Category: Economics for Business: 8e Ch 14

A lack of productivity growth has been a major problem for the UK economy over the past decade (click here for a PowerPoint of the chart). Is it possible that the new decade may see a pick-up in the growth in output per hour worked?

One possible solution to low productivity growth is to reduce working hours and even to move to a four-day week, but not to reduce total pay. If people work fewer hours, they may well be more productive in the hours they do work. In fact, not only may output per hour increase, but so too may output per worker, despite fewer hours being worked. What is more, the quality of output may increase with people being less tired and more motivated.

Several companies have experimented with a four-day week, including Microsoft in Japan, which employees 2300 workers. It found that, despite a 20% reduction in hours worked, output per hour worked increased by 40%, with total output thereby increasing. Workers were generally happier and more motivated and asked for fewer days off.

And it is not just a question of output: fewer hours can result in lower costs. The effect on costs will depend on the nature of new work patterns, including whether everyone has the same extra day off.

But a four-day week is only one way of cutting working hours for full-time employees. Another is to reduce the length of the working day. The argument is that people may work more efficiently if the standard working day is cut from eight to, say, five hours. As the first Thrive Global article article (linked below) states:

Just because you’re at your desk for eight hours doesn’t mean you’re being productive. Even the best employees probably only accomplish two to three hours of actual work. The five-hour day is about managing human energy more efficiently by working in bursts over a shorter period.

If people have more leisure time, this could provide a boost to the leisure and other industries. According to a Henley Business School study:

An extra day off could have a knock-on effect for the wider society. We found 54% of employees said they would spend their day shopping, meaning a potential boost for the high street, 43% would go to the cinema or theatre and 39% would eat out at restaurants.

What is more, many people would be likely to use the extra time productively, undertaking training, volunteering or other socially useful activities. Also family life is likely to improve, with people spending less time at work and commuting and having more time for their partners, children, other relatives and friends. In addition, people’s physical and mental health is likely to improve as they achieve a better work-life balance.

So, should firms be encouraged to reduce hours for full-time workers with no loss of pay? Many firms may need no encouragement at all if they can see from the example of others that it is in their interests. But many firms may find it difficult, especially if their suppliers and/or customers are sticking with ‘normal’ working hours and want to do business during those hours. But, over time, as more firms move in this direction, so it will become increasingly in the interests of others to follow suit.

In the meantime, should the government introduce incentives (such as tax breaks) or regulations to limit the working week? Indeed, it was part of the Labour manifesto for the December 2019 election that the country should, over time, move to a four-day week. Although this was a long-term goal, it would probably have involved the use of some incentives to encourage employers to move in that direction or the gradual introduction of limits on the number of hours or days per week that people could work in a particular job. It is unlikely that the new Conservative government will introduce any specific measures, but would probably not want to discourage firms from reducing working hours, especially if it is accompanied by increased output per worker.

But despite the gains, there are some problems with reduced working hours. Many small businesses, such as shops, restaurants and firms offering technical support, may not have the flexibility to offer reduced hours, or may find it hard to increase productivity when there is a specific amount of work that needs doing, such as serving customers.

Another problem concerns businesses where the output of individuals is not easy to measure because they are part of a team. Reducing hours or the working week may not make such people work harder if they can ‘get way with it’. Not everyone is likely to be motivated by fewer hours to work harder.

Then there is the problem if reduced hours don’t work in boosting productivity. It may then be very difficult to reintroduce longer hours.

But, despite these problems, there are many firms where substantial gains in productivity could be made by restructuring work in a way that reduces hours worked. We may see more and more examples as the decade progresses.

Podcast

Articles

Report

Questions

  1. Distinguish between different ways of measuring labour productivity.
  2. Give some examples (from the linked references) of employers which have tried introducing a four-day week or reduced hours for full-time workers. What has been the outcome in each case?
  3. In what ways may reducing working hours reduce a firm’s total costs?
  4. What are the advantages and disadvantages of the government imposing (at some point in the future) a maximum working week or a four-day week?
  5. What types of firm might struggle in introducing a four-day week or a substantially reduced number of hours for full-time employees?
  6. What external benefits and costs might arise from a shorter working week?

The USA has seen many horizontal mergers in recent years. This has turned industries that were once relatively competitive into oligopolies, resulting in lower output and higher prices for consumers.

In Europe, by contrast, many markets are becoming more competitive. The result is that in industries such as mobile phone services, airlines and broadband provision, prices are considerably lower in most European countries than in the USA. As the French economist, Thomas Philippon, states in a Guardian article:

When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper than in Europe. Twenty years later, American free markets are becoming a myth.

According to Asher Schechter (see linked article below):

Nearly every American industry has experienced an increase in concentration in the last two decades, to the point where … sectors dominated by two or three firms are not the exception, but the rule.

The result has been an increase in deadweight loss, which, according to research by Bruno Pelligrino, now amounts to some 13.3 per cent of total potential surplus.

Philippon in his research estimates that monopolies and oligopolies “cost the median American household about $300 a month” and deprive “American workers of about $1.25tn of labour income every year”.

One industry considered by the final two linked articles below is housebuilding. Since the US housing and financial crash of 2007–8 many US housebuilders have gone out of business. This has meant that the surviving companies have greater market power. According to Andrew van Dam in the linked Washington Post article below:

They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.

According to research by Luis Quintero and Jacob Cosman:

… this dwindling competition has cost the country approximately 150 000 additional homes a year – all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.

Thanks to lobbying of regulators and politicians by businesses and various unfair, but just about legal, practices to exclude rivals, competition policy in the USA has been weak.

In the EU, by contrast, the competition authorities have been more active and tougher. For example, in the airline industry, EU regulators have “encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.” Politicians from individual EU countries have generally favoured tough EU-wide competition policy to prevent companies from other member states getting an unfair advantage over their own country’s companies.

Articles

Questions

  1. What are the possible advantages and disadvantages of oligopoly compared with markets with many competitors?
  2. How can concentration in an industry be measured?
  3. Why have US markets become more concentrated?
  4. Why have markets in the EU generally become more competitive?
  5. Find out what has happened to levels of concentration in the UK housebuilding market.
  6. What are the possible effects of Brexit on concentration and competition policy in the UK?

Firms are increasingly having to take into account the interests of a wide range of stakeholders, such as consumers, workers, the local community and society in general (see the blog, Evolving Economics). However, with many firms, the key stakeholders that influence decisions are shareholders. And because many shareholders are footloose and not committed to any one company, their main interests are short-term profit and share value. This leads to under-investment and too little innovation. It has also led to excessive pay for senior executives, which for many years has grown substantially faster than the pay of their employees. Indeed, executive pay in the UK is now, per pound of turnover, the highest in the world.

So is there an alternative model of capitalism, which better serves the interests of a wider range of stakeholders? One model is that of employee ownership. Perhaps the most famous example of this is the John Lewis Partnership, which owns both the department stores and the Waitrose chain of supermarkets. As the partnership’s site claims, ‘when you’re part of it, you put your heart into it’. Although the John Lewis Partnership is the largest in the UK, there are over 330 employee-owned businesses across the UK, with over 200 000 employee owners contributing some £30bn per year to UK GDP. Again, to quote the John Lewis site:

Businesses range from manufacturers, to community health services, to insurance brokers. Together they deliver 4% of UK GDP annually, with this contribution growing. They are united by an ethos that puts people first, involving the workforce in key decision-making and realising the potential and commitment of their employees.

A recent example of a company moving, at least partly, in this direction is BT, which has announced that that every one of its 100 000 employees will get shares worth £500 every year. Employees will need to hold their shares for at least three years before they can sell them. The aim is to motivate staff and help the company achieve a turnaround from its recent lacklustre performance, which had resulted in its laying off 13 000 of its 100 000-strong workforce.

Another recent example of a company adopting employee ownership is Richer Sounds, the retail TV and hi-fi chain. Its owner and founder, Julian Richer, announced that he had transferred 60% of his shares into a John Lewis-style trust for the chain’s 531 employees. In addition to owning 60% of the company, employees will receive £1000 for every year they have worked for the retailer. A new advisory council, made up of current staff, will advise the management board, which is taking over the running of the firm from Richer.

According to the Employee Ownership Association (EOA), a further 50 businesses are preparing to follow suit and adopt forms of employee ownership. As The Conversation article linked below states:

As a form of stakeholder capitalism, the evidence shows that employee ownership boosts employee commitment and motivation, which leads to greater innovation and productivity.
 
Indeed, a study of employee ownership models in the US published in April found it narrowed gender and racial wealth gaps. Surveying 200 employees from 21 companies with employee ownership plans, Joseph Blasi and his colleagues at Rutgers University found employees had significantly more wealth than the average US worker.
 
The researchers also found that the participatory management practices that accompanied the employee ownership schemes led to employees improving their communication skills and learning management skills, which had helped them make better financial decisions at home.

But, although employee ownership brings benefits, not only to the employees themselves, but also more widely to society, there is no simple mechanism for achieving it when shareholders are unlikely to want to relinquish their shares. Employee buyout schemes require funding; and banks are often cautious about providing such funding. What is more, there needs to be an employee trust overseeing the running of the company which takes a long-term perspective and not just that of current employees, who might otherwise be tempted to sell the company to another seeking to take it over.

Articles

Report

Questions

  1. What are the main benefits of employee ownership?
  2. Are there any disadvantages of employee ownership and, if so, what are they?
  3. What are the main barriers to the adoption of employee ownership?
  4. What are the main recommendations from The Ownership Effect Inquiry? (See linked report above.)
  5. What are the findings of the responses to the employee share ownership questions in the US General Social Survey (GSS)? (See linked Global Banking & Finance Review article above.)

The linked article below, by Evan Davis, assesses the state of economics. He argues that economics has had some major successes over the years in providing a framework for understanding how economies function and how to increase incomes and well-being more generally.

Over the last few decades, economists have …had an influence over every aspect of our lives. …And during this era in which economists have reigned, the world has notched up some marked successes. The reduction in the proportion of human beings living in abject poverty over the last thirty years has been extraordinary.

With the development of concepts such as opportunity cost, the prisoners’ dilemma, comparative advantage and the paradox of thrift, economics has helped to shape the way policymakers perceive economic issues and policies.

These concepts are ‘threshold concepts’. Understanding and being able to relate and apply these core economic concepts helps you to ‘think like an economist’ and to relate the different parts of the subject to each other. Both Economics (10th edition) and Essentials of Economics (8th edition) examine 15 of these threshold concepts. Each time a threshold concept is used in the text, a ‘TC’ icon appears in the margin with the appropriate number. By locating them in this way, you can see their use in a variety of contexts.

But despite the insights provided by traditional economics into the various problems that society faces, the discipline of economics has faced criticism, especially since the financial crisis, which most economists did not foresee.

Even Davis identifies two major shortcomings of the discipline – both beginning with ‘C’. ‘One is complexity, the other is community.’

In terms of complexity, the criticism is that economic models are often based on simplistic assumptions, such as ‘rational maximising behaviour’. This might make it easier to express the models mathematically, but mathematical elegance does not necessarily translate into predictive accuracy. Such models do not capture the ‘messiness’ of the real world.

These models have a certain theoretical elegance but there is now an increasing sense that economies do not evolve along a well-defined mathematical path, but in a far more messy way. The individual players within the economy face radical uncertainty; they adapt and learn as they go; they watch what everybody else does. The economy stumbles along in a process of slow discovery, full of feedback loops.

As far as ‘community’ is concerned, people do not just act as self-interested individuals. Their actions are often governed by how other people behave and also by how their own actions will affect other people, such as family, friends, colleagues or society more generally.

And the same applies to firms. They will be influenced by various other firms, such as competitors, trend setters and suppliers and also by a range of stakeholders – not just shareholders, but also workers, customers, local communities, etc. A firm’s aim is thus unlikely to be simple short-term profit maximisation.

And this broader set of interests translates into policy. The neoliberal free-market, laissez-faire approach to policy is challenged by the desire to take account of broader questions of equity, community and social justice. However privately efficient a free market is, it does not take account of the full social and environmental costs and benefits of firms’ and consumers’ actions or a fair distribution of income and wealth.

It would be wrong, however, to say that economics has not responded to these complexities and concerns. The analysis of externalities, income distribution, incentives, herd behaviour, uncertainty, speculation, cumulative causation and institutional values and biases are increasingly embedded in the economics curriculum and in economic research. What is more, behavioural economics is becoming increasingly mainstream in examining the behaviour of consumers, workers, firms and government. We have tried to reflect these developments in successive editions of our four textbooks.

Article

Questions

  1. Write a brief defence of traditional economic analysis (i.e. that based on the assumption of ‘rational economic behaviour’).
  2. What are the shortcomings of traditional economic analysis?
  3. What is meant by ‘behavioural economics’ and how does it address the concerns raised in Evan Davis’ article?
  4. How is herd behaviour relevant to explaining macroeconomic fluctuations?
  5. Identify various stakeholder groups of an energy company. What influence are they likely to have on the company’s behaviour?
  6. In an era of social media, web-based information and e-commerce, why might it be necessary to rethink the concept of GDP and its measurement?
  7. What is meant by an efficient stock market? Why may the stock market not be efficient?

When did you last think about buying a new car? If not recently, then you may be in for a surprise next time you shop around for car deals. First, you will realise that the range of hybrid cars (i.e. cars that combine conventional combustion and electric engines) has widened significantly. The days when you only had a choice of Toyota Prius and another two or three hybrids are long gone! A quick search on the web returned 10 different models (although five of them belong to the Toyota Prius family), including Chevrolet Malibu, VW Jetta and Ford Fusion. And these are only the cars that are currently available in the UK market.

But the biggest surprise of all may be the number of purely (plug-) electric cars that are available to UK buyers these days. The table below provides a summary of total registrations of light-duty plug-electric cars by model in the UK, between 2010 and June 2016.

Registration of light-duty highway legal plug-electric cars by model in the UK between 2010 and June 2016

Model

Total registered at the end of(1)

Registrations by year between 2010 and December 2013

2Q 2016

2015

2014

2013

2012

2011

2010

Mitsubishi Outlander P-HEV

21 708

16 100

5 273

 

 

 

 

Nissan Leaf

12 837

11 219

6 838

1 812

699

635

 

BMW i3

4 457

3 574

1 534

NA

 

 

 

Renault Zoe

4 339

3 327

1 356

378

 

 

 

Mercedes-Benz C350 e

3 337

628

0

 

 

 

 

Tesla Model S

3 312

2 087

698

 

 

 

 

Volkswagen Golf GTE

2 657

1 359

0

 

 

 

 

Toyota Prius PHV

1 655

1 580

1 324

509

470

 

 

Audi A3 e-tron

1 634

1 218

66

 

 

 

 

Nissan e-NV200

1 487

1 047

399

 

 

 

 

BMW 330e iPerformance

1 479

 

 

 

 

 

 

BMW i8

1 307

1 022

279

 

 

 

 

Vauxhall Ampera

1 267

1 272

1 169

175

455

4

 

Volvo XC90 T8

813

38

 

 

 

 

 

Renault Kangoo Z.E

785

740

663

 

 

 

 

Porsche Panamera S E-Hybrid

475

395

241

 

 

 

 

Volvo V60 Plug-in Hybrid

410

337

232

 

 

 

 

Peugeot iOn

405

374

368

26(2)

251

124

 

Mercedes-Benz B-Class Electric Drive

303

162

0

 

 

 

 

Mitsubishi i MiEV

252

251

266

1(2)

107

125

27

Smart electric drive

215

212

205

3(2)

13

 

63

Citroën C-Zero

213

167

202

45(2)

110

46

 

Kia Soul EV

193

145

20

 

 

 

 

BMW 225xe

163

 

 

 

 

 

 

Volkswagen e-Up!

154

142

118

 

 

 

 

Mercedes-Benz S500 PHEV

125

157

14

 

 

 

 

Volkswagen e-Golf

123

114

47

 

 

 

 

Chevrolet Volt

119

122

124

23(2)

67

 

 

Renault Fluence Z.E.

79

70

73

7(2)

67

 

 

Ford Focus Electric

22

19

19

 

 

 

 

Mercedes-Benz Vito E-Cell

22

23

23

 

 

 

 

Mia electric

15

15

14

 

 

 

 

Volkswagen Passat GTE

1

 

 

 

 

 

 

BYD e6

0

0

0

50(2)

 

 

 

Total registrations

66 374

47 920

21 504

3 586

2 254

1 082

138

Notes: NA: not available. Registrations figures seldom correspond to same sales figure.

(1) Registrations at the end of a period are cumulative figures. (2) CYTD through June 2013.

Source: Wikipedia, “Plug-in electric vehicles in the United Kingdom”

In 2010 there were nly 138 electric vehicles in total registered in the UK. They were indeed an unusual sight at that time – and good luck to you if you had one and you happened to run out of power in the middle of a journey. In 2011 this (small) number increased sevenfold – an increase that was driven mostly by the successful introduction of Nissan Leaf (635 electric Nissans were registered in the UK that year). And since then the number of electric vehicles registered in the country has increased with spectacular speed, at an average rate of 252% per year.

There is clearly strong interest in electric vehicles – an interest likely to increase as their price becomes more competitive. However, they are still very expensive items to buy, especially when compared with their conventional fuel-engine counterparts. What makes electric cars expensive? One thing is the cost of purchasing and maintaining a battery that can deliver a reasonable range. But the cost of batteries is falling, as more and more companies realise the potential of this new market and join the R&D race. As mentioned in a special report that was published recently in the FT:

The cost of lithium-ion batteries has fallen by 75 per cent over the past eight years, measured per kilowatt hour of output. Every time battery production doubles, costs fall by another 5 per cent to 8 per cent, according to analysts at Wood Mackenzie.

There is no doubt that more research will result in more efficient batteries, and will increase the interest in electric cars not only by consumers but also by producers, who already see the opportunity of this new global market. Does this mean that prices will necessarily fall further? You might think so, but then you have to take into consideration the availability and cost of mining further raw materials to make these batteries (such as cobalt, which is one of the materials used in the making of lithium-ion batteries and nearly half of which is currently sourced from the Democratic Republic of Congo). This may lead to bottlenecks in the production of new battery units. In which case, the price of batteries (and, by extension, the price of electric cars) may not fall much further until some new innovation happens that changes either the material or its efficiency.

The good news is that a lot of researchers are currently looking into these questions, and innovation will do what it always does: give solutions to problems that previously appeared insurmountable. They had better be fast because, according to estimates by Wood Mackenzie, the number of electric vehicles globally is expected to rise by over 50 times – from 2 million (in 2017) to over 125 million by 2035.

How many economists does it take to charge an electric car? I guess we are going to find out!

Articles

Information

Questions

  1. Using a demand and supply diagram, explain the relationship between the price of a battery and the market (equilibrium) price of a plug-in electric vehicle.
  2. List all non-price factors that influence demand for plug-in electric vehicles. Briefly explain each.
  3. Should the government subsidise the development and production of electric car batteries? Explain the advantages and disadvantages of such intervention and take a position.