money for winning the competition. If broadcasting revenues for the Champions League increase across the whole of Europe then the size of the prizes will almost certainly increase.

Teams also receive a share of the broadcasting revenue generated by the Champions League known as the market pool. The total size of the market pool allocated to the teams in any particular country depends on the value of the deal between the broadcasters in that country and UEFA. In the 2012-13 season the total market pool to be divided between the four English teams in the Champions League was €86.6 million. This was the second highest figure behind Italy. In contrast the four Portuguese teams had just over €7 million from the market pool to share between them because the value of the broadcasting deal in that country was so much lower. The market pool is split between the clubs based on (a) their finishing position in the domestic league the previous season and (b) how many games they played in the Champions League from the group stage onwards. FC BATE Borisov were the only representative from Belarus so did not have to share the market pool with any other team. Unfortunately for them the size of the market pool was only €290,000. Manchester United received a market pool payment of €19.45 million.

Given the dramatic increase in value of the broadcasting rights the size of the market pool for the English teams will rise significantly in 2015-16 season. The battle in the 2014-15 EPL season for the four Champions League places will be even stronger and more intense than ever. As a result, the competition for the services of the most talented players will probably push up their wages to ever higher levels.

Monopoly money: Football’s TV war makes the rich unreachable’ BBC Sport (17/11/13)
Champions League TV deal in focus BBC Business (11/11/13)
Champions League: BT Sport wins £897 football rights deal BBC Sport (9/11/13)
Top Soccer Leagues Get 25% Rise in TV Rights Sales, Report Says Bloomberg (11/11/13)
BSkyB could face Premier League premium The Guardian (11/11/13)
Clubs benefit from Champions League revenue UEFA (23/7/13)
Sky pleaded with football officials to reopen champions league talks The Telegraph (11/11/13).

Questions

  1. What is a sealed bid auction? How does it compare with different types of auctions?
  2. Suggest some reasons why BT Sport were willing to pay so much more than BSkyB for the broadcasting rights for the Champions League.
  3. Do you think that the potentially higher revenues for the top clubs might actually reduce attendances at their matches? Explain your answer.
  4. Explain how the potentially higher future revenues for teams participating in the Champions League in 2015-16 can be discounted in order to give them a present value.
  5. Draw a diagram to illustrate the impact of the new broadcasting deal on the marginal revenue product of the most talented players.
  6. Is the labour market for the most talented players competitive or is it an oligopsony? What implications does this have their wages? How does your answer change if the labour market is a bilateral monopoly?
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The cost of a living wage

Each year in November, the Living Wage Foundation publishes figures for the hourly living wage that is necessary for people to meet basic bills. The rate for London is calculated by the Greater London Authority and for the rest of the UK by the Centre for Research in Social Policy at Loughborough University.

The 2013 update was published on 4 November. The Living Wage was estimated to be £8.80 in London and £7.65 in the rest of the UK.

Two things need to be noted about the Living Wage rate. The first is that the figure is an average and thus does not take into account the circumstances of an individual household. Clearly households differ in terms of their size, the number of wage earners and dependants, the local costs of living, etc. Second, the figures have been reduced from what is regarded as the ‘reference’ living wage, which is estimated to be £9.08 outside London. The reason for this is that people earning higher incomes have seen their living standards squeezed since 2009, with prices rising faster than average post-tax-and-benefit wages. Thus, the Living Wage is capped to reflect the overall decline in living standards. As the Working Paper on rates outside London explains:

From 2012 onwards, two kinds of limit have been put on the amount that the Living Wage as applied can rise in any one year. The first limits the increase in the net income (after taxes and benefits) requirement for each household on which the living wage calculation is based, relative to the rise in net income that would be achieved by someone on average earnings. The second limits the increase in the living wage itself (representing gross income) relative to the increase in average earnings.

Nevertheless, despite this capping of the living wage, it is still significantly higher than the UK National Minimum Wage, which currently stands at £6.31 for those aged 21 and over. This can be seen from the chart (click here for a PowerPoint).

Paying the Living Wage is voluntary for employers, but as The Guardian reports:

A total of 432 employers are now signed up to the campaign, up from 78 this time last year, including Legal & General, KPMG, Barclays, Oxfam, Pearson, the National Portrait Gallery and First Transpennine Express, as well as many smaller businesses, charities and town halls. Together they employ more than 250,000 workers and also commit to roll out the living wage in their supply chain.

But as The Observer reports:

The number of people who are paid less than a ‘living wage’ has leapt by more than 400,000 in a year to over 5.2 million, amid mounting evidence that the economic recovery is failing to help millions of working families.

A report for the international tax and auditing firm KPMG also shows that nearly three-quarters of 18-to-21-year-olds now earn below this level – a voluntary rate of pay regarded as the minimum to meet the cost of living in the UK. The KPMG findings highlight difficulties for ministers as they try to beat back Labour’s claims of a “cost of living crisis”.

According to the report, women are disproportionately stuck on pay below the living wage rate, currently £8.55 in London and £7.45 elsewhere. Some 27% of women are not paid the living wage, compared with 16% of men. Part-time workers are also far more likely to receive low pay than full-time workers, with 43% paid below living-wage rates compared with 12% of full-timers.

But although paying a living wage may be desirable in terms of equity, many firms, especially in the leisure and retailing sectors, claim that they simply cannot afford to pay the living wage and, if they were forced to, would have to lay off workers.

The point they are making is that it is not economical to pay workers more than their marginal revenue product. But this raises the question of whether a higher wage would encourage people to work more efficiently. If it did, an efficiency wage may be above current rates for many firms. It also raises the question of whether productivity gains could be negotiated in exchange for paying workers a living wage

These arguments are discussed in the following podcast.

Podcast
Higher ‘productivity’ will increase living wage BBC Today Programme, Priya Kothari and Steve Davies (4/11/13)

Articles
UK living wage rises to £7.65 an hour The Guardian (4/11/13)
More than 5 million people in the UK are paid less than the living wage The Observer, Toby Helm (2/11/13)
Increasing numbers of Scots are paid less than living wage Herald Scotland (2/11/13)
Labour would give tax rebates to firms that pay living wage Independent, Jane Merrick (3/11/13)
Employers praise Ed Miliband’s living wage proposal Independent, Andy McSmith (3/11/13)
Miliband’s living wage tax break will raise prices, warns CBI chief The Telegraph, Tim Ross (3/11/13)
Living Wage rise provides a boost for low paid workers BBC News (4/11/13)

Information and Reports
What is the Living Wage? Living Wage Foundation
The Living Wage Centre for Research in Social Policy, Loughborough University
Living wage Mayor of London
One in five UK workers paid less than the Living Wage KPMG News Release (3/11/13)
Number of workers paid less than the Living Wage passes 5 million KPMG News Release (3/11/13)
Living Wage Research for KPMG Markit (October 2012)

Questions

  1. How is the Living Wage calculated?
  2. What are the reasons for announcing a Living Wage figure that is lower than a reference living wage? Assess these reasons.
  3. If there are two separate figures for the Living Wage for London and the rest of the UK, would it be better to work out a living wage for each part, or even location, of the UK?
  4. Why might it be in employers’ interests to pay at least the Living Wage? Does this explain why more and more employers are volunteering to pay it?
  5. Assess the Labour Party’s pledge, if they win the next election, that ‘firms which sign up to the living wage will receive a tax rebate of up to £1000 for every low-paid worker who gets a pay rise, funded by tax and national insurance revenue from the higher wages’.
  6. Which is fairer: to pay everyone at least the Living Wage or to use tax credits to redistribute incomes to low-income households?
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NFL Draft

Imagine if none of the clubs in the English Premier League (EPL) or English Football League (EFL) had junior or youth teams. Instead envisage a situation where all of the talented young footballers in the country go to college or university to develop their skills. Then once a year there is a big televised event where each of the clubs in the EPL and EFL take it in turns to choose which young college/university players they would like to recruit.

Strange as it sounds to football fans in Europe this is exactly what happens in American Football in the USA. It is called the NFL draft and this year’s event took place over three days between 25th and 27th April at Radio City Music Hall in New York. There was greater interest in Britain than usual in this year’s event because of the involvement of 24 year old Menelik Watson who was born and raised in Manchester. Although originally a basketball player, coaches spotted his potential to play American football in the NFL and two years ago he obtained a place at Florida State University.

The NFL draft has seven rounds. Each of the 32 teams has the right to choose one player in each round. An important design issue for any draft system is how to determine the running order in which the teams make their choices. Obviously all 32 teams would like to get the first chance at recruiting the most talented of all the college players. The NFL’s solution to this allocation problem is an interesting one. The team with the worst playing record from the previous season gets the first choice in each round. In the 2012-13 season this happened to be the Kansas City Chiefs who played 16 games and only won 2 of them. The second choice in each round goes to the team with the 2nd worst playing record from the previous season and so on. The final choice in each round goes to the previous year’s Super Bowl champions who in the 2012–13 were the Baltimore Ravens. Another interesting characteristic of the system is the ability of teams to trade draft choices. For example in 2013 the Oakland Raiders traded their choice in the first round (which was the 3rd choice overall) with the Miami Dolphins for their choices in both the first and second round (12th and 42nd choice overall).

What is the rationale for having a draft system? It was first introduced in February 1936 and many commentators have argued that it has been a key factor which has helped to maintain competitive balance in sport. The man behind the idea, Bert Bell of the Philadelphia Eagles, argued that without this type of system the sport would be dominated by the 4 richest teams. He stated that:

Every year, the rich get richer and the poor get poorer. Four teams control the championship. Because they are successful, they keep attracting the best college players in the open market, which makes them more successful.

Some evidence for the success of the scheme is that in the last 15 years the Super Bowl has been won by 10 different teams. However in 1934, just before the scheme was proposed, there was another major issue for team owners. The Brooklyn Dodgers and the Philadelphia Eagles had become involved in a bidding war for a very talented young player called Stan Kostka. Brooklyn won the battle but had to pay him a salary of $5,000 – the same amount that was paid to the star player in the league. Some people have argued that the real purpose of the draft scheme was to limit the pay of young players by effectively reducing any competitive bidding for their services. Once drafted, a player is expected to join the team who selected him. There may be some protracted negotiations over his final salary and bonuses but the only option open to him if an agreement breaks down is to re-enter the draft the following year. This effectively gives the teams monopsony power which may enable them to restrict players pay to below that of their marginal revenue product. For example although Andrew Luck, the first choice draft pick in 2012, reportedly earns just over $20million from his 4 year contract with the Indianapolis Colts some commentators have argued that his true market value is over $100 million.

The good news for Menelik Watson was that he was finally drafted by the Oakland Raiders and was the 42nd overall player chosen in the draft process. This is the highest choice ever made by a team in the NFL for a player born and brought up in Britain. The final outcome for the league as a whole can be seen on the NFL website.

NFL Draft 2013: Your essential comprehensive guide BBC Sport Simon Clancy (25/4/13)
NFL Draft 2013: Menelik Watson goes to Oakland Raiders BBC Sport, (26/4/13)
NFL Draft makes Menelik Watson Oakland Raiders’ second British player The Guardian, Paulo Bandini (27/4/13)
NFL Draft: Manchester’s Menelik Watson looking to start with Oakland Raiders right away Sky Sport, Paul Higham (28/4/13)
Manchester’s Watson lands dream NFL job after being drafted by the Oakland Raiders Daily Mail, Matthew Sherry (27/4/13)
Abolish the NFL Draft Sports on Earth, Patrick Hruby (25/4/13) .

Questions

  1. Explain why the marginal revenue product for sports stars is so much higher than it is for people in most other jobs.
  2. Draw a diagram to illustrate how the wage rate for players would be determined if the labour market was perfectly competitive.
  3. Assuming that the marginal revenue product for sports stars was in fact lower than that of most people in other jobs, draw a diagram to illustrate why they would still tend to be paid so much more.
  4. What is monopsony? Explain how the draft system could give the teams in the NFL monopsony power.
  5. Draw a diagram to illustrate the impact of monopsony on wages and employment in the labour market for NFL players.
  6. Can you think of any perverse incentives that the draft system could create for the performance of teams towards the end of the regular season.
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Is there something fishy going on?

It’s a relatively common dish to see on a menu at a restaurant: mackerel. This particular fish has been promoted as a healthy and sustainable dish, but now its sustainability is coming into question and the Marine Conservation Society has taken it off its ‘fish to eat’ list. My brother Hugh is a marine biologist and often comments on which fish we should be avoiding due to sustainability issues (especially given how much I like fish!) So, how is this an economics issue?

There a couple of key things to pick out here. Firstly, with the conservationists’ warning of this issue of unsustainability, they have been asking consumers to reduce the amount of mackerel they buy. This will naturally have an impact on fisherman. If consumers do listen to the conservationists and hence reduce their demand for mackerel, we could see a fall in the price of this fish and a reduction in the fishermen’s turnover. It could be that we see a switch in consumption to other more sustainable fish, especially if we see some form of intervention.

Another area concerning economics is the idea of over-fishing. For years, there have been disputes over who has the rights to these fish stocks. In the past, the Faroe Isles and Iceland have increased their quotas significantly, as mackerel appear to have migrated to their shores, contributing to this question of sustainability. Iceland and the Faroe Isles have ‘unilaterally agreed their quotas … as they are not governed by the common fisheries policy’.

The question is: when fisherman catch one additional mackerel, what are they considering? Do they think about the private benefit to them (or their company) or do they consider the external cost imposed on others? Whenever one fish is taken from the sea, there is one less fish available for other fishermen.

This leads to over-consumption of fish and contributes towards the well-documented depletion of fish stocks and ‘The Tragedy of the Commons’, if account is not taken of the external cost imposed on other fishermen.

The total catch is now far in excess of what has been scientifically recommended and previously agreed upon by all participating countries. Negotiations to introduce new catch allowances have so far failed to reach agreement.

There are hopes that an international policy on quotas can be agreed to ensure mackerel levels return to or remain at a sustainable level. However, at present no progress has been made. Until some form of an agreement is reached, fishermen around Iceland and the Faroe Isles will continue to battle against the conservationists. The following articles consider this fishy topic.

Mackerel taken off conservationists’ ‘fish-to-eat’ list The Guardian, Rebecca Smithers (22/1/13)
Warning over mackerel stocks Scottish Herald (22/1/13)
Fishing quota talks begin amid ongoing disputes and finger-pointing The Scotsman, Fran Urquhart (14/1/13)
Mackerel no longer an ethical choice because of over-fishing The Telegraph, Louise Gray (22/1/13)
Ths fishy tale of macro-mismanagement The Guardian, Annalisa Barbieri (22/1/13)
You can still eat mackerel – just make sure it’s British The Telegraph, Louise Gray (22/1/13)
Dispute means mackerel is no longer fish of the day BBC News, Matt McGrath (22/1/13)
Mackerel struck off sustainable fish list Associated Press (22/1/13)

Questions

  1. Why are quotas set by the EU for fishing? Who do they apply to?
  2. Why is there an externality from fishing?
  3. What is the Tragedy of the Commons? Using a diagram with average and marginal revenue product and average and marginal cost illustrate the market equilibrium and the social optimum. Why are they different?
  4. Following on from question 3, what does this suggest about the role of governments?
  5. If the conservationists’ request regarding buying less mackerel is successful, what impact might this have on fishermen and fisheries?
  6. If consumers do switch to buying other fish, what would happen to the equilibrium in the mackerel market and in the market for other fish? Think about this question in terms of general equilibrium analysis.
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Women and Walmart

Approximately 1.6 million past and present female employees of Walmart have had their sex discrimination case dismissed by the US Supreme Court. This case began almost 10 years ago with claims by 5 female workers that they were paid less than their male counterparts and had been passed over for promotion. Despite statistical evidence suggesting a case of sexual discrimination, it was ruled that Walmart was not discriminating against women, as promotion decisions were made by individual managers, hence there was no common element between the plaintiffs. Justice Antonin Scalia said that a common element was ‘entirely absent here’.

Discrimination of any kind will have an impact on the demand curve for labour (or the marginal revenue product curve). As such, the equilibrium wage rate will also be affected: if a firm believes that women are less productive than their male counterparts, the MRP curve will shift inwards, pushing down their wage. The key to this case was that there were so many plaintiffs and so it was practically impossible to determine whether or not pay differentials and promotions were based on legitimate grounds. The following articles consider the case against Walmart.

Supreme Court decision in Walmart class-action claim brings praise, anger FoxNews (20/6/11)
Walmart wins class action ruling Financial Times, Barney Jopson (20/6/11)
Wal-Mart women denied discrimination class action BBC News (20/6/11)
Walmart sex discrimination class action rejected Guardian, Dominic Rushe (20/6/11)

Questions

  1. Why might a firm engage in discrimination?
  2. Use a diagram to illustrate the impact of discrimination against women by a firm on the marginal revenue product curve for women.
  3. Following discrimination against women and in favour of men, what happens to the men’s marginal product curve?
  4. Given your answer to the above 2 questions, what would you expect to happen to the equilibrium number of male and female workers and the male and female wage rate?
  5. Are there any adverse effects to a firm of engaging in discrimination of any kind?
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‘Glass ceiling’ still intact

Ahead of Lord Davies’s report on Boardroom equality, he will be somewhat alarmed by the survey results carried out by the Institute of Leadership and Management, which found that 73% of women felt that they still face barriers to top-level promotion. Quotas are a suggestion to break down this barrier. As Sheelagh Whittaker, a non-executive directive of Standard Life said:

‘I am a big supporter of quotas. I believe that we will only have true equality when we have as many incompetent women in positions of power as incompetent men.’

However, others say that quotas are not the answer, as they don’t actually change the fundamentals. Forcing compliance for equality in the workplace is not the same as equality in the workplace. There are a number of other reasons behind fewer women in top level positions, including less confidence and ambition, a more risk-averse attitude to promotion, as well as more women than men aspiring to run their own company, rather than seek promotion within a firm. So does discrimination still remain in the workplace or are there other explanations for the fact that only 12% of FTSE 100 directors are women?

Women still face a glass ceiling Guardian, Graham Dnowdwon (21/2/11)
Female managers say classing ceiling intact – survey BBC News (21/2/11)
The ‘glass ceiling’ is all in the mind: women lack confidence and ambition at work says new survey Daily Mail, Steve Doughty (21/2/11)
Women hit glass ceiling while report rejects boardroom quotas Independent, David Prosser (21/2/11)
Poll: Glass ceiling still a barrier The Press Association (21/2/11)
Men not to blame for the glass ceiling The Australian, Jack Grimston (21/2/11)

Questions

  1. How are equilibrium wages determined in perfect and imperfect markets?
  2. Is it efficient for a firm to pay men more than women or to hire/promote more men than women?
  3. Illustrate the concept of discrimination against women in the labour market. Think about the effect on the MRP curve and hence on equilibrium quantity and wage. How does this affect the MRP curve for men?
  4. What are the other causes of less women being FTSE 100 directors besides ‘the glass ceiling’?
  5. To what extent would a quota be effective in achieving gender equality in the workplace?
  6. Are there any other policies that could be used to tackle discrimination of any kind? What are the pros and cons of each?
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Who will foot the bill?

Demand and supply determine prices, but when it comes to factors of production, such as labour, their ‘price’ is largely influenced by their productivity. This helps to explain why doctors are paid more than cleaners and Premiership footballers more than amateurs. But, can it really explain a £50 million transfer price for Fernando Torres, as he moves from Liverpool to Chelsea? Undoubtedly he’s a good footballer, but are his skills worth the price paid? The same question can be asked about David Luiz – a price of £25 million; Andy Carroll – a price of £36 million and a bargain price for Luis Suarez – a mere £23 million! How can teams, such as Chelsea afford to spend so much money, despite making a loss of £70.9 million in the year to June 2010? How much would they have lost had they not won the Premier league and the FA cup?

With the country facing the possibility of returning to recession and the trouble that Portsmouth FC found itself in last season, UEFA’s ‘financial fair play’ rules seemed like a good idea. But, they appear to have been thrown out the window. £200 million was spent on a handful of footballers, as libraries across the UK are shut down due to a lack of funds. The Premier League in the UK generated a higher income than any other, equal to £2.3 billion. However, 14 of our clubs made substantial losses. The amount owed to banks or the owners backing these clubs came in at a mere £3 billion. As the big clubs in the UK push up the prices, more and more ‘small’ clubs are being competed out of the market.

Torres makes record move from Liverpool to ChelseaBBC Sport(31/1/11)
Chelsea and Liverpool drive astonishing £134 million manic Monday Telegraph, Jason Burt (1/2/11)
Champions Chelsea report £70.9 million loss BBC News (31/1/11)
Chelsea announces 70.9 million pound annual loss despite winning Premier League and FA Cup The Canadian Press, Stuart Condie (1/2/11)
Financial restraint goes out of the window when the big clubs struggle Guardian, David Conn (1/2/11)

Questions

  1. How are the prices of footballers determined? Use a diagram to illustrate your answer.
  2. What factors explain why Premier League footballers are paid so much more than those in the Conference?
  3. What type of market structure is the UK football league?
  4. As prices are bid upwards, is there an argument that smaller clubs are being competed out of the transfer market? What type of market structure is football becoming?
  5. How is that Chelsea can make £70 million loss but still have the finance to spend £50 million on new players?
  6. What policies could be used to ensure lower prices are paid for footballers? Would they be effective and are they needed?
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