Category: Economics for Business 9e

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Hybrid working: too much homework or the ‘new normal’?

During the pandemic, most people who were not furloughed were forced to work from home. After lockdown restrictions were lifted, many employers decided to continue with people working remotely, at least for some of the time.

Today, this hybrid model, whereby workers work partly from home or local workspaces and partly in the office/factory/warehouse etc., has become the ‘new normal’ for around 26% of the working population in Great Britain – up from around 10% at the end of the national lockdowns in the Spring of 2021.

Increasingly, however, employers who had introduced hybrid working are requiring their employees to return to the office, arguing that productivity and hence profits will rise as a result. Amazon is an example. Other employers, such as Asda, are increasing the time required in the office for hybrid workers.

Hybrid working had peaked at around 31% in November 2923 as the chart shows (click here for a PowerPoint). The chart is based on the December 20 database, Public opinions and social trends, Great Britain: working arrangements from the Office for National Statistics (see link under Data, below).

But why are some employers deciding that hybrid working is less profitable than working full time in the office. And does it apply to all employers and all employees or only certain types of firm and certain types of job?

The first thing to note is that hybrid work is more common among certain groups. These include older workers, parents, graduates and those with greater flexibility in scheduling their work, especially those in managerial or professional roles with greater flexibility. Certain types of work on the other hand do not lend themselves to hybrid work (or working completely from home, for that matter). Shop workers and those providing a direct service to customers, such as those working in the hospitality sector, cannot work remotely.

Benefits of hybrid working

For some employees and employers, hybrid working has brought significant benefits.

For employees, less time and money is spent on commuting, which accounts for nearly an hour’s worth of the average worker’s daily time. According to the ONS survey, respondents spent an additional 24 minutes per day on sleep and rest and 15 minutes on exercise, sports and other activities that improved well-being compared to those who worked on-site. Working at home can make juggling work and home life easier, especially when workers can work flexible hours during the day, allowing them to fit work around family commitments.

Employers benefit from a healthier and more motivated staff who are more productive and less likely to quit. Hybrid work, being attractive to many workers, could allow employers to attract and retain talented workers. Also, employees may work longer hours if they are keen to complete a task and are not ‘clocking off’ at a particular time. Working from home allows workers to concentrate (unless distracted by other family members!).

By contrast, office working can be very inefficient, especially in open offices, where chatty colleagues can be distracting and it is difficult to concentrate. What is more, employees who are slightly unwell may continue working at home but may feel unable to commute to the office. If they did, they could spread their illness to other colleagues. Not allowing people to work from home can create a problem of ‘presenteeism’, where people feeling under the weather turn up to work but are unproductive.

One of the biggest benefits to employers of hybrid work is that costs can be saved by having smaller offices and by spending less on heating, lighting and facilities.

With hybrid working, time spent on site can be devoted to collaborative tasks, such as meetings with colleagues and customers/suppliers and joint projects where face-to-face discussion is required, or at least desirable. Tasks can also be completed that required specialist equipment or software not available at home.

Problems of hybrid working

So, if hybrid working has benefits for both employers and employees, why are some employers moving back to a system where employees work entirely on site?

Some employers have found it hard to monitor and engage employees working from home. Workers may be easily distracted at home by other family members, especially if they don’t have a separate study/home office. People may feel detached from their co-workers on days they work from home. After a time, productivity may wane as workers find ways of minimising the amount of time actually working during declared work times.

Far from improving work-life balance, for some workers the boundaries between work and personal life can become blurred, which can erode the value of personal and family time. This can create a feeling of never escaping from work and be demotivating and reduce productivity. Employees may stay logged on longer and work evenings and weekends in order to complete tasks.

Unless carefully planned, on days when people do go into the office they might not work effectively. They may be less likely to have profitable ad hoc conversations with co-workers, and meetings may be harder to arrange. Misunderstandings and miscommunication can occur when some employees are in the office but others are at home.

Some employers have found that the problems of hybrid working in their organisations have outweighed the benefits and that productivity has fallen. In justifying its ending of hybrid working from 1 January 2025, Amazon CEO, Andy Jessy, wrote in a memo to staff in September 2024:

To address the … issue of being better set up to invent, collaborate, and be connected enough to each other and our culture to deliver the absolute best for customers and the business, we’ve decided that we’re going to return to being in the office the way we were before the onset of COVID. When we look back over the last five years, we continue to believe that the advantages of being together in the office are significant.1

But is the solution to do as Amazon is doing and to abandon hybrid working and have a mass ‘return to the office’?

Improving hybrid working

There are ways of making hybrid working more effective so that the benefits can be maximised and the costs minimised.

Given that there are specific benefits from home working and other specific benefits from working on-site, it would be efficient to allocate time between home and office to maximise these benefits. The optimum balance is likely to vary from employer to employer, job to job and individual to individual.

Where work needs to be done in teams and where team meetings are an important element of that work, it would generally make sense for such meetings to be held in person, especially when there needs to be a lot of discussion. If the team requires a brief catch up, however, this may be more efficiently done online via Teams or Zoom.

Individual tasks, on the other hand, which don’t require consultation with colleagues or the use of specific workplace facilities, are often carried out more efficiently when there is minimum chance of interruption. For many workers, this would be at home rather than in an office – especially an open-plan office. For others without a protected work space at home or nearby, it might be better to come into the office.

The conclusion is that managers need to think carefully about the optimum distribution between home and office working and accept that a one-size-fits-all model may not be optimum for all types of job and all workers. Recognising the relative benefits and costs of working in different venues and over different hours may help to achieve the best balance, both for employers and for workers. A crucial element here is the appropriate use of incentives. Workers need to be motivated. Sometimes this may require careful monitoring, but often a more hands-off approach by management, with the focus more on output and listening to the concerns of workers, rather than on time spent, may result in greater productivity.

1Message from CEO Andy Jassy: Strengthening our culture and teams, Amazon News (16/9/24)

Articles

Data

Questions

  1. Why may hybrid working be better for (a) employees and (b) employers than purely home working or purely working in the office?
  2. Why are many firms deciding that workers who were formerly employed on a hybrid basis should now work entirely from the office?
  3. What types of job are better performed on site, or with only a small amount of time working from home?
  4. What types of job are better performed by working at home with just occasional days in the office?
  5. Does the profile of workers (by age, qualifications, seniority, experience, family commitments, etc) affect the likelihood that they will work from home at least some of the time?
  6. How would you set about measuring the marginal productivity of a worker working from home? Is it harder than measuring the marginal productivity of the same worker doing the same job but working in the office?
  7. How may working in the office increase network effects?
  8. How may behavioural economics help managers to understand the optimum balance of home and on-site working?
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Is a flat-rate income tax a good idea?

At an event at the London Palladium on 6 December staged to protest against elements in the recent Budget, the Conservative leader, Kemi Badenoch, was asked whether she would introduce a flat-rate income tax if the Conservatives were returned to government. She replied that it was a very attractive idea. But first the economy would need ‘rewiring’ so that the tax burden could be lightened.

A flat-rate income tax system could take various forms, but the main feature is that there is a single rate of income tax. The specific rate would depend on how much the government wanted to raise. Also it could apply to just income tax, or to both income tax and social insurance (national insurance contributions (NICs) in the UK), or to income tax, social insurance and the withdrawal rate of social benefits. It could also apply to local/state taxes as well as national/federal taxes.

Take the simplest case of a flat-rate income tax with no personal allowance. In this system the marginal and average rate of tax is the same for everyone. This is known as a proportional tax.

Most countries have a progressive income tax system. This normally involves personal allowances (i.e. a zero rate up to a certain level of income) and then various tax bands, with the marginal rate rising when particular tax thresholds are reached. In England, Wales and Northern Ireland, there are three tax bands: 20%, 40% and 45%. Thus the higher a person’s income is, the higher their average rate of tax.

A regressive tax, by contrast, would be one where the average rate of tax fell as incomes rose. The extreme case of a regressive tax would be a lump-sum tax (such as a TV or other licence), which would be same absolute amount for everyone liable to it, irrespective of their income. This was the case with the ‘poll tax’ (or Community Charge, to give it its official title), introduced by Margaret Thatcher’s government in 1989 in Scotland and 1990 in the rest of the UK. It was a local tax, with each taxpayer taxed the same fixed sum, with the precise amount being set by each local authority. After protests and riots, it was replaced in 1993 by the current system of local taxation (Council Tax) based on property values in bands.


Figures 1 and 2 illustrate these different categories of tax: see Figure 11.12 in Economics, 12th edition. (Click here for a PowerPoint.) Income taxes in most countries are progressive, although just how progressive depends on the differences between the tax bands and the size of personal tax-free allowances. A flat-rate income tax with no allowances is shown by the black line in each diagram, the slope in Figure 1 and the height in Figure 2 depending on the tax rate.

Arguments for a flat-rate income tax

Generally, arguments in favour of flat-rate taxes come from the political right. The two main arguments in favour are tax simplification and incentives.

Advocates argue that a flat tax system makes tax collection easier and makes tax evasion harder. If there are no exemptions, then it can be easier to check that people are paying their taxes and working out the correct amount they owe. It is argued that, in contrast, high tax rates on top earners can encourage tax evasion.

Flat taxes can also be part of a drive to reduce the size of the informal economy. As the VoxEU article states:

Unlike progressive taxes, which include complex and numerous exceptions left to the tax collectors’ discretion, the flat tax is clear cut. In combination with the low rate, its simplicity considerably reduces the stimuli for being informal.

Several post-communist countries in Eastern Europe adopted flat taxes, but for most they were seen as a temporary measure to reduce the informal sector and clamp down on tax evasion. Most have now adopted progressive taxes, with the exceptions of Bulgaria and until recently Russia.

The second major argument is that lower taxes for higher earners, especially for entrepreneurs, can act as a positive incentive. People work harder and there is more investment. The argument here is that the positive substitution effect from the lower tax (work is more profitable now and hence people substitute work for leisure) is greater than the negative income effect (lower taxes increase take-home pay so that people do not need to work so much now to maintain their standard of living).

Then there is the question of tax evasion. With high rates of income tax for top earners, such people may employ accountants to exploit tax loopholes and hide earnings. This could be seen as highly unfair by middle-income earners who are still paying relatively high rates of tax. Even though a move to flat taxes is likely to mean a cut in tax rates for high earners, the tax take from them could be higher. There is evidence that post-communist and developing countries that have adopted flat taxes have found an increase in tax revenues as evasion is harder.

The Laffer curve is often used to illustrate such arguments that high top tax rates can lead to lower tax revenue. Professor Art Laffer was one of President Reagan’s advisers during his first administration (1981–4): see Box 11.3 in Economics, 11th edition. Laffer was a strong advocate of income tax cuts, arguing that substantial increases in output would result and that tax revenues could consequently increase.

The Laffer curve in Figure 3 shows tax revenues increasing as the tax rate increases – but only up to a certain tax rate (t1). Thereafter, tax rates become so high that the resulting fall in output more than offsets the rise in tax rate. When the tax rate reaches 100 per cent, the revenue will once more fall to zero, since no one will bother to work. (Click here for a PowerPoint)

However, as Box 11.3 explains, evidence suggests that tax rates in most countries were well below t1 in the 1980s and certainly are now, given the cuts in income tax rates that have been made around the world over the past 20 years.

Arguments against flat-rate income taxes

The main argument against moving from a progressive to a flat-rate income tax in an advanced country, such as the UK, is that is would involve a large-scale redistribution of income from the poor to the rich. If the tax were designed to raise the same amount of revenue as at present, those on low incomes would pay more tax than now, as their tax rate would rise to the new flat rate. Those on high incomes would pay less tax, as their marginal rate would fall to the new flat rate.

If a new flat-rate tax in the UK also replaced national insurance contributions (NICs), then the effect would be less extreme as NICs are currently initially progressive, as there is a personal allowance before the 8% rate is applied (on incomes above £12 570 in 2024/25). But above a higher NI threshold (£50 270 in 2024/25), the marginal rate drops to 2%, making it a regressive tax beyond that level. Figure 4 shows tax and NI rates in England, Wales and Northern Ireland for 2024/25. (Click here for a PowerPoint.)

Nevertheless, even if a new flat-rate tax replaced NICs as well as varying rates of income tax, it would still involve a large-scale redistribution from low-income earners to high-income earners. The effect would be mitigated somewhat if personal allowances were raised so that the tax only applied to mid-to-higher incomes. Then the redistribution would be from middle-income earners to high-income earners and also somewhat to low-income earners: i.e. those below, or only a little above, the new higher personal allowance. If, on the other hand, personal allowances were scrapped so that the flat tax applied to all incomes, then there would be a massive redistribution from people on low incomes, including very low incomes, to those on high incomes.

One of the arguments used to justify a flat-rate tax is that its simplicity would ensure greater compliance. But in an advanced country, compliance is high, except, perhaps, for those on very high incomes. Most people in the UK and many other countries, have tax deducted automatically from their wages. People cannot avoid such taxes.

As far as the self-employed are concerned, they file tax returns online and the software automatically works out the tax due. There are no complex calculations that have to be performed by the individual. There is come scope for tax evasion by charging various expenditures to the business that are really personal spending, but the tax authorities can ask for evidence and sometimes do, with penalties for false claims.

What tax evasion does take place, could still do so with a flat tax. At a rate of, say, 20%, it would still be financially beneficial for a dishonest person to lie if they could get way with it.

Conclusions

If the government did try to introduce a flat-rate income tax, there would probably be an outcry. Also, as some rich people would gain a very large amount of money, the number of people gaining would be lower than the number losing if the total revenue raised were to remain the same. In other words, it would be politically difficult to achieve if the number of losers exceeded the number of gainers.

It is true that if the top rate of income tax were very high, then reducing it might bring in more revenue. But at 45%, or 47% if you include NICs, the top marginal rate in the UK is relatively low compared with other countries. In 2024, the UK had the second lowest top rate of tax out of Western European countries (behind Norway and Switzerland) and only the 16th highest out of 33 European countries when Central and Eastern European countries are also included (see the final ink below under ‘Information’). Reducing the UK’s top rate would be unlikely to bring in more revenue and would redistribute income to high-income earners.

Articles

Information

Questions

  1. Distinguish between progressive, proportional, regressive and lump-sum taxes. Into which of these four categories would you place (a) VAT, (b) motor fuel duties, (c) tobacco duties, (d) road-fund licence, (e) inheritance tax? Where the answer is either progressive or regressive, how progressive or regressive are they?
  2. What are the income and substitution effects of changing tax rates?
  3. Explain the Laffer curve and consider whether it is likely to be symmetrical.
  4. Discuss the desirability of having a flat tax set at a relatively high rate (say 25%) with tax-free personal allowances up to the level of income considered to be the poverty threshold. (In the UK the poverty threshold is often defined as 60% of median income.)
  5. In the London Palladium event where Kemi Badenoch stated that flat taxes were a very attractive idea, she also said that ‘We cannot afford flat taxes where we are now. We need to make sure we rewire our economy so that we can lighten the burden of tax and the regulation on individuals and on those businesses that are just starting out, in particular’. What do you think she meant by this?
  6. Find out what Bulgaria’s experience of a flat tax of 10% has been.
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The merger of Vodafone and Three: competition implications

In September 2023, UK mobile phone network operators Vodafone and Three (owned by CK Hutchinson) announced their intention to merge. At the time, in terms of total revenue from the supply of mobile phone services to consumers, Vodafone and Three had market shares of 23% and 12%, respectively.

In addition to Vodaphone and Three, there are two other major network operators – the BT Group (BT & EE) and Virgin-media 02, with market shares of around 31% and 23%, respectively, with other operators having a combined market share of 12%. As we shall see below, these other operators use one of the four major networks. Therefore, the merged entity of Vodafone-Three would become the market leader with a share of around 35% and there would only be three major network operators competing in the UK.

Not surprisingly, the UK competition agency, the Competition and Markets Authority (CMA), decided to conduct a detailed investigation into whether the merger would harm competition. However, in early December 2024 the CMA announced its decision to allow the merger to go ahead, subject to several important commitments by the merging parties.

CMA’s phase 1 findings

The CMAs phase 1 investigation raised several concerns with the merger (see fifth CMA link below).

First, it was worried that retail and business customers would have to pay higher prices for mobile services after the merger.

Second, in addition to the four mobile network operators, the UK market is served by a number of mobile ‘virtual’ network operators (MVNOs), for example Sky Mobile and Lyca Mobile. As we saw above, these suppliers account for around 12% of the consumer retail market. The MVNOs do not own their own networks and instead agree wholesale terms with one of the network operators to access their network and supply their own retail mobile services. The CMA was concerned that since the merger would reduce the number of networks competing to host these MVNOs from four to three, it would result in MVNOs paying higher wholesale access prices.

Vodafone and Three did not offer any remedies to the CMA to address these competition concerns. Consequently, the CMA referred the case to phase 2 for a more thorough investigation.

CMA’s phase 2 findings

The CMA’s analysis in phase 2 confirmed its earlier concerns (see linked report below). It was still worried that because the merged entity would become the largest network operator, retail customers would face higher prices or get a poorer service – for example, a reduced data allowance in their contract. In addition, the CMA remained concerned that the MVNOs would be negatively impacted and that this would lessen their ability to offer the best deals to retail customers.

However, during the phase 2 investigation, the merging parties put forward various efficiency justifications for the merger. They argued that the merger would provide them with much needed scale and investment capacity to improve their network and roll-out 5G technology. The CMA recognised these claims but questioned the merging parties’ incentives to go through with the investment once the merger was approved. Furthermore, it was concerned that if they did invest, this would be funded by raising the prices charged to consumers.

As a result, the CMA only agreed to allow the merger once Vodafone and Three accepted remedies that would address these concerns.

The remedies necessary for the merger to proceed

First, the merged entity must cap a range of tariffs and data plans it offers in the retail market for three years.

Second, again for three years, it must commit to maintain the wholesale contract terms it offers to MNVOs.

Finally, over the next eight years, the merged entity must deliver the network upgrade plans that it claimed the merger would allow. The CMA believes that in the long run this network development would significantly boost competition between the three remaining mobile network operators.

The acceptance of remedies of this nature was unusual for the CMA. Typically, like other competition agencies, the CMA has favoured divestment remedies in which the merging parties are required to sell-off some of the assets or capacity acquired. In contrast, the remedies in the Vodafone-Three deal impact on the merging parties’ behaviour.

One clear disadvantage of such remedies is that they require the merged firm’s actions to be monitored, in this case for eight years, to make sure it adheres to the agreed behaviour. One reason why the CMA may have been willing to accept this is that the communications industries regulator, OFCOM, will be able to assist with this monitoring.

It was also surprising that the CMA was willing to allow the number of network operators to decrease to three. Previously, there had been a perception that it was important to maintain four networks. This was certainly the view in 2016 when Three’s attempted merger with O2 was prohibited. This decision was made by the European Commission (EC). However, the CMA raised serious concerns to the EC and when the merging parties offered behavioural remedies argued that these were:

materially deficient as they will not lead to the creation of a fourth Mobile Network Operator (MNO) capable of competing effectively and in the long-term with the remaining three MNOs such that it would stem the loss of competition caused by the merger.

Why has the authorities’ attitude towards the merger changed?

So why has there been a change of stance in this latest attempted merger in the mobile phone sector?

One explanation is that the market has fundamentally changed over time. The margins for network operators have declined, network usage has grown and there has been a lack of investment in expensive 5G technology. This would certainly fit with the CMA’s desire to use the remedies to facilitate network investment.

A second possible explanation is that the CMA has recently faced criticism from UK Prime Minister, Keir Starmer (see third Guardian article below). In a speech at the International Investment Summit in London in October 2024, he said that

We will rip out the bureaucracy that blocks investment and we will make sure that every regulator in this country take growth as seriously as this room does.

In response to this, the CMA has indicated that in 2025 it will review its approach to mergers, ensuring that only truly problematic mergers don’t proceed, and reconsider when behavioural remedies may be appropriate (see final CMA link below).

The CMA’s decision in the Vodafone-Three case certainly demonstrates that it is now willing to accept behavioural remedies when there is a regulator in place to support the subsequent monitoring.

It will be interesting to see how this merger affects competition in the mobile phone market and, more generally, whether the CMA starts to implement behavioural remedies more widely, especially in markets where it would have to do all the subsequent monitoring.

Articles

CMA reports, etc

Questions

  1. Why is it beneficial to have MVNOs in the market for mobile phone services?
  2. Why is it important that MVNOs have a choice of mobile networks to supply their retail mobile services?
  3. How do you think the other mobile network operators will react to the Vodafone-Three merger?
  4. Compare the relative benefits of blocking a merger with requiring merging companies to adopt certain remedies.