Tag: underemployment

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Lockdown 2.0: fiscal and monetary responses

With the imposition of a new lockdown in England from 5 November to 2 December and in Wales from 3 October to 9 November, and with strong restrictions in Scotland and Northern Ireland, the UK economy is set to return to negative growth – a W-shaped GDP growth curve.

With the closure of leisure facilities and non-essential shops in England and Wales, spending is likely to fall. Without support, many businesses would fail and potential output would fall. In terms of aggregate demand and supply, both would decline, as the diagram below illustrates. (Click here for a PowerPoint.)

The aggregate demand curve shifts from AD1 to AD2 as consumption and investment fall. Exports also fall as demand is hit by the pandemic in other countries. The fall in aggregate supply is represented partly by a movement along the short-run aggregate supply curve (SRAS) as demand falls for businesses which remain open (such as transport services). Largely it is represented by a leftward shift in the curve from SRAS1 to SRAS2 as businesses such as non-essential shops and those in the hospitality and leisure sector are forced to close. What happens to the long-run supply curve depends on the extent to which businesses reopen when the lockdown and any other subsequent restrictions preventing their reopening are over. It also depends on the extent to which other firms spring up or existing firms grow to replace the business of those that have closed. The continuing rise in online retailing is an example.

With the prospect of falling GDP and rising unemployment, the UK government and the Bank of England have responded by giving a fiscal and monetary boost. We examine each in turn.

Fiscal policy

In March, the Chancellor introduced the furlough scheme, whereby employees temporarily laid off would receive 80% of their wages through a government grant to their employers. This scheme was due to end on 31 October, to be replaced by the less generous Job Support Scheme (see the blog, The new UK Job Support Scheme: how much will it slow the rise in unemployment?). However, the Chancellor first announced that the original furlough scheme would be extended until 2 December for England and then, on 5 November, to the end of March 2021 for the whole of the UK. He also announced that the self-employed income support grant would increase from 55% to 80% of average profits up to £7500.

In addition, the government announced cash grants of up to £3000 per month for businesses which are closed (worth more than £1 billion per month), extra money to local authorities to support businesses and an extension of existing loan schemes for business. Furthermore, the government is extending the scheme whereby people can claim a repayment ‘holiday’ for up to 6 months for mortgages, personal loans and car finance.

The government hopes that the boost to aggregate demand will help to slow, or even reverse, the predicted decline in GDP. What is more, by people being put on furlough rather than being laid off, it hopes to slow the rise in unemployment.

Monetary policy

At the meeting of the Bank of England’s Monetary Policy Committee on 4 November, further expansionary monetary policy was announced. Rather than lowering Bank Rate from its current historically low rate of 0.1%, perhaps to a negative figure, it was decided to engage in further quantitative easing.

An additional £150 billion of government bonds will be purchased under the asset purchase facility (APF). This will bring the total vale of bonds purchased since the start of the pandemic to £450 billion (including £20 billion of corporate bonds) and to £895 billion since 2009 when QE was first introduced in response to the recession following the financial crisis of 2007–8.

The existing programme of asset purchases should be complete by the end of December this year. The Bank of England expects the additional £150 billion of purchases to begin in January 2021 and be completed within a year.

UK quantitative easing since the first round in March 2009 is shown in the chart above. The reserve liabilities represent the newly created money for the purchase of assets under the APF programme. (There are approximately £30 billion of other reserve liabilities outside the APF programme.) The grey area shows projected reserve liabilities to the end of the newly announced programme of purchases, by which time, as stated above, the total will be £895 billion. This, of course, assumes that the Bank does not announce any further QE, which it could well do if the recovery falters.

Justifying the decision, the MPC meeting’s minutes state that:

There are signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak. …The fall in activity over 2020 has reflected a decline in both demand and supply. Overall, there is judged to be a material amount of spare capacity in the economy.

Conclusions

How effective these fiscal and monetary policy measures will be in mitigating the effects of the Covid restrictions remains to be seen. A lot will depend on how successful the lockdown and other restrictions are in slowing the virus, how quickly a vaccine is developed and deployed, whether a Brexit deal is secured, and the confidence of both consumers, businesses and financial markets that the economy will bounce back in 2021. As the MPC’s minutes state:

The outlook for the economy remains unusually uncertain. It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It also depends on the responses of households, businesses and financial markets to these developments.

Articles

Official documents

Questions

  1. Illustrate the effects of expansionary fiscal and monetary policy on (a) a short-run aggregate supply and demand diagram; (b) a long-run aggregate supply and demand diagram.
  2. In the context of the fiscal and monetary policy measures examined in this blog, what will determine the amount that the curves shift?
  3. Illustrate on a Keynesian 45° line diagram the effects of (a) the lockdown and (b) the fiscal and monetary policy measures adopted by the government and Bank of England.
  4. If people move from full-time to part-time working, how is this reflected in the unemployment statistics? What is this type of unemployment called?
  5. How does quantitative easing through asset purchases work through the economy to affect output and employment? In other words, what is the transmission mechanism of the policy?
  6. What determines the effectiveness of quantitative easing?
  7. Under what circumstances will increasing the money supply affect (a) real output and (b) prices alone?
  8. Why might quantitative easing benefit the rich more than the poor?
  9. How could the government use quantitative easing to finance its budget deficit?
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More and more zeros

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

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

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

According to the ONS:

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

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

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

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

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

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

Articles

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

Data

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

Questions

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

Figures for employment and unemployment give an incomplete picture of the state of the labour market. Just because a person is employed, that does not mean that they are working the number of hours they would like.

Some people would like to work more hours, either by working more hours in their current job, or by switching to an alternative job with more hours or by taking on an additional part-time job. Such people are classed as ‘underemployed’. On average, underemployed workers wanted to work an additional 11.3 hours per week in 2014 Q2. Underemployment is a measure of slack in the labour market, but it is not picked up in the unemployment statistics.

Other people would like to work fewer hours (at the same hourly rate), but feel they have no choice – usually because their employer demands that they work long hours. Some, however, would like to change to another job with fewer hours even if it involved less pay. People willing to sacrifice pay in order to work fewer hours are classed as ‘overemployed’.

Statistics released by the Office for National Statistics show that, in April to June 2014, 9.9%, or 3.0 million, workers in the UK were underemployed; and 9.7%, or 2.9 million, were overemployed.

The figures for underemployment vary between different groups:

• 11.0% of female workers 8.9% of male workers
• 19.6% of 16-24 year olds 9.9% of all workers
• 21.1% of people in elementary occupations (e.g. cleaners, shop assistants and security guards) 5.4% of people in professional occupations (e.g. doctors, teachers and accountants)
• 11.5% of people in the North East of England (in 2013) 9.2% of people in the East of England (in 2013)
• 22.1% of part-time workers 5.4% of full-time workers

As far as the overemployed are concerned, professional people and older people are more likely want shorter hours

The ONS data also show how under- and overemployment have changed over time: see chart (click here for a PowerPoint). Before the financial crisis and recession, overemployment exceeded underemployment. After the crisis, the position reversed: underemployment rose from 6.8% in 2007 to a peak of 10.8% in mid-2012; while overemployment fell from 10.5% in 2007 to a trough of 8.8% in early 2013.

More recently, as the economy has grown more strongly, underemployment has fallen back to 9.9% (in 2014 Q2) and overemployment has risen to 9.7%, virtually closing the gap between the two.

The fact that there is still significant underemployment suggests that there is still considerable slack in the labour market and that this may be acting as a brake on wage increases. On the other hand, the large numbers of people who consider themselves overemployed, especially among the professions and older workers, suggests that many people feel that they have not got the right work–life balance and many may be suffering consequent high levels of stress.

Articles

Rise in number of UK workers who want to cut back hours, ONS says The Guardian, Phillip Inman (25/11/14)
Data reveal slack and stretch in UK workforce Financial Times, Sarah O’Connor (25/11/14)
Will you graduate into underemployment? The Guardian, Jade Grassby (30/9/14)
Three million people would take pay cut to work shorter hours: Number who say they feel overworked rises by 10 per cent in one year Mail Online, Louise Eccles (26/11/14)
ONS: Rate of under-employment in Scotland lower than UK average Daily Record, Scott McCulloch (25/11/14)

ONS Release

Underemployment and Overemployment in the UK, 2014 ONS (25/11/14)

Questions

  1. Distinguish between unemployment (labour force survey (LFS) measure), unemployment (claimant count measure), underemployment (UK measure), underemployment (Eurostat measure) and disguised unemployment.
  2. Why is underemployment much higher amongst part-time workers than full-time workers?
  3. How do (a) underemployment and (b) overemployment vary according to the type of occupation? What explanations are there for the differences?
  4. Is the percentage of underemployment a good indicator of the degree of slack in the economy? Explain.
  5. How is the rise in zero hours contracts likely to have affected underemployment?
  6. How could the problem of overemployment be tackled? Would it be a good idea to pass a law setting a maximum number of hours per week that people can be required to do in a job?
  7. Would flexible working rights be a good idea?
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Zero-hours contracts: the ultimate flexible labour market?

Despite the prolonged stagnation in the UK, unemployment has not soared. In fact, over the past two years the ILO unemployment rate (see here for a definition) has fallen slightly – from 8.6% in October 2011 to around 8.0% today. What is more, the claimant count rate is considerably lower than the ILO rate – at around 4.4%.

Part of the reason for the relatively good unemployment figures is the rise in ‘zero-hours contracts’. These allow employers to cut the hours that people work without laying them off. The Office for National Statistics estimates that last year (2012) 250,000 people, or 0.84% of the workforce, were on such contracts.

But just what is meant by ‘zero-hours contracts’? According to the ONS:

People on zero-hours contracts are classified as being in employment regardless of the number of hours they actually worked during the survey reference week. This includes anyone who was not required to work any hours during the reference week whilst remaining on their current contract of employment. The continued existence of the contract of employment is the key determinant of their employment status in these situations.

If people are working less than they would like to, this is classified as underemployment, but such people do not appear in the unemployment statistics. Such contracts thus mask the true extent of surplus labour in the economy.

The Chartered Institute of Personnel and Development (CIPD) puts the figure much higher than the ONS. In the Summer 2013 issue of its Labour Market Outlook, it estimates that one million workers are on zero-hours contracts.

Many employers use such contracts, including many voluntary-sector and public-sector organisations, including the NHS, local councils and Buckingham Palace. They are also used by many small and medium-sized enterprises and many well-known large companies, such as Sports Direct, Amazon, JD Wetherspoon and Cineworld. It gives them the flexibility to adjust the hours they employ people. It allows them to keep people in employment when demand is low. It also makes them more willing to take on staff when demand rises, as it removes the fear of being over-staffed if demand then falls back.

But many workers dislike such contracts, which give them fewer employment rights and fewer hours than they would like to work. It also makes it difficult to budget when future income is uncertain. It also make credit and mortgages harder to obtain, as people have no guaranteed income. Another complaint is that companies may use the threat of lower hours as a tool to bully staff and get away with poorer working conditions.

In May of this year, the Business Secretary, Vince Cable, announced that he was setting up a review of zero hours contracts.

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

The following videos and articles look at the issue in some detail: at the extent of the practice and at its benefits to employers and its costs (and some benefits) to workers. Both The Guardian and the BBC have an extensive range of articles on the topic.

Webcasts

Do zero hours contracts create real jobs? BBC Newsnight, Allegra Stratton (14/8/12)
Record number of ‘Zero Hours Contracts’ ITV News on YouTube, Laura Kuenssberg (2/5/13)
Britons rally against ‘Zero Hour’ contracts Al Jazeera on YouTube (4/8/13)
Anger at Amazon working conditions Channel 4 News (1/8/13)
Government to include Amazon in its zero hours probe Channel 4 News (2/8/13)
Councils using zero hours contracts BBC London, Warren Nettleford (31/7/13)

Podcasts

The real economy: Labour market BBC Today Programme, Evan Davis (24/8/11)
Zero hour contracts ‘just the norm’ BBC Today Programme, Rochelle Monte and Peter Cheese (5/8/13)

Articles

Zero-hours contracts: One million British workers could be affected Independent, Nigel Morris (5/8/13)
Zero hours contracts “spreading like wildfire”, official stats show Union News, Pete Murray (1/8/13)
Zero-hours contracts: what are they? The Guardian, Phillip Inman (30/7/13)
Buckingham Palace uses zero-hours contracts for summer staff The Guardian, Simon Neville, Matthew Taylor and Phillip Inman (30/7/13)
Nick Clegg: business department will investigate zero-hours contracts The Guardian,
Patrick Wintour, Simon Neville, Matthew Taylor and Phillip Inman (31/7/13)
Zero-hours contracts are not unavoidable The Guardian, Phillip Inman (1/8/13)
ONS admits it underestimated number of zero-hours contracts The Guardian, Simon Neville (1/8/13)
Zero-hours contract workers – the new reserve army of labour? The Guardian, Philip Inman (4/8/13)
Zero-hours contracts cover more than 1m UK workers The Guardian, Simon Goodley and Phillip Inman (5/8/13)
Zero-hours contracts use by councils needs to be moderated The Guardian, Vidhya Alakeson (5/8/13)
If zero-hours contracts are driving this ‘recovery’, it’s a lousy kind of recover The Guardian, Deborah Orr (9/8/13)
ONS increases its estimate of workers on zero hours contracts Financial Times, John Aglionby (1/8/13)
Zero Hours Herald Scotland, Ian Bell and Scott Dickson (4/8/13)
Sports Direct protests planned over zero hours contracts Channel 4 News (3/8/13)
Cable warns of exploitation of zero-hours contracts BBC News (5/8/13)
Q&A: What are zero-hours contracts? BBC News (5/8/13)
Record number of 16-24s on zero hours contracts at work BBC Newsbeat, Jim Reed (15/5/13)
Figures show 18-24s most likely on zero-hours contract BBC Newsbeat, Jim Reed and Amelia Butterly (5/8/13)
Andy Burnham calls for ban on zero hours contracts BBC News (28/4/13)
Zero-hours contracts: What is it like living on one? BBC News, Sean Clare (5/8/13)
Small Talk: Zero-hours contracts? Key for growth Independent, David Prosser (5/8/13)
Zero Hour Contracts Manchester based law firm, Emma Cross (30/7/13)

Data

People and proportion in employment on a zero-hour contract ONS (31/7/13)
Estimating Zero-Hour Contracts from the Labour Force Survey ONS (26/7/13)
One million workers on zero hours contracts, finds CIPD study CIPD, Michelle Stevens (5/8/13)
Labour Market Outlook CIPD

Questions

  1. Distinguish between open unemployment, disguised unemployment and underemployment?
  2. Distinguish between functional, numerical and financial flexibility? Which type or types of flexibility do zero-hours contracts give the firm?
  3. Identify the various benefits to employers of zero-hours contracts?
  4. What are the costs and benefits to workers of such contracts?
  5. Identify what forms of flexible contracts are used for staff in your university or educational establishment. Do they benefit (a) staff; (b) students?
  6. Are zero-hours contracts fair?
  7. In what ways do zero-hours contracts transfer risks from employers to employees?
  8. If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
  9. From the perspective of the employer, how do the benefits of zero-hours contracts compare with other forms of flexible working?
  10. Consider the arguments for and against (a) banning and (b) regulating zero-hours contracts.
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Is the UK economy ready for recovery?

If aggregate demand were to expand, would there be sufficient spare capacity to allow aggregate supply to expand to meet the additional demand? This is the question addressed by the podcast and article below.

If there is plenty of spare capacity, policies to increase aggregate demand could help to take up the slack and thereby achieve economic growth – at least as long as spare capacity remains. In other words, in the short run the aggregate supply curve may be horizontal or only gently upward sloping at the current point of intersection with the aggregate demand curve. This is illustrated by point a in the diagram. A rightward shift in the aggregate demand curve would cause a movement along the aggregate supply curve to a new higher level of real national income (Y).

If, however, there is little or no spare capacity, an increase in nominal aggregate demand is likely to be purely inflationary, or virtually so. This would the case at point b in the diagram. Real national income cannot expand beyond the full-capacity level, YFC. Under such circumstances, any attempt by the government to stimulate economic growth should focus on the supply side and attempt to shift the aggregate supply curve to the right. Examples of supply-side policy include incentives to encourage research and development, incentives for the private sector to invest in new capacity and direct public investment in infrastructure.

Unemployment is not just caused by a lack of aggregate demand relative to aggregate supply. It may be the result of a mismatching of labour supply with the demand for labour. People may have the wrong qualifications or not be where the jobs are. Unemployment may co-exist with quite high levels of vacancies. There may be vacancies for highly qualified scientists, technicians or craftspeople and unemployment of people with low skills or skills no longer in high demand. The same may apply to capital equipment. There may be a shortage of high-tech equipment or equipment to produce goods in high demand and redundant older equipment or equipment in areas of declining demand.

Part of a comprehensive set of policies to tackle unemployment and achieve economic growth would be to focus on the whole balance of the economy and the matching of the demand and supply of inputs.

Podcast
Is there ‘spare capacity’ in the economy? BBC Today Programme, Evan Davis and Andrew Sentance (4/12/12)

Article
OBR’s supply pessimism could be the ruin of this government The Telegraph, Roger Bootle (25/11/12)

Data
Claimant count and vacancies dataset ONS (14/11/12)
Labour Market Statistics, November 2012 ONS (14/11/12)
Actual weekly hours worked ONS (14/11/12)
Usual weekly hours worked ONS (14/11/12)

Questions

  1. Distinguish between ‘unemployment’, ‘underemployment’ and ‘disguised unemployment’?
  2. To what extent does the level of unemployment provide a good measure of spare capacity?
  3. Is the UK economy suffering from a deflationary gap? If so, how would you measure the size of that gap?
  4. If there is substantial spare capacity, is expansionary fiscal policy the best means of achieving economic growth?
  5. What policies are likely to have both a positive supply-side effect and a positive demand-side effect?
  6. What constraints does the government face in attempting to boost aggregate demand?
  7. Why might policies designed to stimulate aggregate demand also increase supply capacity?
  8. What policies would you recommend for tackling the mismatching of the demand and supply of inputs?