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The geographical immobility of labour in England – a social problem

Where you live in Great Britain can have a profound effect on your earning potential. According to a report published by the Social Mobility Commission, there is a growing geographical divide, with more affluent areas getting relatively richer, while ‘many other parts of the country are being left behind economically and hollowed out socially’.

The Commission uses a Social Mobility Index to rank the 324 local authorities in England. The index is a measure of the social mobility prospects for people from disadvantaged backgrounds. It is ‘made up of 16 key performance indicators spanning each major life stage’.

The index shows that children from disadvantaged backgrounds have lower educational attainment, poorer initial jobs and poorer prospects for advancement in the labour market. Often they are stuck in low paid jobs with little chance of getting on the housing ladder and fewer chances of moving away from the area.

The problem is not simply one of a North-South divide or one of inner cities versus the suburbs. Many inner-city areas have been regenerated, with high incomes and high social and geographical mobility. Other inner-city areas remain deprived.

The worst performing areas are remote rural or coastal areas and former industrial areas, where industries have closed. As the author of the report states in the Guardian article linked below:

These areas have fewer specialist teachers, fewer good schools, fewer good jobs and worse transport links. … Many of these areas have suffered from a lack of regeneration: few high-paying industries are located there, and they often exhibit relatively limited job opportunities and clusters of low pay.

The problem often exists within areas, with some streets exhibiting growing affluence, where the residents have high levels of social mobility, while other streets have poor housing and considerable levels of poverty and deprivation. Average incomes for such areas thus mask this type of growing divide within areas. Indeed, some of the richest areas have worse outcomes for disadvantaged children than generally poorer areas.

There are various regional and local multiplier effects that worsen the situation. Where people from disadvantaged backgrounds are successful, they tend to move away from the deprived areas to more affluent ones, thereby boosting the local economy in such areas and providing no stimulus to the deprived areas. And so the divide grows.

Policies, according to the report, need to focus public investment, and incentives for private investment, in deprived areas. They should not focus simply on whole regions. You can read the specific policy recommendations in the articles below.

Articles
Social mobility is a stark postcode lottery. Too many in Britain are being left behind The Guardian, Alan Milburn (28/11/17)
State of the Nation – Sector Response FE News (28/11/17)
Social mobility: the worst places to grow up poor BBC News, Judith Burns and Adina Campbell (28/11/17)
How Britain’s richest regions offer worst prospects for poor young people Independent, May Bulman (28/11/17)
Small Towns Worst Places In Britain For Social Mobility, New ‘State Of The Nation’ Report Reveals Huffington Post, Paul Waugh (28/11/17)

Report
Social mobility in Great Britain: fifth state of the nation report Social Mobility Commission, News (28/11/17)
Fifth State of the Nation Report Social Mobility Commission, News (28/11/17)

Questions

  1. Explain how local multipliers operate.
  2. What is the relationship between social immobility as identified in the report and the elasticity of supply of labour in specific jobs?
  3. What is the link between geographical, occupational and social mobility?
  4. Explain why, apart from London, English cities are ‘punching below their weight on social mobility outcomes’.
  5. Go through each of the key policy recommendations of the report and consider the feasibility of introducing them.
  6. What policies could be adopted to retain good teachers in schools in deprived areas?
  7. To what extent might an increased provision of training ease the problem of social mobility?
  8. Investigate policies adopted in other European countries to tackle local deprivation. Are there lessons that can be learned by the UK government, devolved governments, local authorities or other agencies?
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A Budget warning on productivity and growth

In delivering his Budget on 22 November, Philip Hammond reported that the independent Office for Budget Responsibility had revised down its forecasts of growth in productivity and real GDP, and hence of earnings growth.

Today, median earnings are £23,000 per annum. This is £1500 less than the £24,500 that the median worker earned in 2008 in today’s prices. The OBR forecasts a growth in real household disposable income of just 0.35% per annum for the next four years.

With lower growth in earnings would come a lower growth in tax revenues. With his desire to cut the budget deficit and start eventually reducing government debt, this would give the government less scope for spending on infrastructure, training and other public-sector investment; less scope to support public services, such as health and education; less scope for increasing benefits and public-sector wages.

The normal measure of productivity, and the one used by the OBR, is the value of output produced per hour worked. This has hardly increased at all since the financial crisis of 2008. It now takes an average worker in the UK approximately five days to produce the same amount as it takes an average worker in Germany four days. Although other countries’ productivity growth has also slowed since the financial crisis, it has slowed more in the UK and from a lower base – and is now forecast to rebound less quickly.

For the past few years the OBR has been forecasting that productivity growth would return to the trend rate of just over 2% that the UK achieved prior to 2008. For example, the forecasts it made in June 2010 are shown by the grey line in the chart, which were based on the pre-crash trend rate of growth in productivity (click on chart to enlarge). And the forecasts it made in November 2016 are shown by the pale green line. Yet each year productivity has hardly changed at all. Today output per hour is less than 1% above its level in 2008.

Now the OBR believes that poorer productivity growth will persist. It is still forecasting an increase (the blue line in the chart) – but by 0.7 of a percentage point less than it was forecasting a year ago (the pale green line): click here for a PowerPoint of the chart.

We have assumed that productivity growth will pick up a little, but remain significantly lower than its pre-crisis trend rate throughout the next five years. On average, we have revised trend productivity growth down by 0.7 percentage points a year. It now rises from 0.9 per cent this year to 1.2 per cent in 2022. This reduces potential output in 2021-22 by 3.0 per cent. The ONS estimates that output per hour is currently 21 per cent below an extrapolation of its pre-crisis trend. By the beginning of 2023 we expect this to have risen to 27 per cent.

Why has there been such weak productivity growth?
Weak productivity growth has been caused by a mixture of factors.

Perhaps the most important is that investment as a percentage of GDP has been lower than before the financial crisis and lower than in other countries. Partly this has been caused by a lack of funding for investment as banks have sought to rebuild their capital and have cut down on riskier loans. Partly it has been caused by a lack of demand for investment, given sluggish rates of economic growth and the belief that austerity will continue.

And it is not just private investment. Public-sector investment in transport infrastructure, housing and education and training has been lower than in other countries. Indeed, the poor training record and low skill levels in the UK are main contributors to low productivity.

The fall in the pound since the Brexit vote has raised business costs and further dampened demand as incomes have been squeezed.

Another reason for low productivity growth has been that employers have responded to weak demand, not by laying off workers and thereby raising unemployment, but by retaining low-productivity workers on low wages. Another has been the survival of ‘zombie’ firms, which, by paying low wages and facing ultra-low interest rates, are able to survive competition from firms that do invest.

Why is weak productivity growth forecast to continue?
Looking forward, the nature of the Brexit deal will impact on confidence, investment, wages and growth. If the deal is bad for the UK, the OBR’s forecasts are likely to be too optimistic. As it is, uncertainty over the nature of the post-Brexit world is weighing heavily on investment as some businesses choose to wait before committing to new investment.

On the other hand, exports may rise faster as firms respond to the depreciation of the pound and this may stimulate investment, thereby boosting productivity.

Another factor is the effect of continuing tight Budgets. There was some easing of austerity in this Budget, as the Chancellor accepted a slower reduction in the deficit, but government spending will remain tight and this is likely to weigh on growth and investment and hence productivity.

But this may all be too gloomy. It is very difficult to forecast productivity growth, especially as it is hard to measure output in much of the service sector. It may be that the productivity growth forecasts will be revised up before too long. For example, the benefits from new technologies, such as AI, may flow through more quickly than anticipated. But they may flow through more slowly and the productivity forecasts may have to be revised down even further!

Articles
The OBR’s productivity “forecast” Financial Times, Kadhim Shubber
U.K. Faces Longest Fall in Living Standards on Record Bloomberg, Simon Kennedy and Thomas Penny (23/11/17)
Britain’s Productivity Pain Costs Hammond $120 Billion Bloomberg, Fergal O’Brien (22/11/17)
OBR slashes Britain’s growth forecast on sluggish productivity and miserly pay The Telegraph, Tim Wallace (22/11/17)
Budget 2017: Stagnant earnings forecast ‘astonishing’ BBC News (23/11/17)
Economists warn Budget measures to lift productivity fall short Financial Times, Gavin Jackson and Gill Plimmer (22/11/17)
Why the economic forecasts for Britain are so apocalyptic – and how much Brexit is to blame Independent, Ben Chu (24/11/17)
Growth holds steady as economists doubt OBR’s gloom The Telegraph, Tim Wallace (23/11/17)
Britain’s debt will not fall to 2008 levels until 2060s, IFS says in startling warning Independent, Lizzy Buchan (23/11/17)
Philip Hammond’s budget spots Britain’s problems but fails to fix them The Economist (22/11/17)
Debunking the UK’s productivity problem The Conversation, Paul Lewis (24/11/17)
Budget 2017: experts respond The Conversation (22/11/17)
Autumn Budget 2017 Forecasts Mean ‘Longest Ever Fall In Living Standards’, Says Resolution Foundation Huffington Post, Jack Sommers (23/11/17)
It May Just Sound Like A Statistic, But Productivity Growth Matters For All Of Us Huffington Post, Thomas Pope (24/11/17) (see also)
UK prospects for growth far weaker than first predicted, says OBR The Guardian, Angela Monaghan (22/11/17)
UK faces two decades of no earnings growth and more austerity, says IFS The Guardian, Phillip Inman (23/11/17)
Age of austerity isn’t over yet, says IFS budget analysis The Guardian, Larry Elliott (23/11/17)

Summary of Budget measures
Budget 2017: FT experts look at what it means for you Financial Times (24/11/17)

Official Documents
Autumn Budget 2017 HM Treasury (22/11/17)
Economic and fiscal outlook – November 2017 Office for Budget Responsibility (22/11/17)

IFS analysis
Autumn Budget 2017 Institute for Fiscal Studies (23/11/17)

Questions

  1. What measures of productivity are there other than output per hour? Why is output per hour normally the preferred measure of productivity?
  2. What factors determine output per hour?
  3. Why have forecasts of productivity growth rates been revised downwards?
  4. What are the implications of lower productivity growth for government finances?
  5. What could cause an increase in output per hour? Would there be any negative effects from these causes?
  6. What policies could the government pursue to increase productivity? How feasible are these policies? Explain.
  7. Would it matter if the government increased borrowing substantially to fund a large programme of public investment?
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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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Job losses and labour mobility

Lloyds Banking Group has announced that it plans to reduce its labour force by 9000. Some of this reduction may be achieved by not replacing staff that leave, but some may have to be achieved through redundancies.

The reasons given for the reduction in jobs are technological change and changes in customer practice. More banking services are available online and customers are making more use of these services and less use of branch banking. Also, the increasingly widespread availability of cash machines (ATMs) means that fewer people withdraw cash from branches.

And it’s not just outside branches that technological change is impacting on bank jobs. Much of the work previously done by humans is now done by software programs.

One result is that many bank branches have closed. Lloyds says that the latest planned changes will see 150 fewer branches – 6.7% of its network of 2250.

What’s happening in banking is happening much more widely across modern economies. Online shopping is reducing the need for physical shops. Computers in offices are reducing the need, in many cases, for office staff. More sophisticated machines, often controlled by increasingly sophisticated computers, are replacing jobs in manufacturing.

So is this bad news for employees? It is if you are in one of those industries cutting employment. But new jobs are being created as the economy expands. So if you have a good set of skills and are willing to retrain and possibly move home, it might be relatively easy to find a new, albeit different, job.

As far as total unemployment is concerned, more rapid changes in technology create a rise in frictional and structural unemployment. This can be minimised, however, or even reduced, if there is greater labour mobility. This can be achieved by better training, education and the development of transferable skills in a more adaptive labour force, where people see changing jobs as a ‘normal’ part of a career.

Webcasts
Lloyds Bank cuts 9,000 jobs – but what of the tech future? Channel 4 News, Symeon Brown (28/10/14)
Lloyds Bank confirms 9,000 job losses and branch closures BBC News, Kamal Ahmed (28/10/14)

Article
Lloyds job cuts show the technology axe still swings for white collar workers The Guardian, Phillip Inman (28/10/14)

Reports
Unleashing Aspiration: The Final Report of the Panel on Fair Access to the Professions Cabinet Office (July 2009)
Fair access to professional careers: a progress report Cabinet Office (30/5/12)

Questions

  1. Is a reduction in banking jobs inevitable? Explain.
  2. What could banks do to reduce the hardship to employees from a reduction in employment?
  3. What other industries are likely to see significant job losses resulting from technological progress?
  4. Distinguish between demand-deficient, real-wage, structural and frictional unemployment. Which of these are an example, or examples, of equilibrium unemployment?
  5. What policies could the government pursue to reduce (a) frictional unemployment; (b) structural unemployment?
  6. What types of industry are likely to see an increase in employment and in what areas of these industries?
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