Greece’s public deficit currently stands at 13.6% and the UK isn’t that far behind. Austerity measures are planned to reduce the Greek deficit to less than 3% of GDP by 2014. This will be achieved through a variety of spending cuts and tax rises. This is the price that Greece will have to pay to receive a £95 billion bailout. Wages are likely to be frozen, cuts will be evident throughout the economy in areas such as education and pensions and the general population may see a tax rise.
In response to these proposals, on which Parliament will vote by the end of the week, the Greek economy has suffered from widespread strikes. Flights were grounded, trains stopped, schools shut, hospitals closed their doors, offices closed for business and those close to retirement are considering resignation before the measures are passed.
As life almost comes to a stop in Greece, could the UK follow suit? It’s no secret that the UK deficit is enormous – £163 billion or about 12% of GDP. Nor is it a secret that spending cuts and tax rises are inevitable. Furthermore, over the past two years, there have been several high profile strikes. (See article The Winter of Discontent: the sequel? and Turbulence in the air). A spokesman from The Public and Commercial Services Union said:
“If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable”.
The bailout of Greece may avert one Greek tragedy, but another one could be just around the corner and that’s not just for Greece.
Greece brought to half over general strike over cuts BBC News (5/5/10)
Greek strikes test government austerity plans Reuters (4/5/10)
Bank of England Governor: poll winner will be out of power for a generation Independent, Andrew Grice and Colin Brown (30/4/10)
Flights grounded, shops shut in Greek strike Channel 4 News, Kris Jepson (5/5/10)
Greek strikers hit Athens streets over austerity plan BBC News (4/5/10)
Greek strikes test government austerity plans The Economic Times (4/5/10)
Questions
- What is the purpose behind the strikes? How effective are they likely to be?
- What are the costs of strikes to a) consumers b) businesses c) the wider economy?
- Why is collective bargaining more effective than individual bargaining?
- Why could the Greek picture be a possible forecast of the UK economy after the May election?
- Are strikes a price worth paying if the government is to reduce its debt?
In the midst of the election campaign we can well imagine that economic data are analysed in minute detail by politicians looking to make political capital. Of particular interest are likely to be the labour market numbers. So here we ‘digest’ a few of the latest numbers from the latest ONS labour market release.
The ONS reports that in the three months to February 2010 the number unemployed in the UK rose above the 2½ million mark to stand at 2.502 million. Of these, 61.2% were male and 38.8% female. The rise of 43,000 on the previous three months (i.e. the three months to November) took unemployment to its highest level since the three months to December 1994.
While unemployment rose, employment fell by 90,000 over the same period to 28.824 million. Of those in employment, 53.2% were male and 46.8% female. Employment levels are now at their lowest since the three months to December 2005. The latest unemployment and employment numbers mean that the number of economically active individuals in the three months to February stood at 31.326 million (53.9% male and 46.1% female), down by 47,000 on the previous three months. Therefore the unemployment rate, which is expressed as a percentage of those economically active, has now edged up to 8% (9.1% amongst males and 6.7% amongst females); it was 6.8% a year ago (7.6% amongst males and 5.9% amongst females) and 5.2% two years ago (5.6% amongst males and 4.8% amongst females).
If we look at the number who have been unemployed for at least one year we see a rather worrying trend with a rise of 89,000 over the past three months to some 726,000. This compares with 486,000 in the same period a year ago and 390,000 two years ago. Another potentially problematic trend is the rise in inactivity rates. The proportion of individuals of working age who are now inactive, so neither employed or actively seeking work, rose to 21.5% in the three months to February (17.5% amongst men and 25.8% amongst females), up from 20.7% in the same period last year (16.2% amongst men and 25.7% amongst females).
Finally, part-time employment fell by 30,000 in the three months to February to 7.671 million. However, it rose by 6000 amongst men to 1.880 million. We now observe that 12.2% of men in employment are employed part-time compared with 43.0% of females in employment. Further, of all part-time workers 24.5% – that’s effectively one-quarter – are male, double the share back in 1984 when these numbers were first recorded.
Articles
UK Unemployment hits 2.5 million mark The Wall Street Journal, Nicholas Winning and Ilona Billington (21/4/10)
UK unemployment at 16-year high Financial Times, Brian Groom (21/4/10)
UK unemployment increases to 2.5 million BBC News (21/4/10) )
Unemployment breaks through 2.5 million Guardian, Graeme Wearden (21/4/10)
UK unemployment surges to 15-year high The Times, Grainne Gilmore (21/4/10)
Data
Latest on employment and unemployment Office for National Statistics (21/4/10)
Labour Market Statistics, April 2010 Office for National Statistics (21/4/10)
Labour market statistics page Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- The current rate of unemployment is 8%. During the downturn of the early 1990s it peaked at 10.7%. What might explain this difference? Do you think the current rate may have now peaked?
- What might explain the rise in inactivity rates? Does this rise have any implications for potential output?
- Does the rise in the number of those unemployed for over a year have implications for our potential output?
- Go back through the commentary: are there any notable gender differences in the figures? What factors might help to explain these?
- In 1984 part-time employment stood at 4.985 million while currently the figure is 7.671 million. Is it possible to explain this growth in part-time employment in the UK?
The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.
Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.
With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.
Articles
Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)
Data
HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)
Questions
- Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
- What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
- Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
- Is the ‘50% participation in higher education’ a good policy?
- What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
- Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
- What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?
It is often said of statistics that you can make of them whatever you want to. Well, this appears especially true of the latest labour market figures from the Office for National Statistics. Firstly, the good news: unemployment fell. But, secondly, the not so good news: the number of economically inactive individuals rose to an all-time high. So what are we supposed to make of the latest figures? And, are there any other little gems to be uncovered in the latest set of labour market numbers?
At its most simple, an economically active individual is somebody 16 or over who is either in employment or is unemployed but actively seeking work. In the three months to January 2010, the total number of economically active individuals in the UK stood at 31.309 million, of which 28.860 million were employed and 2.449 million were unemployed. The number unemployed in the previous three months had been at 2.482 million. When expressed as a percentage of those economically active, the unemployment rate has fallen from 7.9% in the previous three months to 7.8% in the three months to January.
The total number of economically inactive individuals of working age, i.e. those aged 16 to 59 (women) or 64 (men), stood at 8.157 million in the three months to January, which, as well being an historic high, was a rise from 8.009 million in the previous three months. This converts into an inactivity rate amongst those of working age of some 21.5%, the highest since the three months to October 2004. A key point though is that inactivity rates do tend to rise either during periods of rising unemployment and/or following prolonged periods of relatively high unemployment. For instance, following the early 1990s downturn the rate of inactivity peaked at 22.1% in the three months to January 1995. In comparison, following the boom of the late 1980s the rate, the inactivity rate began the 1990s at only 19.3% – a record low. A large contributing factor to the rise in inactivity in the three months to January has been the rise in the number of students not in the labour market to 2.13 million, an increase of some 98,000 over the three months. Again, parallels can be drawn with the early 1990s because this is the highest number of students not in the labour market since comparable figures began in 1993.
In part, it appears that inactivity levels reflect perceptions amongst individuals of the probability of finding employment. So, while unemployment has fallen by 33,000 over the latest three months we do have to keep in mind that inactivity has increased by 149,000. Therefore, this may be a case of a ‘jobless’ decrease in unemployment!
Some commentators, however, are more optimistic about the current trend in unemployment, pointing to the fact that unemployment levels have not hit the levels predicted, despite the economy contracting by 5% in 2009. They point to the flexible labour market. Of course, time will tell if this is truly a ‘benefit’ of a more flexible labour market. But, what is clear is that one manifestation of a changing structure to the UK labour market is the growth in part-time work. In the three months to January, 26.69% of those employed were employed part-time: this was another record high which seems to have been largely lost in the mass of statistics.
Articles
Unemployment falls as ‘economic inactive hits record’ Telegraph, Harry Wallop (17/3/10)
Unemployment plunge boost economy hopes thisismoney, Ed Monk (17/3/10)
UK unemployment records further fall BBC News (17/3/10) )
Gordon Brown given unexpected boost by fall in unemployment Guardian, Kathryn Hopkins and Julia Kollewe (17/3/10)
Not lagging, but not leading either BBC News blogs: Stephanomics, Stephanie Flanders (17/3/10)
Data
Latest on employment and unemployment Office for National Statistics (17/3/10)
Labour market statistics, March 2010 Office for National Statistics (17/3/10)
Labour Market Statistics page Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What factors do you think could affect labour market inactivity rates?
- How might inactivity rates affect an economy’s potential output?
- What factors do you think will have contributed to the growth in part-time employment in the UK?
- The UK economy came out of recession in the last quarter of 2009. Does this mean that unemployment will continue to fall from now on?
The happiness literature has established that, in the developed countries, increasing affluence has not increased well-being in recent decades. We seek an explanation for this in terms of conspicuous consumption, a phenomenon originally identified by Veblen.
This is from the abstract of an article in the Economic Journal, ‘Well-being and Affluence in the Presence of a Veblen Good’ by B. Curtis Eaton and Mukesh Eswaran. The authors argue that while increased affluence of the rich may bring a small amount of extra benefit to them, it actually reduces the well-being of others who crave after things that they cannot afford. As the first article below states:
[The authors] believe their work shows that as a nation becomes wealthier, consumption shifts increasingly to buying status symbols with no intrinsic value – such as lavish jewellery, designer clothes and luxury cars. But they warn: “These goods represent a ‘zero-sum game’ for society: they satisfy the owners, making them appear wealthy, but everyone else is left feeling worse off.”
… There is another downside. As people yearn for more status symbols they have less time or inclination for helping others. This, the authors argue, damages “community and trust”, which are vital to an economy because they ensure the smooth running of society.
But do the super wealthy generate more jobs and more prosperity? Do we need to pay vast salaries and bonuses as incentives for executives to take risks: to invest in new products and processes, and drive technological advance and productivity increases? According to the second article, ‘Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list.’
So is the ever widening gap between rich and poor necessary if the economy is to grow? Or is it something of very little value to society, except, perhaps, for the super rich themselves?
Articles
More money makes society miserable, warns report The Observer, Jamie Doward (14/3/10)
Don’t celebrate these billionaires, be horrified by their existence The Observer, Will Hutton (14/3/10)
Data
For the latest Guardian survey of executive pay, see: Executive pay survey, 2009
For data on UK incomes and income distribution, see: Annual Survey of Hours and Earnings (ASHE) Office for National Statistics
For data on the distribution of wealth in the UK, see Distribution of Personal Wealth HM Revenue and Customs
Questions
- Explain what is meant by a ‘Veblen good’.
- What is meant by the diminishing marginal utility of income? What implications does this have for the effects of income distribution and redistribution on social well-being?
- Why may a rise in GDP make society worse off if it is accompanied by growing inequality?
- To what extent can marginal productivity theory explain the salaries and other rewards of the wealthy?
- Using the data below, examine the extent to which the gap between rich and poor is growing.
- Explain why increasing conspicuous consumption by the wealthy might be a zero-sum game for society or even a negative-sum game.
- What factors cause a rise in productivity?
- How might greater entrepreneurship be encouraged in the UK?