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
- 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?
- Using indifference analysis, explain how a change in the number of hours worked might affect an individual’s happiness.
- Why might a shorter working day help to increase a firm’s profits?
- 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?
Economic growth is vital to an economy: it helps to create jobs and is crucial in stimulating confidence, both for businesses and consumers. Growth comes from various sources, both domestic and external, and so for each individual country it’s not just its growth rate that is important, but the growth rates of other countries, in particular those it trades with.
Recent data suggest that the global economy could be on the downturn and here we consider three countries/continents.
The US economy has been doing relatively well and we saw discussion by the Federal Reserve as to whether the economy was in a position to be able to handle an increase in interest rates. Although rates didn’t rise, there was a general consensus that a rate rise would not significantly harm the economy. However, perhaps those opinions may now be changing with the latest information regarding US growth. In the second quarter of 2015, growth was recorded at 3.9%, but according to the Department of Commerce, it fell to 1.5% for the third quarter. Though it’s still a solid growth rate, especially compared to other economies, it does represent a significant fall from quarter to quarter.
Many analysts suggest that this slowing is just a blip, partly the result of running down stocks, but it’s also a trend that has occurred in the UK. Although the fall in growth in the UK (see series IHYR) has been less than in the USA, it is still a fall. Annual growth was recorded at 2.7% in quarter 1, but fell to 2.4% in quarter 2 and to 2.3% in quarter 3 (with GDP in quarter 3 only 0.5% higher than in quarter 2). A big cause of this slowdown in growth has been a fall in manufacturing output and it is the service sector that prevented an even larger slowdown.
And it’s not just the West that is experiencing declining growth. The IMF has warned of a slowdown in economic growth in Africa. Although the absolute annual rate of growth at 3.75% is high compared to the UK, it does represent the slowest rate of growth in the past six years. One key factor has been the lower oil prices. Although this has helped to stimulate consumer spending in many countries, it has hit oil-producing countries.
With some of the big players experiencing slowdowns, world economic growth may be taking something of a dive. The Christmas period in many countries is when companies will make significant contributions to their annual sales, and this year these sales are going to be vital. The following articles consider the slowdowns in growth around the world.
Articles
US growth slows despite spending free Financial Times, Sam Fleming and Richard Blackden (29/10/15)
US economic growth slows in third quarter as businesses cut back The Guardian, Dominic Rushe (30/10/15)
US economic growth slows sharply BBC News (29/10/15)
US Q3 gross domestic product up 1.5% vs 1.6% growth expected CNBC, Reuters (29/10/15)
US growth cools in third quarter Wall Street Journal, Eric Morath (29/10/15)
UK economic growth slows to 0.5% in third quarter BBC News (27/10/15)
GDP growth in the UK slows more than expected to 0.5% The Guardian, Julia Kollewe (27/1015)
UK growth slows as construction and manufacturing output shrinks The Telegraph, Szu Ping Chan (27/10/15)
UK economy loses steam as GDP growth slows to 0.5% Financial Times, Ferdinando Giugliano (27/10/15)
No UK growth without services BBC News, Robert Peston (27/10/15)
IMF warns of African economic slowdown BBC News (27/10/15)
African growth feels the strain from China’s slowdown Financial Times, Andrew England (27/10/15)
Tax credits: George Osborne ‘comfortable’ with ‘judgement call’ BBC News (22/10/15)
IMF revises down Sub-Saharan Africa 2015 growth Wall Street Journal, Matina Stevis (27/10/15)
WEO publications
World Economic Outlook, October 2015: Adjusting to Lower Commodity Prices IMF (6/10/15)
Global Growth Slows Further, IMF’s latest World Economic Outlook IMF Podcast, Maurice Obstfeld (6/10/15)
Transcript of the World Economic Outlook Press Conference IMF (6/10/15)
World Economic Outlook Database IMF (October 2015 edition)
Questions
- How do we measure economic growth?
- Using an AD/AS diagram, explain why economic growth has fallen in (a) the US, (b) the UK and (c) Africa.
- How have oil prices contributed towards recent growth data?
- Why has the IMF forecast slowing growth for Africa and how dependent is the African economy on growth in China?
- Which sectors are contributing towards slower growth in each of the 3 countries/continents considered? Can you explain the reason for the downturn in each sector?
- What do you think should be done regarding interest rates in the coming months?
One of the most controversial policy changes being made by the Conservative government relates to the tax credit system. For many years, the tax and benefits system in the UK has come in for significant criticism. It has been described as overly complex, a system that doesn’t reward work and yet a system that doesn’t provide sufficient incentives to move off benefits and into work.
The changes that the government is proposing are wide-ranging and focused in part on reducing the deficit. With changes to tax thresholds, the introduction of the National Living Wage (NLW) and changes to the thresholds at which tax credits are available, the Treasury suggests that £4.5 billion will be saved per year. It also says that most working families will be made better off. However, the IFS suggests that some families could lose up to £1000 per year following the changes.
In addition to these changes, the amount of tax-free childcare is also set to increase, helping those households with young children
Tax credits are designed to help low income families and working tax credit, in particular, is aimed to encourage people to move into work. A key change to this tax credit will see the threshold at which the recipient’s payments of this benefit begin to decline move from £6420 to £3850. The withdrawal rate – the rate at which the benefit is withdrawn – will also be increased.
The idea is that this will help to target the benefit more tightly – make it more vertically efficient. But, the concern is that this will also mean that low-income working households are worse off, despite the introduction in April 2016 of the National Living Wage. The Chancellor suggests that anyone who is working full time will be better off following these changes and that as such the changes will actively encourage work and lead to an increase in the supply of labour. This, the government argues, is a good policy for the working population, tax payers and for the wider economy.
This policy will remain controversial, with changes set to come in from 2016 and then 2017. It is certainly difficult to assess the impact of these changes on households and part of that stems from the complexities of the existing system, which mean that some households are eligible for some benefits, whereas others are not.
The final impact, if such changes are approved, will only be known once the tax credit changes are implemented. The House of Lords will vote on whether to ‘kill’ the tax credit cuts and Mr. Osborne, despite some concerns from Conservative back-benchers has said he is ‘comfortable’ with the policy and that the House of Lords should respect the views of the other house. Until we see the results of the vote and, even then, the impact of the changes on households, both sides will continue to produce data and estimates in support of their views.
Tax credit changes: who will be the winners and losers? BBC News, Brian Milligan (20/10/14)
Tax credit cuts: Osborne ‘comfortable’ with plan despite pressure from fellow Tories The Guardian, Rowena Mason and Heather Stewart (22/10/15)
George Osborne insists he signalled tax credit cuts before the election Independent, Jon Stone (22/10/15)
George Osborne: I am “comfortable” with tax credit cuts The Telegraph, Steven Swinford (22/10/15)
Commons Speaker warns Lords not to block tax credit cuts The Guardian, Patrick Wintour (21/10/15)
Tax credits: George Osborne ‘comfortable’ with ‘judgement call’ BBC News (22/10/15)
Osborne stands firm despite tax credits unease Financial Times, George Parker and Ferdinando Giugliano (22/10/15)
Austerity was a political choice. Now it’s starting to look like a bad one The Guardian. Heather Stewart (25/10/15)
Questions
- What are tax credits?
- How do they aim to affect the supply of labour?
- Using indifference analysis, explain how the income and substitution effects will work, following a change to tax thresholds.
- What is meant by vertical efficiency and the targeting of benefits?
- Why would the changes to tax credits help those in full-time work more than those in part-time work?
- What are the main arguments for and against the changes to tax credits?
The housing market can be divided into two areas: owner-occupied and rental. Many news articles have focused on the problems in owner-occupation with house prices preventing first-time buyers from getting on the property ladder and forcing young people to move out of areas where they grew up. Second homes, foreign investors and a shortage of affordable housing have all added to the problems in this part of the housing market. But what about the rental market?
Many people have been forced to consider rental accommodation due to the affordability issues with owner-occupation. But, with more and more people demanding rental properties, affordability in this sector is also becoming a problem. Latest figures from Your Move and Reeds Rains suggest that rents have increased 
by around 6.3% over the past year to an average of £816 per month. This has occurred, despite inflation being at very low levels.
The average increase in rents has varied across the UK, as is the case with average increases in house prices, but looking at the UK-wide data in both cases, house price growth appears to have been out-stripped by rental price growth. This spells trouble for the government which is already under pressure to address the housing shortage. Adrian Gill, Director of the two firms has said:
“Rents have been growing faster than ever – particularly in real terms, given inflation has essentially been zero since February. Across the country, towns and cities are seeing demand from local tenants outstrip the supply of properties to let, with inevitable effects on rents. There is little sign yet of this cooling substantially as the autumn progresses.”
So definitely bad news for those in rented accommodation, especially in places like London, where average rents are up 11.6%, and the East of England, where they have increased by 8.8%. However, this report will make for happier reading for landlords, who will not only see an increase in their rental income, but will also recognise that the value of the house itself has increased.
The following articles consider the housing market and in particular, the latest data on rental prices.
Average monthly rent hits record high of £816, highlighting housing shortage The Guardian, Rupert Jones (16/10/15)
Tenants ‘face 6.3% annual rent rise’ BBC News, Kevin Peachey (16/10/15)
London Skyscraper rents rise 11%, Hong Jong remains priciest Bloomberg, Neil Callanan (14/10/15)
Buy-to-let investors earn near 10% a year Introducer Today, Harvey Jones (16/10/15)
Rent rises slower in Scotland Herald Scotland, Jody Harrison (21/10/15)
Record rents as property shortage deepens Sky News (16/10/15)
Generation rent: the reluctant rise of the older tenant The Telegraph, Hannah Betts (3/10/15)
Questions
- Use a demand and supply diagram to explain the housing problem.
- If the main cause of the housing issue is house price rises, why has this affected the rental market so badly?
- What are the solutions to the housing problem? In each case, explain whether it is a demand- or supply-side solution.
- Why is the rate of consumer price inflation important when thinking about house price or rental price increases?
- Given the regional differences in house prices, does the government have a role to intervene here? How could governments affect regional variations in house prices?
Most of us will have milk in our fridges – it’s a basic product consumed by the majority of people on a daily basis and hence a common feature of most shopping trolleys. As we saw in the post Got milk?, the low price of milk has been causing problems for farmers. This has caused one Morrisons store to take a different approach.
In the increasingly globalised world, British dairy farmers are no longer competing against each other. The global market place means that they are now facing growing competition from abroad and in this global world, supply exceeds demand. Even in the EU, the member states in 2015 are exceeding the milk production levels from 2014. In many markets, we wouldn’t be so concerned about production (or supply) rising, as demand can keep pace. However, in the market for milk, it’s not a product that you consume (that much) more of as your income rises. So, as the world gets richer, demand for milk is not increasing at the same pace as supply – demand in China has collapsed. This means that prices are being forced down. Adding to this global market place, we saw the European Union remove its quotas on milk production, thus boosting supply and Russian bans on imports.
The farmers themselves are in a tricky situation. They are often the small players in the supply chain, with prices being forced down by customers, supermarkets and milk processors. AHDB Dairy, the trade body, says that the average price of milk has decreased to just 23.66p per litre. According to leading industry experts this is well below the costs of production, suggested to be closer to 30p per litre. If these figures are even close to being accurate, then clearly dairy farmers’ costs of production per litre are no longer covered by the price they receive. Every litre of milk produced represents a loss.
The price that supermarkets pay to farmers for milk does vary, with some such as Marks and Spencer and Tesco ensuring that they pay farmers a price above cost. However, Morrisons in Bradford has adopted a new strategy and brand. 
Their new milk brand ‘Morrisons Milk for Farmers’ has been launched at a 23p price rise for every four pint bottle. The catch: they will become the first UK retailer where the 23p price hike goes directly to farmers. This represents 10 pence per litre of milk going directly back to the farmers that produce it. This is a bold strategy, but data and surveys do suggest a willingness to pay more from customers, if it means that dairy farmers get a fairer deal. The protests we have seen across the country have certainly helped to generate interest and created awareness of the difficulties that many farmers are facing. Rob Harrison from the NFU said:
“We are pleased that Morrisons has acknowledged the desperate situation that many dairy farmers still find themselves in and recognise that retailers have a big role to play in, helping customers to support the UK dairy sector…
…Research from Mintel revealed over half of people who drink cows milk, would be prepared to pay more than £1 for a four-pint bottle of milk, as long as it is dairy farmers that benefit. This new initiative will enable them to do just that. The 10p a litre extra will go directly back into the dairy sector will make a difference on farm.”
The interesting thing will be to observe the impact on sales following this 23p price rise. We would normally expect customers to look for the cheaper substitutes, but evidence does suggest that British consumers are willing to pay the price premium if it means helping British farmers. A similar strategy adopted for British Cheddar Cheese proved fruitful and over the coming weeks, we will see if the average consumer is willing to pay directly the dairy farmers. The following articles consider this topic.
Morrisons milk for farmers brand goes nationwide at £1.12 for four pints The Grocer, Carina Perkins (12/10/15)
Morrisons to create new milk brand for farmers BBC News (11/10/15)
Milk price row: farming union leaders meet Morrisons bosses The Guardian, Graham Ruddick (11/10/15)
Morrisons to sell new ‘Milk for farmers’ brand to support British dairy producers Independent, Loulla-Mae Eleftheriou-Smith (11/8/15)
Government to give one-off milk payment for dairy farmers as Morrisons launches premium milk brand City A.M., Catherine Neilan (12/10/15)
New Morrisons milk brand pays farmers more The Yorkshire Post (12/10/15)
Questions
- Using demand and supply analysis, explain which factors have caused the price of milk to fall.
- When incomes rise, the demand for milk does not really change. What does this suggest about the income elasticity of demand for milk and the type of product that it is?
- If prices rise and sales also rise, does this suggest that British milk has an upward sloping demand curve?
- If we do see little effect on the demand for milk following Morrisons 23p price rise, what conclusion can we come to about the price elasticity of demand?
- Why do supermarkets and milk processors have the power to force down prices paid to dairy farmers?
- What type of market structure do you think dairy farmers compete in?
- If dairy farmers are unable to sell a litre of milk for a higher price than it costs to produce, is it a sensible strategy for them to remain in the market?
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?
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.
