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Posts Tagged ‘productivity’

UK low productivity growth – even worse than thought

In various blogs, we’ve looked at the UK’s low productivity growth, both relative to other countries and relative to the pre-1998 financial crisis (see, for example, The UK productivity puzzle and Productivity should we be optimistic?). Productivity is what drives long-term economic growth as it determines potential GDP. If long-term growth is seen as desirable, then a fall in productivity represents a serious economic problem.

Recent data suggest that the problem, if anything, is worse than previously thought and does not seem to be getting better. Productivity is now some 21% below what it would have been had productivity growth continued at the rate experienced in the years before the financial crisis (see second chart below).

In its latest productivity statistics, the ONS reports that labour productivity (in terms of output per hour worked) fell by 0.1% in the second quarter of 2017. This follows a fall of 0.5% in quarter 1. Over the whole year to 2017 Q2, productivity fell by 0.3%.

Most other major developed countries have much higher productivity than the UK. In 2016, Italy’s productivity was 9.9% higher than the UK’s; the USA’s was 27.9%, France’s was 28.7% and Germany’s was 34.5% higher. What is more, their productivity has grown faster (see chart).

But what of the future? The Office for Budget responsibility publishes forecasts for productivity growth, but has consistently overestimated it. After predicting several times in the past that UK productivity growth would rise towards its pre-financial crisis trend of around 2% per year, in its October 2017 Forecast evaluation Report it recognises that this was too optimisitic and revises downwards its forecasts for productivity growth for 2017 and beyond.

As the period of historically weak productivity growth lengthens, it seems less plausible to assume that potential and actual productivity growth will recover over the medium term to the extent assumed in our most recent forecasts. Over the past five years, growth in output per hour has averaged 0.2 per cent. This looks set to be a better guide to productivity growth in 2017 than our March forecast of 1.6 per cent.

Looking further ahead, it no longer seems central to assume that productivity growth will recover to the 1.8 per cent we assumed in March 2017 within five years.

But why has productivity growth not returned to pre-crisis levels? There are five possible explanations.

The first is that there has been labour hoarding. But with companies hiring more workers, this is unlikely still to be true for most employers.

The second is that very low interest rates have allowed some low-productivity companies to survive, which might otherwise have been driven out of business.

The third is a reluctance of banks to lend for investment. After the financial crisis this was driven by the need for them to repair their balance sheets. Today, it may simply be greater risk aversion than before the financial crisis, especially with the uncertainties surrounding Brexit.

The fourth is a fall in firms’ desire to invest. Although investment has recovered somewhat from the years directly following the financial crisis, it is still lower than might be expected in an economy that is no longer is recession. Indeed, there has been a much slower investment recovery than occurred after previous recessions.

The fifth is greater flexibility in the labour market, which has subdued wages and has allowed firms to respond to higher demand by taking on more relatively low-productivity workers rather than having to invest in human capital or technology.

Whatever the explanation, the solution is for more investment in both technology and in physical and human capital, whether by the private or the public sector. The question is how to stimulate such investment.

Articles
UK productivity lagging well behind G7 peers – ONS Financial Times, Katie Martin (6/10/17)
UK productivity sees further fall BBC News (6/10/17)
UK resigned to endless productivity gloom The Telegraph, Tim Wallace (10/10/17)
UK productivity estimates must be ‘significantly’ lowered, admits OBR The Guardian, Richard Partington and Phillip Inman (10/10/17)
UK productivity growth to remain sluggish, says OBR BBC News (10/10/17)
Official Treasury forecaster slashes UK productivity growth forecast, signalling hole in public finances for November Budget Independent, Ben Chu (10/10/17)
The Guardian view on Britain’s productive forces: they are not working The Guardian, Editorial (10/10/17)

Data and statistical analysis
Labour productivity: April to June 2017 ONS Statistical Bulletin (6/10/17)
International comparisons of productivity ONS Dataset (6/10/17)
Forecast evaluation report OBR (October 2017)

Questions

  1. Explain the relationship between labour productivity and potential GDP.
  2. What is the relationship between actual growth in GDP and labour productivity?
  3. Why does the UK lag France and Germany more in output per hour than in output per worker, but the USA more in output per worker than in output per hour?
  4. Is there anything about the UK system of financing investment that results in lower investment than in other developed countries?
  5. Why are firms reluctant to invest?
  6. In what ways could public investment increase productivity?
  7. What measures would you recommend to encourage greater investment and why?
  8. How do expectations affect the growth in labour productivity?
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A broken economy

According to a new report, Time for Change published by the Institute for Public Policy Research (IPPR), ‘The British economic model needs fundamental reform.’

It is no longer generating rising earnings for a majority of the population, and young people today are set to be poorer than their parents. Beneath its headlines figures, the economy is suffering from deep and longstanding weaknesses, which make it unfit to face the challenges of the 2020s.

The report by the IPPR’s Commission on Economic Justice is an interim one, with the final report due in the latter part of next year. The commission was set up in 2016 and includes business leaders, such as the heads of John Lewis and Siemens, the TUC General Secretary, the Archbishop of Canterbury and other leading figures.

Commenting on the interim report, Justin Welby, the Archbishop of Canterbury said

Our economic model is broken. Britain stands at a watershed moment where we need to make fundamental choices about the sort of economy we need. We are failing those who will grow up into a world where the gap between the richest and poorest parts of the country is significant and destabilising

The report found that wages have stagnated for the majority of the population since the financial crisis of 2007/8. Wage income has fallen as a proportion of national income, while the proportions going to income from profits and property have risen. Young people are poorer than previous generations of young people.

Despite low unemployment, many people are on zero-hour contracts, part-time contracts or employed on a casual basis. For many, their jobs are insecure and they have no bargaining power.

The UK for many years has had a lower rate of investment that other developed economies and productivity, in terms of output per hour, is the lowest of its major competitors. Productivity in Germany is 36% higher than in the UK; in France and the USA it is 29% higher. Although there are some internationally competitive UK firms with high productivity, the country has:

a longer ‘tail’ of low-productivity businesses, in which weak management and poor use of skills leads to ‘bad jobs’ and low wages.

There are many other challenges, including an ageing population, uncertainties from Brexit, a large current account deficit, increased competition from abroad and growth once more in private-sector debt, which means that consumption may cease to be the main driver of economic growth as people seek to curb their borrowing.

The report is also critical of fiscal policy, which with record low interest rates could have been used to finance infrastructure projects as well as supporting public services.

The report recommends three approaches:

The first is institutional reform to support investment.

The second is making the economy more competitive through a coherent industrial strategy, reform of the financial sector to support long-term investment, reform of corporate governance to promote business success and tackling the market dominance of companies such as Amazon and Google.

The third is to bring greater social justice and equality through encouraging more secure and better-paid jobs, strengthening trades unions and reforming the tax system to make it fairer and smarter.

Not surprisingly the government has defended its record of reducing debt, presiding over falling unemployment and reduced inequality as measured by a reduced Gini coefficient. However, there has only been a modest fall in the Gini coefficient, from 0.333 in 2009/10 to 0.315 in 2016/7, and this has largely been the result of the very rich seeing a decline in income from assets.

Articles
Britain’s economy is broken and failing to tackle inequality, says major new report Independent, Ben Chu (6/9/17)
UK’s economic model is broken, says Archbishop of Canterbury The Guardian, Phillip Inman (5/9/17)
Tax wealth or see the UK tear itself apart, Cable will warn Bloomberg, Alex Morales and Thomas Penny (6/9/17)
Archbishop of Canterbury calls for radical economic reform BBC News (5/9/17)
Archbishop warns economy is “broken” as report reveals longest period of wage stagnation for 150 years Huffington Post, Rachel Wearmouth (6/9/17)
Britain’s economy is broken. We desperately need new ideas The Guardian, Tom Kibasi (4/6/17)
Carney: Britain is in the ‘first lost decade since the 1860s’, Business Insider, Oscar Williams-Grut (6/12/16)
Our broken economy, in one simple chart New York Times, David Leonhardt (7/8/16)

Report
Time for Change: A new Vision for the British Economy IPPR Commission on Economic Justice (6/9/17)

Questions

  1. Why have wages for the majority of the UK population stagnated for the past 10 years?
  2. Why is productivity in the UK lower than in most other developed economies?
  3. Is it possible for poor people to become poorer and yet for the Gini coefficient to fall?
  4. What institutional reforms would you suggest to encourage greater investment?
  5. Explain the possible advantages and disadvantages of abandoning ‘austerity policy’ and adopting a more expansionist fiscal stance?
  6. Does it matter that Amazon and Google are dominant players in their respective markets? Explain.
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Falling UK real wages – comparison with other OECD countries

In the last blog post, As UK inflation rises, so real wages begin to fall, we showed how the rise in inflation following the Brexit vote is causing real wages in the UK to fall once more, after a few months of modest rises, which were largely due to very low price inflation. But how does this compare with other OECD countries?

In an article by Rui Costa and Stephen Machin from the LSE, the authors show how, from the start of the financial crisis in 2007 to 2015 (the latest year for which figures are available), real hourly wages fell further in the UK than in all the other 27 OECD countries, except Greece (see the chart below, which is Figure 5 from their article). Indeed, only in Greece, the UK and Portugal were real wages lower in 2015 than in 2007.

The authors examine a number of aspects of real wages in the UK, including the rise in self employment, differences by age and sex, and for different percentiles in the income distribution. They also look at how family incomes have suffered less than real wages, thanks to the tax and benefit system.

The authors also look at what the different political parties have been saying about the issues during their election campaigns and what they plan to do to address the problem of falling, or only slowly rising, real wages.

Articles
Real Wages and Living Standards in the UK LSE – Centre for Economic Performance, Rui Costa and Stephen Machin (May 2017)
The Return of Falling Real Wages LSE – Centre for Economic Performance, David Blanchflower, Rui Costa and Stephen Machin (May 2017)
The chart that shows UK workers have had the worst wage performance in the OECD except Greece Independent, Ben Chu (5/6/17)

Data
Earnings and working hours ONS
OECD.Stat OECD
International comparisons of productivity ONS

Questions

  1. Why have real wages fallen more in the UK than in all OECD countries except Greece?
  2. Which groups have seen the biggest fall in real wages? Explain why.
  3. What policies are proposed by the different parties for raising real wages (a) generally; (b) for the poorest workers?
  4. How has UK productivity growth compared with that in other developed countries? What explanations can you offer?
  5. What is the relationship between productivity growth and the growth in real wages?
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The engine of global productivity stuck in first gear

According to Christine Lagarde, Managing Director of the IMF, the slow growth in global productivity is acting as a brake on the growth in potential income and is thus holding back the growth in living standards. In a recent speech in Washington she said that:

Over the past decade, there have been sharp slowdowns in measured output per worker and total factor productivity – which can be seen as a measure of innovation. In advanced economies, for example, productivity growth has dropped to 0.3 per cent, down from a pre-crisis average of about 1 per cent. This trend has also affected many emerging and developing countries, including China.

We estimate that, if total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today. That would be the equivalent of adding another Japan – and more – to the global economy.

So why has productivity growth slowed to well below pre-crisis rates? One reason is an ageing working population, with older workers acquiring new skills less quickly. A second is the slowdown in world trade and, with it, the competitive pressure for firms to invest in the latest technologies.

A third is the continuing effect of the financial crisis, with many highly indebted firms forced to make deep cuts in investment and many others being cautious about innovating. The crisis has dampened risk taking – a key component of innovation.

What is clear, said Lagarde, is that more innovation is needed to restore productivity growth. But markets alone cannot achieve this, as the benefits of invention and innovation are, to some extent, public goods. They have considerable positive externalities.

She thus called on governments to give high priority to stimulating productivity growth and unleashing entrepreneurial energy. There are several things governments can do. These include market-orientated supply-side policies, such as removing unnecessary barriers to competition, driving forward international free trade and cutting red tape. They also include direct intervention through greater investment in education and training, infrastructure and public-sector R&D. They also include giving subsidies and/or tax relief for private-sector R&D.

Banks too have a role in chanelling finance away from low-productivity firms and towards ‘young and vibrant companies’.

It is important to recognise, she concluded, that innovation and structural change can lead to some people losing out, with job losses, low wages and social deprivation. Support should be given to such people through better education, retraining and employment incentives.

Articles
IMF chief warns slowing productivity risks living standards drop Reuters, David Lawder (3/4/17)
Global productivity slowdown risks social turmoil, IMF warns Financial Times, Shawn Donnan (3/4/17)
Global productivity slowdown risks creating instability, warns IMF The Guardian, Katie Allen (3/4/17)
The Guardian view on productivity: Britain must solve the puzzle The Guardian (9/4/17)

Speech
Reinvigorating Productivity Growth IMF Speeches, Christine Lagarde, Managing Director, IMF(3/4/17)

Paper
Gone with the Headwinds: Global Productivity IMF Staff Discussion Note, Gustavo Adler, Romain Duval, Davide Furceri, Sinem Kiliç Çelik, Ksenia Koloskova and Marcos Poplawski-Ribeiro (April 2017)

Questions

  1. What is the relationship between actual and potential economic growth?
  2. Distinguish between labour productivity and total factor productivity.
  3. Why has total factor productivity growth been considerably slower since the financial crisis than before?
  4. Is sustained productivity growth (a) a necessary and/or (b) a sufficient condition for a sustained growth in living standards?
  5. Give some examples of technological developments that could feed through into significant growth in productivity.
  6. What is the relationship between immigration and productivity growth?
  7. What policies would you advocate for increasing productivity? Explain why.
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A new industrial strategy for the UK: bold or timid?

The government has launched its promised industrial strategy by publishing a Green Paper which details the measures the government plans to take. This represents a move away from a laissez-faire approach to business and a move towards greater intervention.

There are 10 elements or ‘pillars’ of the policy. These include investing in science and technology, skills training and infrastructure – energy, transport, digital and water. They also include support to businesses, developing local institutions and encouraging trade and inward investment.

The drivers of the policy are planned to be a mixture of financial support, government procurement, new structures or organisations and laws and regulations. Details will be fleshed out in the coming months as the policy is enacted.

Reactions to the announcement have been mixed. An industrial policy is generally seen as an important element for improving the supply side of the economy by improving productivity and encouraging capacity growth. However, much of the criticism of the policy is that it does not go far enough. The following articles assess the policy – both its design and likely success.

Articles
Theresa May’s long-awaited “industrial strategy” looks a bit thin The Economist (28/1/17)
Factbox: The 10 pillars of Britain’s Modern Industrial Strategy Reuters, William James (23/1/17)
Theresa May give details of action plan for British industry BBC News (23/1/17)
Industry plan is break with ‘laissez-faire’ approach of the past Sky News, Ian King (23/1/17)
Skills and infrastructure top priority in industrial strategy, say UK firms The Guardian, Graham Ruddick (21/1/17)
The Guardian view on industrial strategy: hot air but no liftoff The Guardian (23/1/17)
The industrial strategy acknowledges a fundamental truth about growth New Statesman, Michael Jacobs (23/1/17)
European bosses underwhelmed by UK industrial revival plan Reuters, Ludwig Burger (27/1/17)
Is the UK finally getting serious about industrial strategy? Economia, David Bailey (25/1/17)

Government policy documents
Building our Industrial Strategy: Our 10 pillars HM Government (23/1/17)
Building our Industrial Strategy: Green Paper HM Government (23/1/17)

Questions

  1. Distinguish between interventionist and market-orientated supply-side policy. In terms of this distinction, how would you categorise the UK government’s industrial strategy?
  2. How will the strategy address the UK’s productivity puzzle?
  3. Go through each of the 10 pillars and assess how they will help to address weaknesses in the UK economy.
  4. How can government ‘missions’ to address major social challenges help to drive innovation? (See New Statesman article above.)
  5. How may Brexit help or hinder the government’s industrial strategy?
  6. The Economist article describes the strategy as looking thin. Do you agree?
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The UK productivity puzzle

UK productivity growth remains well below levels recorded before the financial crisis, as Chart 1 illustrates. In fact, output per hour worked in 2016 Q3 was virtually the same as in 2007 Q4. What is more, as can be seen from Chart 2, UK productivity lags well behind its major competitors (except for Japan).

But why does UK productivity lag behind other countries and why has it grown so slowly since the financial crisis? In its July 2015 analysis, the ONS addressed this ‘productivity puzzle’.

Among the many reasons suggested are low levels of investment, the impact of the financial crisis on bank’s willingness to lend to new businesses, higher numbers of people working beyond normal retirement age as a result of population and pensions changes, and firms’ ability to retain staff because of low pay growth. While these and other factors may be relevant, they do not provide a complete explanation for the weakness in productivity.

The lack of investment in technology and lack of infrastructure investment have been key reasons for the sluggish growth in productivity. Many companies are prepared to continue using relatively labour-intensive techniques because wage growth has been so low and this reduces the incentive to invest in labour-saving technology.

Another factor has been long hours and, for many office workers, being constantly connected to their work, checking and responding to emails and messages away from the office. The Telegraph article below reports Ann Francke, chief executive of the Chartered Management Institute, as saying:

“This is having a deleterious effect on the health of managers, which has a direct impact on productivity. UK workers already have the longest hours in Europe and yet we’re less productive.”

Another problem has been ultra low interest rates, which have reduced the burden of debt for poor performing companies and has allowed them to survive. It may also have prevented finance from being reallocated to more dynamic companies which would like to develop new products and processes.

Another feature of UK productivity is the large differences between regions. This is illustrated in Chart 3. Productivity in London in 2015 (the latest full year for data) was 31.5% above the UK average, while that in Wales was 19.4% below.

This again reflects investment patterns and also the concentration of industries in particular locations. Thus London’s financial sector, a major part of London’s economy, has experienced relatively large increases in productivity and this has helped to push productivity growth in the capital well above other parts of the country.

Another factor, which again has a regional dimension, is the poor productivity performance of family-owned businesses, where ownership and management is passed down the generations within the family without bringing in external managerial expertise.

The government is very aware of the UK’s weak productivity performance. Its recently launched industrial policy is designed to address the problem. We look at that in a separate post.

Articles
UK productivity edges up but growth still flounders below pre-crisis levels The Telegraph, Julia Bradshaw (6/1/17)
Weak UK productivity spurs warnings of living standards squeeze The Guardian, Katie Allen (6/1/17)
Productivity gap yawns across the UK BBC News, Jonty Bloom (6/1/17)
The UK productivity puzzle Fund Strategy. John Redwood (26/1/17)
Productivity puzzle remains for economists despite UK growth in third quarter of 2016 City A.M., Jasper Jolly (6/1/17)

Portal site
Solve the Productivity Puzzle Unipart

Report
Productivity: no puzzle about it TUC (Feb 2015)

Data
Labour Productivity: Tables 1 to 10 and R1 ONS (6/1/17)
International comparisons of UK productivity (ICP) ONS (6/10/16)
Gross capital formation (% of GDP) The World Bank

Questions

  1. In measuring productivity, the ONS uses three indicators: output per worker, output per hour and output per job. Compare the relative usefulness of these three measures of productivity.
  2. How would you explain the marked difference in productivity between regions and cities within the UK?
  3. How do flexible labour markets impact on productivity?
  4. Why is investment as a percentage of GDP so low in the UK compared to that in most other developed countries (see)?
  5. Give some examples of industrial policy measures that could be adopted to increase productivity growth.
  6. Examine the extent to which very low interest rates and quantitative easing encourage productivity-enhancing investment.
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Low global growth – the new norm?

In the blog post, Global warning, we looked at the use of unconventional macroeconomic policies to deal with the slow pace of economic growth around the world. One of the articles was by Nouriel Roubini. In the linked article below, he argues that slow economic growth may be the new global norm.

At the centre of the problem is a fall in the rate of potential economic growth. This has been caused by a lack of investment, which has slowed the pace of innovation and the growth in labour productivity.

The lack of investment, in turn, has been caused by a lack of spending by both households and governments. What is the point in investing in new capacity, argue firms, if they already have spare capacity?

Low consumer spending is partly the result of a redistribution of income from low- and middle-income households (who have a high marginal propensity to consume) to high-income households and corporations (who have a low mpc). Low spending is also the result of both consumers and governments attempting to reduce their levels of debt by cutting back spending.

Low growth leads to hysteresis – the process whereby low actual growth leads to low potential growth. The reason is that the unemployed become deskilled and the lack of investment by firms reduces the innovation that is necessary to embed new technologies.

Read Roubini’s analysis and consider the policy implications.

Article
Has the global economic growth malaise become the ‘new normal’? The Guardian, Nouriel Roubini (2/5/16)

Questions

  1. Explain what is meant by ‘hysteresis’ and how the concept is relevant in explaining low global economic growth.
  2. Why has there been a reduction in the marginal propensity to consume in recent years? What is the implication of this for the multiplier and economic recovery?
  3. Explain what Roubini means by ‘a painful de-leveraging process’. What are the implications of this process?
  4. How important are structural reforms and what forms could these take? Why has there been a reluctance for governments to institute such reforms?
  5. ‘Asymmetric adjustment between debtor and creditor economies has also undermined growth.’ Explain what Roubini means by this.
  6. Why are governments reluctant to use fiscal policy to boost both actual and potential economic growth?
  7. What feasible policy measures could be taken to boost actual and potential economic growth?
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Brexit costs

The Treasury has published a paper analysing the costs of Britain leaving the EU. Its central assumption is that the UK would negotiate a bilateral trade deal with the EU similar to that between Canada and the EU. Under this assumption the Treasury estimates that, by 2030, GDP would be 6.2% lower than if the UK had remained in the EU, meaning that the average household would be £4300 per year worse off than it would otherwise have been. The analysis also finds that there would be a total reduction in tax receipts of £36 billion per year – far greater than any savings from lower contributions to the EU budget.

Not surprisingly the ‘Vote Remain’ campaign for the UK to stay in the EU has welcomed the analysis, seeing it as strong evidence in support of their case. Also, not surprisingly, the Vote Leave campaign has questioned both the analysis and the assumptions on which it is based.

The Treasury analysis looks at three possible scenarios: (a) a Canada-style bilateral arrangement (the central estimate); (b) the UK becoming a member or the European Economic Area – the ‘Norwegian model’ (according to the Treasury, this would reduce GDP by 3.8%); (c) no specific deal with the EU, with the UK simply having the same access to the EU as any other country that is a mamber of the WTO (this would reduce GDP by 7.5%). Thus the Norwegian model would probably result in a smaller reduction in growth, but the UK would still continue to make contributions to the EU budget and have to allow free movement of labour. Only in option (c) would it have total control over migration. Each of the estimates has a margin of error, giving a range for the reduction in GDP across the three scenarios from 3.4% to 9.5%.

The Treasury used a three-stage process to arrive at its conclusions, as explained in the FT article below:

First, it uses gravity models to estimate the effect of different trade relationships on the quantity of trade and foreign direct investment. Gravity models take into account how close countries are to each other geographically, as well as their historical links, rather than assuming that trade flows to wherever the lowest tariffs are.

Second, it uses external academic results to estimate the consequences for productivity – the efficiency of the UK economy – from different levels of trade and foreign direct investment.

Third, it plugs the productivity numbers unto a global economic model run by the National Institute of Economic and Social Research to estimate the long-run differences in national income and prosperity.

Clearly there is large-scale uncertainty over any forecasts 14 years ahead, especially when the relationship with the EU and other countries post-EU exit can only be roughly estimated. The question is whether the assumptions are reasonable and whether there would be substantial costs from Brexit, but not necessarily of £4300 per household.

The following articles look at the analysis and its assumptions. Unlike many newspaper articles, which clearly have an agenda, these articles are relatively unbiased and try to assess the arguments. Of course, it would be difficult to be totally unbiased and it would be a good idea to try to spot any biases in each of the articles.

Articles
Treasury’s Brexit analysis: what it says — and what it doesn’t Financial Times, Chris Giles (18/4/16)
A Treasury analysis suggests the costs of Brexit would be high The Economist (18/4/16)
George Osborne says UK would lose £36bn in tax receipts if it left EU The Guardian, Anushka Asthana and Tom Clark (18/4/16)
Will each UK household be £4,300 worse off if the UK leaves the EU? The Guardian, Larry Elliott (18/4/16)
FactCheck Q&A: can we trust the Treasury on Brexit? Channel 4 News, Patrick Worrall (18/4/16)
Reality Check: Would Brexit cost your family £4,300? BBC News, Anthony Reuben (18/4/16)
Brexit sparks outbreak of agreement among economists Financial Times, Chris Giles (27/4/16)

Treasury analysis
EU referendum: HM Treasury analysis key facts HM Treasury (18/4/16)
HM Treasury analysis: the long-term economic impact of EU membership and the alternatives HM Treasury (18/4/16)

Questions

  1. Would households actually be poorer if the Treasury’s forecasts are correct?
  2. What alternative trade arrangements with the EU would be possible if the UK left the EU?
  3. What are the Treasury model’s main weaknesses?
  4. What considerations are UK voters likely to take into account in the referendum which are not included in the Treasury analysis?
  5. Make out the case for supporting the analysis of the Treasury.
  6. Make out the case for rejecting the analysis of the Treasury.
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One little piggy went to market …

Pork – a favourite food of many Brits, whether it’s as a key ingredient of a roast dinner or a full English Breakfast! But, British pig farmers may be in for a tricky ride and we might be seeing foreign pork on our plates in the months to come. This is because of the falling price of pork, which may be driving local farmers out of the market.

As we know, market prices are determined by the interaction of demand and supply and as market conditions change, this will affect the price at which pork sells at. This in turn will have an impact on the incomes of farmers and hence on farmers’ ability to survive in the market. According to forecasts from Defra, specialist pig farms are expected to see a fall in income by 46%, from £49,400 to £26,500 in 2016. A key driver of this, is the decline in the price of pork, which have fallen by an average of £10 per pig. This loss in income has led to pig farmers facing the largest declines of any type of farm, even beating the declines of dairy farmers, which have been well-documented.

If we think about the forces of demand and supply and how these have led to such declines in prices, we can turn to a few key things. Following the troubles in Russia and the Ukraine and Western sanctions being imposed on Russia, a retaliation of sorts was Russia banning European food imports. This therefore reduced demand for British pork. Adding to this decline in demand, there were further factors pushing down demand, following suggestions about the adverse impact that bacon and ham have on health. If pig farmers in the UK continue with the number of pigs they have and bearing in mind they would have invested in their pig farms before such bans and warnings were issued, then we see supply being maintained, demand falling and prices being pushed downwards.

Zoe Davies, Chief Executive of the National Pig Association said:

“This year is going to be horrendous for the British pig industry … Trading has been tough for at least 18 months now and we are starting to see people leave. We’re already seeing people calling in saying they’ve decided to give up. All we can hope is that more people leave European pig farms before ours do.”

We can also look to other factors that have been driving pig farmers out of business, including a strong pound, the glut of supply in Europe and productivity in the UK. Lily Hiscock, a commentator in this market said:

“It is estimated that the average pig producer is now in a loss-making position after 18 months of positive margins … The key factors behind the fall in markets are the exchange rate, UK productivity and retail demand … Indeed, pigmeat seems to be losing out to cheaper poultry meat in consumers’ shopping baskets … The recent fall in prices may stimulate additional demand, and a strengthening economy could help, but at present these are hopes rather than expectations.”

The future of British pig farms is hanging in the balance. If the economy grows, then demand may rise, offsetting the fall in demand being driven by other factors. We will also see how the exit of pig farmers affects prices, as each pig farmer drops out of the market, supply is being cut and prices rise. Though this is not good news for the farmers who go out of business, it may be an example of survival of the fittest. The following articles consider the market for pork.

Podcast
UK pork market, Poppers, Scrap Metal BBC Radio 4, You and Yours (28/01/16)

Articles
Drop in global pork prices to bottom out – at 10-year lows agrimoney.com (29/01/16)
UK pork crisis looms as pig farmers expect income to half in 2016 Independent, Zlata Rodionova (5/02/16)
British pig farmers et for horrendous year as pork prices fall Western Morning News (17/01/16)

Questions

  1. What are they demand-side and supply-side factors which have pushed down the price of pork?
  2. Illustrate these effects using a demand and supply diagram.
  3. Into which market structure, would you place the pork industry?
  4. Using a diagram showing costs and revenues, explain why pig farmers in the UK are being forced out of the market.
  5. How has the strength of the pound affected pork prices in the UK?
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Finish at 3.30?

There are countless people who work 12-hour days – some get rewarded with huge salaries, while others are paid peanuts. A key question is: are these people happy? With 24 hours in a day for both rich and poor, the more hours we work, the fewer hours we have for leisure time. So, how do we choose the optimal work-life balance?

In economics, we often talk about the concept of diminishing marginal utility and this concept can be applied to working life. For many people, each additional hour worked is tougher or adds less to your utility – we get tired, bored and the job may seem more unpleasant the more hours you work. The typical day of work is around 7-8 hours, but across Sweden, some offices are now closing at 3.30, with a 6-hour working day, but with salaries remaining the same. It’s not a new idea in Sweden and trials of this shorter working day concept have proved successful, with higher reported profits, better service to customers (or patients) and happier, more productive staff.

This shorter working day is not a common occurrence across Sweden or other countries, but it’s a practice that is certainly garnering media attention. Companies will certainly be keen if this means an increase in productivity, but one key concern will be the potential loss of business from companies who do keep working after 3.30 and expect phones to be answered.

It would certainly be an attractive prospect for employees and perhaps is a good way of ‘poaching’ the best staff and hence of boosting worker productivity. With more free time, perhaps an employee’s happiness would also increase, which could have significant effects on a range of variables. The following article considers this shorter working day.

The truth about Sweden’s short working hours BBC News, Maddy Savage (2/11/15)

Questions

  1. Explain the concept of diminishing marginal utility with respect to hours worked. Can this be used to explain why overtime often receives higher rates of pay?
  2. Using indifference analysis, explain how a change in the number of hours worked might affect an individual’s happiness.
  3. Why might a shorter working day help to increase a firm’s profits?
  4. If a shorter working day did increase happiness, what other factors might be affected? Does this explain why other countries are so interested in the success of this initiative?
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