The most common demands for trade unions are for higher wages and better working conditions. However, pensions have become an increasingly important issue that many public-sector workers in particular have raised concerns over. While actions by trade unions have been less frequent and public in recent months, the Public and Commercial Services Union (PCS) has voted to strike.
The labour market works like any other market – there is a demand for and supply of labour. The intersection of the demand and supply of labour give the equilibrium wage rate and equilibrium number of workers. Trade unions may aim to push up the wage rate above this equilibrium and the impact on the number of workers employed will depend on the type of labour market. If we have a competitive labour market, then the increase in wage will create an excess supply of labour: that is, unemployment. This is often a choice a trade union has to make. However, if the market is a monopsony, then it is possible for a trade union to force up wages and yet there may not be any fall in the number of workers employed.
Pay is just one of the issues being raised by the PCS. Public-sector pay was frozen for two years for those earning above £21,000. According to the Cabinet Office, this was necessary to ‘protect jobs in the public sector and support high quality public services.’ A 5% pay rise has been requested to counter an alleged 7% fall in earnings since 2008. 61% of those who voted in the ballot were in favour of strike action. Other concerns include job losses and pensions.
One concern of the PCS will be the low turn-out. Only 28% of the union’s members voted in this ballot and this is likely to weaken the union’s bargaining position. The government has monopsony power in employing civil servants and this is one of the reasons why a powerful trade union is likely to emerge: it acts to reduce the power of the monopsonist employer. Negotiations will typically take place between the employer and the trade union and with such a low turn-out, the power is certainly with the government. However, with the threat of strike action to occur around the time of the Budget, this does present something of a concern for the government, especially with growth remaining weak and the loss of the AAA rating.
Two separate pay offers have been made to 1.6 million public-sector workers, but Unison has suggested that members of PCS should reject them. If headway is not made in negotiations between PCS and the government, then strike action could be just around the corner. The following articles consider this looming industrial action.
Articles
Questions
- Use a diagram to illustrate a competitive market for labour and show how a trade union will aim to push up the wage rate. Show why a trade-off exists between the higher wage and the number of workers employed.
- Illustrate a diagram showing a monopsony and explain why the MC curve exceeds the AC curve. Why is it possible for a trade union to force up wages without creating a decline in the equilibrium number of workers employed?
- What other actions, besides striking, are available for trade union members? What are the costs and benefits of each relative to striking?
- Which factors, besides a low turn-out in the ballot, will reduce the trade union’s negotiating power?
- Public-sector pay was frozen for two years. If the government accepted the trade union’s pay demands, what would be the impact on the budget deficit? Could the higher pay help boost economic growth by creating a multiplier effect?
As part of the Basel III round of banking regulations, representatives of the EU Parliament and member governments have agreed with the European Commission that bankers’ bonuses should be capped. The proposal is to cap them at 100% of annual salary, or 200% with the agreement of shareholders. The full Parliament will vote in May and then it will go to officials from the 27 Member States. Under a system of qualified majority voting, it is expected to be accepted, despite UK resistance.
The main arguments in favour of a cap are that it will reduce the focus of bankers on short-term gains and reduce the incentive to take excessive risks. It will also appease the anger of electorates throughout the EU over bankers getting huge bonuses, especially in the light of the recession, caused in major part by the excesses of bankers.
The main argument against is that it will drive talented top bankers to countries outside the EU. This is a particular worry of the UK government, fearful of the effect on the City of London. There is also the criticism that it will simply drive banks into increasing basic salaries of senior executives to compensate for lower bonuses.
But it is not just the EU considering curbing bankers’ pay. The Swiss have just voted in a referendum to give shareholders the right to veto salaries and bonuses of executives of major companies. Many of these companies are banks or other financial sector organisations.
So just what will be the effect on incentives, banks’ performance and the movement of top bankers to countries without such caps? The following videos and articles explore these issues. As you will see, the topic is highly controversial and politically charged.
Meanwhile, HSBC has revealed its 2012 results. It paid out $1.9bn in fines for money laundering and set aside a further $2.3bn for mis-selling financial products in the UK. But its underlying profits were up 18%. Bonuses were up too. The 16 top executives received an average of $4.9m each. The Chief Executive, Stuart Gulliver, received $14.1m in 2012, 33% up on 2011 (see final article below).
Webcasts and podcasts
EU moves to cap bankers bonuses Euronews on Yahoo News (1/3/13)
EU to Curb Bank Bonuses WSJ Live (28/2/13)
Inside Story – Curbing Europe’s bank bonuses AlJazeera on YouTube (1/3/13)
Will EU bonus cap ‘damage economy’? BBC Radio 4 Today Programme (28/2/13)
Swiss back curbs on executive pay in referendum BBC News (3/3/13)
Has the HSBC scandal impacted on business? BBC News, Jeremy Howell (4/3/13)
Articles
Bonuses: the essential guide The Guardian, Simon Bowers, Jill Treanor, Fiona Walsh, Julia Finch, Patrick Collinson and Ian Traynor (28/2/13)
Q&A: EU banker bonus cap plan BBC News (28/2/13)
Outcry, and a Little Cunning, From Euro Bankers The New York Times, Landon Thomas Jr. (28/2/13)
Bank bonuses may shrink – but watch as the salaries rise The Observer, Rob Taylor (3/3/13)
Don’t cap bank bonuses, scrap them The Guardian, Deborah Hargreaves (28/2/13)
Capping banker bonuses simply avoids facing real bank problems The Telegraph, Mats Persson (2/3/13)
Pro bonus The Economist, Schumpeter column (28/2/13)
‘The most deluded measure to come from Europe since fixing the price of groceries in the Roman Empire’: Boris Johnson attacks EU banker bonus cap Independent, Gavin Cordon , Geoff Meade (28/2/13)
EU agrees to cap bankers’ bonuses BBC News (28/2/13)
Viewpoints: EU banker bonus cap BBC News (28/2/13)
Voters crack down on corporate pay packages swissinfo.ch , Urs Geiser (3/3/13)
Swiss voters seen backing executive pay curbs Reuters, Emma Thomasson (3/3/13)
Swiss referendum backs executive pay curbs BBC News (3/3/13)
Voters in Swiss referendum back curbs on executives’ pay and bonuses The Guardian, Kim Willsher and Phillip Inman (3/3/13)
Swiss vote for corporate pay curbs Financial Times, James Shotter and Alex Barker (3/3/13)
HSBC pays $4.2bn for fines and mis-selling in 2012 BBC News (4/3/13)
Questions
- How does competition, or a lack of it, in the banking industry affect senior bankers’ remuneration?
- What incentives are created by the bonus structure as it is now? Do these incentives result in desirable outcomes?
- How would you redesign the bonus system so that the incentives resulted in beneficial outcomes?
- If bonuses are capped as proposed by the EU, how would you assess the balance of advantages and disadvantages? What additional information would you need to know to make such an assessment?
- How has the relationship between banks and central banks over the past few years created a moral hazard? How could such a moral hazard be eliminated?
When you look at the linked articles below, I’m sure many of you will be thinking that this is an odd choice for an economics blog! However, part of the economic relevance of ‘cyber-crime fighters’ relates to the relative skills of workers and the gap that exists between the most and least skilled workers in the UK.
Crime has always existed, but as technology has developed the types of crime committed have grown along with the complexity of them. For certain crimes, a very skilled individual is needed. With this emergence of technologically advanced crimes, those fighting crimes have also had to improve their skills and techniques. Thus crime-fighters have become more technologically advanced as well.
The problem is that the number of skilled workers able to deal with things like cyber crime has not kept pace with the demand for them and thus we have a skills gap. Usage of the Internet has continued to grow, creating more and more opportunities for cyber crime. However, the UK supply of IT and cyber-security professionals has not been able to keep pace. Therefore, we have a shortage of skilled labour in this area.
More investment into research and education is occurring, with the aim of addressing this shortage, but it is expected to take many years before supply catches up to demand. In particular, more investment is needed in the sciences and technology subjects at school to create the supply at university level. The NAO said that:
‘The current pipeline of graduates and practitioners are unable to meet demand.’
A second area of relevance to economics is the cost of cyber crime. The NAO estimated that the cost is somewhere between £18bn and £27bn per annum. However, on the other side, is there a case that crime actually benefits the macroeconomy by requiring government investment. As cyber crime has grown, so has the demand for cyber-crime fighters and this has created more jobs. With more jobs comes increased spending and the benefits of the multiplier. The following articles consider cyber crime and the impact it is having.
National Audit Office warns UK needs more skilled cyber crime fighters BBC News (12/2/13)
IT staff shortages raise cyber crime risk Sky News (12/2/13)
UK planning ‘Cyber Reserve’ defence force BBC News (3/12/12)
Britain vulnerable from cyber attacks for at least 20 years The Telegraph, Tom Whitehead (12/2/13)
Britain targeted by 120,000 every DAY with cost to country thought to total £27billion Mail Online, Jack Doyle (12/2/13)
Questions
- Illustrate the demand for and supply of labour curves in the market for cyber crime fighters. How is the equilibrium wage determined?
- If there is increased investment in education, how would this affect the shape and position of the MRP curve and what impact would this have on your diagram?
- If there is a shortage of cyber crime fighters, what does that suggest about the position of the two curves? Illustrate this situation and explain why it is a problem.
- Which factors would be considered by NAO in estimating the costs of cyber crime?
- Explain why crime can pay.
- How does the macroeconomy benefit from increased crime? Illustrate this on a diagram.
- Does your answer to question 5 above suggest anything about the effectiveness of using GDP as a measure of welfare?
- How is the multiplier effect relevant?
Unemployment is a term that economists and non-economists are familiar with, even if the non-economists perhaps have a less stringent definition of what we term unemployment. Typically, we say you are unemployed if you are of working age and available for work at the current wage rate, but are not in work. Another important and related concept is that of underemployment, which according to the ONS, is a growing problem in the economy.
Latest figures released by the ONS show that just over 10% of all workers in the UK would like to work more hours each week. This is essentially what underemployment is and it typically affects part-time workers who want to move closer to a full-time job, but are unable to find the necessary hours from their employer. As the economic situation in the UK worsened after the financial crisis, unemployment increased rapidly. Some people went from working full-time to part-time and others simply lost their job. As the economy started to stabilize, people began returning to work, but many found that part-time employment was the only option, despite wanting to work many more hours at the going wage rate. As the ONS said:
During this period [the economic downturn] many workers moved from full-time to part-time roles and many of those returning to work after a period of unemployment could only find part-time jobs … Of the extra one million underemployed workers in 2012 compared with 2008, three-quarters were in part-time posts.
The increase in underemployment has levelled off and though the recession has been a key contributing factor to the higher levels of underemployment, it’s important to note that it can be caused by a few things, as outlined by the ONS.
• employers only being able to offer a few hours of work each week
• workers, such as bar staff, being in jobs where they are only required for a few hours a day
• personal circumstances changing so that someone now wants to work more hours than before
• people settling for a part-time job as second-best when they would much rather have a full-time one
Although many people are happy with their part-time jobs and hence would not see themselves as underemployed, for those who are underemployed, the fact that they cannot find sufficient hours seems to indicate an inefficiency within the economy, especially if long-term unemployment or underemployment emerges. This problem is particularly relevant amongst the young and those in low-skilled jobs. However, it is also an increasing problem amongst the self-employed.
The implications of underemployment are far-reaching. Naturally it adversely affects an individual’s financial situation, which at the current time with rising household bills can have devastating consequences. There are also wider effects such as the economic implications in terms of economic growth and inefficiency, as well as a potential increased strain on the tax and benefits system. Given these far-reaching consequences, it is an issue that everyone should be concerned about. The following articles consider the growth of underemployment in the UK economy.
Underemployed workers jump by 1m since financial crisis Telegraph, Rebecca Clancy (28/11/12)
Underemployment affects 10.5% of UK workforce (including video) BBC News (28/11/12)
Economic crash leaves an extra 1million workers under-employed and wanting more hours Mail Online (28/11/12)
UK is underemployed: should we be surprised? BBC News, Stephanomics, Stephanie Flanders (28/11/12)
Unemployment affects 1 in 10 workers, ONS says Guardian, Mark King (28/11/12)
One in 10 workers no underemployed Financial Times, Brian Groom (28/11/12)
Underemployment rises to affect one in ten workers Channel 4 News (28/11/12)
Questions
- What is the difference between unemployment and underemployment? Is one worse than the other?
- Why did underemployment initially begin to rise after the financial crisis and what factors helped to slow the increase?
- How can underemployment be measured? Is it likely to be accurate?
- Part-time work has risen in recent decades, as part of a more flexible labour market. Do you think this is a good thing or does it add to the problem of underemployment?
- What are the economic implications of underemployment? You should think about the effects on an individual, their family, society and the wider economy.
- How can someone who is self-employed be classed as underemployed?
- What action, if any, can be taken by the government to tackle the rising problem of underemployment?
More and more food banks are opening every week across the developed world. In the UK alone, there are over 250 food banks. These are run by volunteers and provide food and other basic provisions to those who struggle to feed themselves and their children. The food is donated by people or sometimes supermarkets. Some food banks receive financial help from local authorities.
According to the Trussell Trust, which runs many food banks in the UK, “In 2011-12 food banks fed 128,687 people nationwide, 100% more than the previous year.” But why, in mixed economies, where the State is expected to provide benefits to the poor, do so many people have to resort to food handouts?
Partly the problem is a cut in benefits – a response of many countries to rising public-sector deficits; partly it’s delays in receiving benefits or the complexities in claiming; partly it’s because some people have had their benefits suspended because of a change in their circumstances or changes in the conditions for claiming benefits; partly it’s the inability of people to afford to feed their families properly in times of rising food and energy prices and rising rents, where incomes are not rising in line with the personal rates of inflation that poor households experience; partly it’s the sky-high interest rates that many poor people, often deep in debt, have to pay to continue obtaining credit – often from ‘payday loan companies’ or ‘doorstep lenders’; partly it’s the inability of many poor people to find work which pays enough to feed their families and pay all their other bills.
Food poverty is a real and growing problem. But are food banks the answer? The following videos and articles look at the issues.
Webcasts
UK
Growing demand for food banks in Britain BBC Newsnight, Paul Mason (5/9/12)
Children will go hungry warn Bristol food banks This is Bristol, (2/7/12)
Children going hungry ITV News (16/10/12)
Food bank: We need more food to feed UK’s hungry The Telegraph, Gregg Morgan (27/9/12)
Food banks help struggling London families BBC News (21/6/12)
Europe
EU food aid to dry up by 2014? France 24 (16/10/12)
Spain
Food banks squeezed in Spain Euronews (3/11/12)
USA
As donations dwindle, food banks are feeling the pinch Komo News, Elisa Jaffe (28/9/12)
Articles
UK
Breadline Britain: councils fund food banks to plug holes in welfare state The Guardian, Patrick Butler (21/8/12)
Councils to invest in food banks LocalGov, Dominic Browne (22/8/12)
The growing demand for food banks in breadline Britain BBC News, Paul Mason (4/9/12)
Food banks: ‘I had no-one else to turn to’ BBC News (4/9/12)
Poorest starved of dignity as charity food parcels double in just two years Daily Record (4/9/12)
More and more banking on generosity to others for food South Wales Evening Post (13/11/12)
USA
Northern Illinois Food Bank Kicks Off Hunger Action Month St. Charles Patch, Rick Nagel (1/9/12)
Australia
More families get help as food becomes discretionary spend Sydney Morning Herald (21/8/12)
Information
How a foodbank works The Trussell Trust
Questions
- Why do so many people find themselves trapped in food poverty?
- What factors are likely to lead to an increase in food poverty in the coming months?
- Should the government subsidise food banks?
- Discuss ways of tackling the problem of poor families being trapped in debt and having to pay very high interest rates.
- Is rent control a good means of tackling poverty?
