Over recent years, labour markets have become more flexible. Both firms and workers have been much more adaptable to changing market conditions.
This has been illustrated by responses to the 2008/9 recession and the minimal recovery since then. Many firms have seen a drop in demand for their products and have responded by producing less. But this has not necessarily meant laying off workers. But why not? The following include some of the reasons:
• greater flexibility in hours worked: thus hours can be reduced;
• reduction in real wages because of wages not keeping up with inflation;
• many workers receiving part of their income in the form of profit sharing: when profits fall, employees’ income automatically falls;
• a general reduction in unionisation in the private sector;
• in firms where workers are still unionised, unions and management increasingly seeing themselves to be on the ‘same side’: thus unions more willing to explore flexibility;
• less support from state if people are unemployed;
• greater flexibility from the use of temporary or agency staff: these can be reduced in a recession, thus helping to protect the jobs of established workers.
The following podcast looks at this growing flexibility and why it has helped to restrict the rise in unemployment.
Podcast
The real economy: Labour market BBC Today Programme, Evan Davis (24/8/11)
Articles
Agencies placing more in new jobs Western Mail (4/8/11)
Staff appointments increase at subdued pace in July, according to latest Report on Jobs The Recruitment & Employment Federation, News Release (4/8/11)
Manufacturing week: How we got here The Telegraph, Roland Gribben (27/8/11)
Jobless figures show the real risk of creating a lost generation London Evening Standard, Jonathan Portes, Director, National Institute of Economic and Social Research (17/8/11)
Flexible working: is more legislation needed? Personnel Today, Laura Chamberlain (1/9/11)
Recruitment agencies ‘play a big part’ in flexible working The Sales Director, John Oak (10/8/11)
Questions
- Find out what has happened to real GDP, employment and unemployment over the past four years. (Try searching Reference Tables for GDP and Labour Market Statistics on the National Statistics site at http://www.ons.gov.uk/ons/datasets-and-tables/index.html.)
- Distinguish between ‘insiders’ and ‘outsiders’ in the labour market? How has the relationship between the two groups changed in recent years?
- Distinguish between functional, numerical and financial flexibility of firms? (See Box 9.8 in Economics (7th ed), Web Case 6.2 in Essentials of Economics (5th ed), section 18.7 in Economics for Business (5th ed) or section 8.5 in Economics and the Business Environment (3rd ed).)
- Examine the effects of wage rises being less than the rate of inflation on the profit-maximising number of full-time equivalent people employed. How is this influenced by the rate of increase in the price of other inputs and the ability of the firm to raise prices in line with inflation?
- Should firms be required by law to allow workers to demand flexible working conditions? What forms might such flexibility take?
Approximately 1.6 million past and present female employees of Walmart have had their sex discrimination case dismissed by the US Supreme Court. This case began almost 10 years ago with claims by 5 female workers that they were paid less than their male counterparts and had been passed over for promotion. Despite statistical evidence suggesting a case of sexual discrimination, it was ruled that Walmart was not discriminating against women, as promotion decisions were made by individual managers, hence there was no common element between the plaintiffs. Justice Antonin Scalia said that a common element was ‘entirely absent here’.
Discrimination of any kind will have an impact on the demand curve for labour (or the marginal revenue product curve). As such, the equilibrium wage rate will also be affected: if a firm believes that women are less productive than their male counterparts, the MRP curve will shift inwards, pushing down their wage. The key to this case was that there were so many plaintiffs and so it was practically impossible to determine whether or not pay differentials and promotions were based on legitimate grounds. The following articles consider the case against Walmart.
Supreme Court decision in Walmart class-action claim brings praise, anger FoxNews (20/6/11)
Walmart wins class action ruling Financial Times, Barney Jopson (20/6/11)
Wal-Mart women denied discrimination class action BBC News (20/6/11)
Walmart sex discrimination class action rejected Guardian, Dominic Rushe (20/6/11)
Questions
- Why might a firm engage in discrimination?
- Use a diagram to illustrate the impact of discrimination against women by a firm on the marginal revenue product curve for women.
- Following discrimination against women and in favour of men, what happens to the men’s marginal product curve?
- Given your answer to the above 2 questions, what would you expect to happen to the equilibrium number of male and female workers and the male and female wage rate?
- Are there any adverse effects to a firm of engaging in discrimination of any kind?
Taxes are a key element in redistributive policies: taxes on the rich can be spent on benefits to the poor. The more progressive the taxes (i.e. the more steeply they rise with rising incomes), the bigger will be the redistributive effect and hence the more equal will post-tax incomes be.
But high and steeply progressive taxes can act as a disincentive to work longer, or to go for promotion or to move to a better paid job. High corporate taxes and income taxes can act as disincentive to inward investment and may encourage a ‘brain drain’ and capital flight with people and capital leaving the country for lower tax regimes abroad.
Raising taxes has two effects. First there is the substitution effect: people may work less and substitute it with leisure – after all, work is now less rewarding. People may also substitute working abroad for working at home. But the second effect works in the opposite direction. This is the income effect. As taxes are raised and people’s take-home pay is thereby reduced, they may feel the need to work longer hours or try harder for promotion in order to make up the lost income and maintain their living standards. Thus the effect of higher taxes is not clear-cut. It is an empirical question of which of the two effects is the stronger.
One important determinant of the effects of different tax rates is their relative position compared with other countries. Another is the international mobility of labour and capital. The greater the mobility, the greater the elasticity of supply with respect to changes in tax rates.
The following report and articles look at relative tax rates between different countries and the effects on output and factor movements
Articles
Wide tax gaps among countries, UHY study finds UHY International, Press Release (10/6/11)
Britain’s most talent workers flee to avoid high tax rates The Telegraph, Myra Butterworth (13/6/11)
UK tax rate ‘one of the highest’ Belfast Telegraph (13/6/11)
Data
Tax Rates Around the World – Comparison UHY Worldwide-tax.com
Effects of taxes and benefits on household income National Statistics
(see especially Data: The effects of taxes and benefits on household income, 2009/10)
Questions
- Why may relative income tax rates between countries give only a partial picture of the international competitiveness of these countries? What else would need to be taken into account?
- Does making taxes more steeply progressive necessarily act as a disincentive to output? Explain.
- What factors are likely to determine the relative size of the income and substitution effects of tax changes?
- How progressive are income taxes in the UK compared with other countries? Give examples.
- What externalities (positive and negative) might result from steeply progressive income tax rates?
- What determines the international elasticity of supply of labour?
- What is the Laffer curve? How will the shape of the Laffer curve be affected by the international mobility of labour and international tax rates?
Inequality is growing in most countries. This can be illustrated by examining what has been happening to countries’ Gini coefficient. The Gini coefficient measures income inequality, where 0.00 represents perfect equality, with everyone in the country earning the same, and 1.00 represent perfect inequality, with one person earning all the country’s income. (Note that sometimes it is expressed as the ‘Gini index’, with 100 representing perfect inequality). In virtually all countries, the Gini coefficient has been rising. In the OECD countries it has risen by an average of 0.3% per annum over the past 25 years. The OECD average is now 0.31.
But despite the fact that the Gini coefficient has been rising, its value differs markedly from one country to another, as does its rate of change. For example, Finland’s Gini coefficient, at 0.26, is below the average, but it has been rising by 1.2% per annum. By contrast, Turkey’s Gini coefficient, at 0.41, is above the average and yet has been falling by 0.3% per annum.
The most unequal of the developed countries is the USA. According to OECD data, its Gini coefficient is 0.38, well above the values in the UK (0.34), Japan (0.33), Germany (0.30) France (0.29) and Denmark (0.26). What is more, inequality in the USA has been increasing by an average of 0.5% per annum since the mid 1980s.
According to the United Nations’ Human Development Report 2010, the USA’s Gini coefficient is even higher, at 0.41 (see Table 3 of the report). But this is still below that of Russia, with a figure of 0.44, a figure that has markedly worsened over time, along with those of other former Soviet countries. According to the report (page 72):
The worsening is especially marked in countries that were part of the former Soviet Union – which still have relatively low Gini coefficients because they started with low inequality. Transition has eroded employment guarantees and ended extensive state employment. Before the fall of the Berlin Wall, 9 of 10 people in socialist countries were employed by the state, compared with 2 of 10 in Organisation for Economic Co-operation and Development economies. While the privileged elite (the nomenklatura) often attained higher material well-being, the measured differences in income were narrow.
The Gini coefficient for Russia is the same as the average of the 39 developing countries with the lowest level of human development &nbash; and developing countries are generally much less equal than developed ones. Of course, some developing countries have an even higher Gini coefficient: for Angola the figure is 0.59; for Haiti it is 0.60.
The following three webcasts look at aspects of the growing inequality in Russia.
Webcasts
Gap between rich and poor widens in Russia BBC News, Jamie Robertson (29/5/11)
Corruption slows Russian modernisation BBC News, Emma Simpson (29/5/11)
Corruption and poverty in Russia’s far east Al Jazeera (28/2/11)
Articles
Russia’s rich double their wealth, but poor were better off in 1990s Guardian, Tom Parfitt (11/4/11)
Russia’s growing wealth gap BBC News, Jamie Robertson (28/5/11)
A Country of Beggars and Choosers Russia Profile, Svetlana Kononova (16/5/11)
Rich and poor, growing apart The Economist (3/5/11)
Data
Distribution of family income – Gini Index CIA World Factbook (ranked by country in desending order)
Society at a Glance 2011 – OECD Social Indicators OECD: see particularly the Excel file 6. Equity Indicators: Income inequality (click on No if prompted about a linked workbook)
Russia Distribution of family income – Gini index Index Mundi
Chart of the week: inflation stoking inequality in China and India Financial Times, Andrew Whiffin (24/5/11)
List of countries by income equality Wikipedia
Reports
Growing Income Inequality in OECD Countries: What Drives it and How Can Policy Tackle it? OECD Forum on Tackling Inequality (2/5/11)
Human Development Report 2010 United Nations Development Programme
Questions
- Explain what is meant by the Gini coefficient. How does it relate to the Lorenz curve? What does a figure of 0.31 mean?
- Why has income inequality been growing in most countries of the world? Has the process of globalisation dampened or exacerbated this trend?
- What specific factors in Russia can explain the growing inequality?
- How is privatisation likely to affect income distribution??
- Why is it difficult to quantify the extent of inequality in Russia?
- What maxim of taxation has been used in setting income tax rates in Russia?
- What role does corruption play in determining the degree of inequality in Russia?
- What policy measures, if any, could realistically be adopted in Russia to reduce inequality? What constraints are there on adopting such policies?
There’s been a lot of bad news about the economy, but perhaps things are looking up. Inflation is now at 4% and the latest data suggests that unemployment has fallen, with more jobs being created in the private sector. An estimated 143,000 jobs were created, many of which were full-time and the ILO measure if unemployment is down by some 17,000. There is still some doom and gloom, as growth in annual average earnings has fallen slightly and this will undoubtedly affect retail sales. Numbers claiming JSA have also increased marginally to 1.5 million and youth unemployment has seen a small increase to 20.4%. A big area of concern is that unemployment might rise in the coming months due to the time lag. Growth in the last quarter of 2010 was negative and this could increase unemployment when the full effects are felt in the labour market later in the year. Howard Archer, the Chief Economist at HIS Global Insight had this to say about the latest data.
‘Despite the overall firmer tone of the latest labour market data, we retain the view that unemployment is headed up over the coming months. We suspect that likely below-trend growth will mean that the private sector will be unable to fully compensate for the increasing job losses in the public sector that will result from the fiscal squeeze that is now really kicking in. Indeed, we believe that private sector companies will become increasingly careful in their employment plans in the face of a struggling economy and elevated input costs.’
The wage price spiral hasn’t begun as many though, and this may encourage the Bank of England to keep interest rates down, especially as inflation has come down to 4% and concerns about growth still remain. So despite good news about unemployment overall falling, young workers, women and public sector workers have not benefited. Youth unemployment is up, more women are claiming JSA and more jobs in the public sector are expected to be cut this year. The following articles consider the implications.
UK Unemployment: What the experts say Guardian (13/4/11)
Good news on jobs BBC News blogs: Stephanomics, Stephanie Flanders (13/4/11)
Unemployment falls, but young are left on the shelf Independent, Sean O’Grady (14/4/11)
Unemployment falls but jobs market remains fragile Telegraph, Louisa Peacock (14/4/11)
UK unemployment data reveals downturn victims as jobless total drops Guardian, Heather Stewart (13/4/11)
FTSE boosted by dip in unemployment The Press Association (14/4/11)
Unemployment falls: reaction (including video) Telegraph (14/4/11)
Questions
- What is the ILO method of measuring unemployment?
- To what extent does the change in unemployment and inflation conform with the Phillips curve?
- What can explain the fall in the unemployment rate, despite the decline in the economy in the last quarter of 2010?
- Explain how the FTSE was affected by the lower unemployment rate.
- Why is unemployment expected to rise later this year?
- Why has there been a rise in the numbers claiming JSA, despite unemployment falling?
- What is meant by the wage-price spiral and why has it not occured?