Despite the prolonged stagnation in the UK, unemployment has not soared. In fact, over the past two years the ILO unemployment rate (see here for a definition) has fallen slightly – from 8.6% in October 2011 to around 8.0% today. What is more, the claimant count rate is considerably lower than the ILO rate – at around 4.4%.
Part of the reason for the relatively good unemployment figures is the rise in ‘zero-hours contracts’. These allow employers to cut the hours that people work without laying them off. The Office for National Statistics estimates that last year (2012) 250,000 people, or 0.84% of the workforce, were on such contracts.
But just what is meant by ‘zero-hours contracts’? According to the ONS:
People on zero-hours contracts are classified as being in employment regardless of the number of hours they actually worked during the survey reference week. This includes anyone who was not required to work any hours during the reference week whilst remaining on their current contract of employment. The continued existence of the contract of employment is the key determinant of their employment status in these situations.
If people are working less than they would like to, this is classified as underemployment, but such people do not appear in the unemployment statistics. Such contracts thus mask the true extent of surplus labour in the economy.
The Chartered Institute of Personnel and Development (CIPD) puts the figure much higher than the ONS. In the Summer 2013 issue of its Labour Market Outlook, it estimates that one million workers are on zero-hours contracts.
Many employers use such contracts, including many voluntary-sector and public-sector organisations, including the NHS, local councils and Buckingham Palace. They are also used by many small and medium-sized enterprises and many well-known large companies, such as Sports Direct, Amazon, JD Wetherspoon and Cineworld. It gives them the flexibility to adjust the hours they employ people. It allows them to keep people in employment when demand is low. It also makes them more willing to take on staff when demand rises, as it removes the fear of being over-staffed if demand then falls back.
But many workers dislike such contracts, which give them fewer employment rights and fewer hours than they would like to work. It also makes it difficult to budget when future income is uncertain. It also make credit and mortgages harder to obtain, as people have no guaranteed income. Another complaint is that companies may use the threat of lower hours as a tool to bully staff and get away with poorer working conditions.
In May of this year, the Business Secretary, Vince Cable, announced that he was setting up a review of zero hours contracts.
Note that zero hours are not the only form of flexible working. Other examples include: ‘self-employed’ workers, contracted separately for each job they do for a company; people paid largely or wholly on commission; on-call working; part-time working, where the hours are specified in advance, but where these are periodically re-negotiated; overtime; people producing a product or service for a company (perhaps at home), where the company varies the amount paid per unit according to market conditions.
The following videos and articles look at the issue in some detail: at the extent of the practice and at its benefits to employers and its costs (and some benefits) to workers. Both The Guardian and the BBC have an extensive range of articles on the topic.
Webcasts
Do zero hours contracts create real jobs? BBC Newsnight, Allegra Stratton (14/8/12)
Record number of ‘Zero Hours Contracts’ ITV News on YouTube, Laura Kuenssberg (2/5/13)
Britons rally against ‘Zero Hour’ contracts Al Jazeera on YouTube (4/8/13)
Anger at Amazon working conditions Channel 4 News (1/8/13)
Government to include Amazon in its zero hours probe Channel 4 News (2/8/13)
Councils using zero hours contracts BBC London, Warren Nettleford (31/7/13)
Podcasts
The real economy: Labour market BBC Today Programme, Evan Davis (24/8/11)
Zero hour contracts ‘just the norm’ BBC Today Programme, Rochelle Monte and Peter Cheese (5/8/13)
Articles
Zero-hours contracts: One million British workers could be affected Independent, Nigel Morris (5/8/13)
Zero hours contracts “spreading like wildfire”, official stats show Union News, Pete Murray (1/8/13)
Zero-hours contracts: what are they? The Guardian, Phillip Inman (30/7/13)
Buckingham Palace uses zero-hours contracts for summer staff The Guardian, Simon Neville, Matthew Taylor and Phillip Inman (30/7/13)
Nick Clegg: business department will investigate zero-hours contracts The Guardian,
Patrick Wintour, Simon Neville, Matthew Taylor and Phillip Inman (31/7/13)
Zero-hours contracts are not unavoidable The Guardian, Phillip Inman (1/8/13)
ONS admits it underestimated number of zero-hours contracts The Guardian, Simon Neville (1/8/13)
Zero-hours contract workers – the new reserve army of labour? The Guardian, Philip Inman (4/8/13)
Zero-hours contracts cover more than 1m UK workers The Guardian, Simon Goodley and Phillip Inman (5/8/13)
Zero-hours contracts use by councils needs to be moderated The Guardian, Vidhya Alakeson (5/8/13)
If zero-hours contracts are driving this ‘recovery’, it’s a lousy kind of recover The Guardian, Deborah Orr (9/8/13)
ONS increases its estimate of workers on zero hours contracts Financial Times, John Aglionby (1/8/13)
Zero Hours Herald Scotland, Ian Bell and Scott Dickson (4/8/13)
Sports Direct protests planned over zero hours contracts Channel 4 News (3/8/13)
Cable warns of exploitation of zero-hours contracts BBC News (5/8/13)
Q&A: What are zero-hours contracts? BBC News (5/8/13)
Record number of 16-24s on zero hours contracts at work BBC Newsbeat, Jim Reed (15/5/13)
Figures show 18-24s most likely on zero-hours contract BBC Newsbeat, Jim Reed and Amelia Butterly (5/8/13)
Andy Burnham calls for ban on zero hours contracts BBC News (28/4/13)
Zero-hours contracts: What is it like living on one? BBC News, Sean Clare (5/8/13)
Small Talk: Zero-hours contracts? Key for growth Independent, David Prosser (5/8/13)
Zero Hour Contracts Manchester based law firm, Emma Cross (30/7/13)
Data
People and proportion in employment on a zero-hour contract ONS (31/7/13)
Estimating Zero-Hour Contracts from the Labour Force Survey ONS (26/7/13)
One million workers on zero hours contracts, finds CIPD study CIPD, Michelle Stevens (5/8/13)
Labour Market Outlook CIPD
Questions
- Distinguish between open unemployment, disguised unemployment and underemployment?
- Distinguish between functional, numerical and financial flexibility? Which type or types of flexibility do zero-hours contracts give the firm?
- Identify the various benefits to employers of zero-hours contracts?
- What are the costs and benefits to workers of such contracts?
- Identify what forms of flexible contracts are used for staff in your university or educational establishment. Do they benefit (a) staff; (b) students?
- Are zero-hours contracts fair?
- In what ways do zero-hours contracts transfer risks from employers to employees?
- If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
- From the perspective of the employer, how do the benefits of zero-hours contracts compare with other forms of flexible working?
- Consider the arguments for and against (a) banning and (b) regulating zero-hours contracts.
The Preliminary Estimate of the UK Q2 GDP figures by the Office for National Statistics show that the UK economy grew by 0.6% in the second quarter of 2013: double the growth rate of the first quarter and almost back to the long-run average growth rate prior to 2008.
At first sight, this would seem to be good news – certainly from the government’s point of view. What is more, unlike the previous quarter, growth is spread relatively evenly across the three main sectors: the production (manufacturing, mining, water supply, etc.) and services sectors both grew by 0.6% and the construction sector by 0.9% (this sector fell by 1.8% in the previous quarter). (Click here for a PowerPoint of the chart below.)
But while growth in the latest quarter may be balanced between the broad sectors, the rise in aggregate demand is not balanced between its components. As an earlier news item (A balancing act) showed, the rise in aggregate demand has been driven largely by a rise in consumption, and a corresponding fall in saving. Exports are rising only slowly and investment is some 25% lower than in the boom years prior to 2008.
So will the latest growth be sustainable? Will investment now begin to pick up and what constraints are there on investment? The following articles consider some of the issues.
Articles
Economy firing on all cylinders as growth hits 0.6pc The Telegraph, Philip Aldrick (25/7/13)
The good, the bad or the ugly? How the UK economy stands up. The Telegraph, Philip Aldrick (25/7/13)
George Osborne’s 0.6% growth is good but unspectacular The Guardian, Larry Elliott (25/7/13)
The (not-so) green shoots of recovery The Economist, John Van Reenen (23/7/13)
Economic recovery slow to take root for some in UK Reuters, William Schomberg and Max De Haldevang (25/7/13)
GDP figures offer hard evidence for political narrative BBC News, Paul Mason (25/7/13)
Ignore the hype: Britain’s ‘recovery’ is a fantasy that hides our weakness The Observer, Will Hutton (21/7/13)
UK economy: Half-speed ahead BBC News, Stephanie Flanders (25/7/13)
BoE guidance can help sustain the UK recovery The Economist, Kevin Daly (22/7/13)
George Osborne’s description of the economy is near-Orwellian The Guardian, Ha-Joon Chang (26/7/13)
Economic growth: more must be done to encourage investment The Guardian, Phillip Inman (1/8/13)
Data
Gross Domestic Product: Preliminary Estimate, Q2 2013 ONS (25/7/13)
Questions
- Compare the macroeconomic situation today with that prior to the financial crisis of 2007/8 and subsequent recession.
- What factors will determine the sustainability of the UK economic recovery?
- What is meant by the ‘accelerator’ and what will determine the size of any accelerator effect from the latest rise in UK GDP?
- What supply-side constraints are likely to limit the rate and extent of recovery?
- Why do economies that are in recession ‘naturally bounce back’ without any government intervention? Have the macroeconomic policies of the UK government helped or hindered this bounce back? Explain.
- What monetary measures by the Bank of England are most appropriate in the current circumstances?
One very important characteristic of economic growth is its short-term volatility. Economic activity is notoriously volatile. It is such a fundamental idea that economists refer to it as one of their threshold concepts. The volatility of growth sees occasional recessions. The traditional definition is where real GDP (output) declines for 2 or more consecutive quarters. The latest figures from the Quarterly National Accounts call into question whether the UK technically experienced a recession at the start of 2012 with output broadly flat in 2012 Q1 following a contraction of 0.1 per cent in 2011 Q4.
The ONS’s latest output numbers raise some interesting questions around our understanding of what constitutes a recession. These figures show that the 2008/9 recession was deeper than first thought with output declining by 7.2 per cent. They show that UK output peaked in 2008Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters where output declined.
Output declined again in 2010 Q4 (–0.2% growth) and again in 2011 Q4 (–0.1% growth). But then interpretations of the data become more controversial. Not least, we get in the debates concerning the accuracy with which we can expect to measure the size of the economy and so to how many decimal places one should realistically measure a rise or fall. In terms of the raw real GDP numbers output fell in 2012 Q1. In 2011 Q4 GDP is estimated at £376,462 billion (at 2010 prices) ‘falling’ to £376,436 billion (at 2010 prices) in 2012 Q1. But, this is a percentage fall only when measured to the third decimal place (–0.007% growth).
In its publication Impact of changes in the National Accounts and economic commentary for Q1 2013 the ONS argue that:
While some commentators may attempt to read some significance into this revision, particularly in the context of whether the UK experienced a “double-dip” recession, it is clearly absurd to imagine that it is possible to measure the size of the economy to this degree of accuracy. The best interpretation of the Blue Book figures is that the economy was flat in the first quarter of 2012, and 0.6% larger than in the same quarter of 2011.
It is however understandable that those with vested interests – including economists, policy-makers and politicians – will take a slightly different view and will read more into the figures than perhaps an objective, sober view might demand. What appears more certain is that output did again fall in 2012 Q2 (–0.5 per cent growth) and in 2012 Q4 (–0.2 per cent growth). Despite estimated growth of 0.3 per cent in 2013 Q1, output remains 3.9 per cent lower than at its 2008 Q1 peak.
Perhaps the ‘absurdity’ or not around the debate of a double-dip recessions strengthens the argument for a more holistic and considered view of what constitutes a recession. In the USA the wonderfully-named Business Cycle Dating Committee takes a less fixed view of economic activity and, hence, of recessions. Its website argues:
It (the Committee) examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).
Of course, the advantage of focusing on real GDP alone in measuring activity and in determining recessions is that it is usually very straightforward to interpret. Regardless of whether the UK has experienced or not two recessions in close proximity, our chart helps to put the recent growth numbers into an historical context
. It shows both the quarter-to-quarter changes in real GDP (left-hand axis) and the level of output as measured by GDP at constant 2010 prices (right-hand axis). Click here to download the chart to PowerPoint.
The chart captures nicely the twin characteristics of growth. Since 1960, the average rate of growth per quarter has been 0.63 per cent. This is equivalent to an average rate of growth of 2.55 per cent per year. Since 2008 Q2, quarterly growth has averaged –0.19 per cent which is equivalent to an annual rate of growth of –0.78 per cent! In any language these are extraordinary numbers. Indeed, one could argue that focusing any policy debate around whether or not the UK experienced a double-dip recession rather misses the more general point concerning the absense of any sustained economic growth since 2008.
Data
Quarterly National Accounts Time Series Dataset Q1 2013 Office for National StatisticsStatistical Bulletin: Quarterly National Accounts Q1 2013 Office for National Statistics
Articles
UK avoided double-dip recession in 2011, revised official data shows Guardian, Phillip Inman (27/6/13)
Britain’s double dip recession revised away, but picture still grim Reuters, David Milliken and William Schomberg (27/6/13)
UK double-dip recession revised away BBC News (27/6/13)
IMF raises UK economic growth forecast BBC News (9/7/13)
IMF raises UK economic growth forecast to 0.9% but cuts prediction for global growth Independent, Holly Williams (9/7/13)
IMF Upgrades UK Growth Forecast For 2013 Sky News (9/7/13)
Questions
- What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
- Looking at the chart above, summarise the key patterns in real GDP since the 1960s.
- What is a recession? What is a double-dip recession?
- What are some of the problems with the traditional definition of a recession?
- Explain the arguments for and against the proposition that the UK has recently experienced a double-dip recession.
- Can a recession occur if nominal GDP is actually rising? Explain your answer.
- What factors might result in economic growth being so variable?
- Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
There’s some good news and some bad news about the UK economy. The good news is that there are signs that the recovery is gathering momentum; the ‘green shoots’ are growing bigger. The bad news is that it’s the ‘wrong type of growth’!
One of the main underlying problems of the 2008 financial crisis was that household debt had been increasing to unsustainable levels, egged on by banks only too willing to lend, whether as personal loans, on credit cards or through mortgages. When the recession hit, many people sought to reduce their debts by cutting back on spending. This further fuelled the recession.
What the government and most economists hoped was that there would be some rebalancing of the economy, with less reliance on consumer spending to drive economic growth. Instead it was hoped that growth would be driven by a rise in investment and exports. Indeed, the 25% depreciation of sterling exchange between 2007 and 2009 was seen as a major advantage as this would boost the demand for exports and encourage firms to invest in the export sector.
But things haven’t turned out the way people hoped. The recession (or lack of growth) has been much deeper and more prolonged than previous downturns in the economy. Today, real GDP per head is more than 7% below the level in 2007 and many people have seen much bigger declines in their living standards.
But also, despite the austerity policies, the economy has not been ‘rebalanced’ towards exports and investment. Exports are 3% lower than in 2006 (although they did grow between 2009 Q2 and 2011 Q1, but have since stagnated). And investment is 27% lower than in 2006. Household consumption, however, has grown by about 2% and general government consumption by around 9% since 2006. The chart shows the figures, based on 2006 Q1 = 100.
(Click here for a PowerPoint of the chart.)
And recent evidence is that consumption is beginning to grow faster – not because of rising household incomes, but because of falling saving rates. In 2008, the household saving ratio had fallen to nearly 0% (i.e. households were on average saving about the same as they were borrowing). Then the saving ratio rose dramatically as people reined in their spending. Between 2009 and 2012, the ratio hovered around 7%. But in the first quarter of 2013, it had fallen to 4.2%
So the good news is that aggregate demand is rising, boosting economic growth. But the bad news is that, at least for the time being, this growth is being driven by a rise in household borrowing and a fall in household saving. The videos and articles consider whether this is, however, still good news on balance.
Webcasts
Britain’s imbalanced economy The Economist, Zanny Minton Beddoes and Richard Davies (4/7/13)
Britain’s Export Drought: an enduring disappointment The Economist, Andrew Palmer and Richard Davies (9/2/13)
‘Green shoots’ of economic recovery in Rugby BBC News, Paul Mason (12/6/13)
Articles
Is the UK economy seeing the ‘wrong kind’ of green shoots? BBC News, Stephanie Flanders (3/7/13)
The export drought: Better out than in The Economist (9/2/13)
Exports and the economy: Made in Britain The Economist (21/1/12)
The economy: On a wing and a credit card The Economist (6/7/13)
Unbalanced and unsustainable – this is the wrong kind of growth The Telegraph, Jeremy Warner (8/7/13)
The UK economy’s looking up – but no one’s told manufacturers The Guardian, Heather Stewart (10/7/13)
Data
Quarterly National Accounts, Q1 2013 (27/6/13)
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury (June 2013)
ISM Manufacturing Report on Business® PMI History Institute for Supply Management
Questions
- What are forecasters expecting to happen to economic growth in the coming months? Why?
- What factors determine investment? Why has it fallen so substantially in the UK?
- Explain what is meant by the ‘accelerator’. Is the rise in consumption likely to lead to an accelerator effect and, if so, what will determine the size of this effect?
- Why have exports not grown more rapidly despite the depreciation of sterling after 2007?
- What will determine the rate of potential economic growth in the UK economy? How will a rise in real GDP driven by a rise in consumption impact on potential GDP and potential economic growth?
- What supply-side policies would you recommend, and why, in order to increase potential economic growth?
The strength of the housing market is often a key indicator of the strength of the economy. But, the opposite is also true: a weak economy often filters through to create a weak housing market. With the current weak economy, a boost in confidence is needed and signs suggest that the housing market is beginning to recover.
While the picture of the housing market today is nothing like the pre-crisis view, things are beginning to look up. For a couple of years now, house price inflation in the UK has been very close, if not equal to zero. However, data from Nationwide Building Society suggests that in May, house prices rose by 0.4% and the once stagnant year-on-year change in house prices rose to 1.1% (see chart below: click here for a PowerPoint of the chart). This is the fastest it has grown since the end of 2011.
Commentators have suggested that this latest data is an indication that ‘the market is gaining momentum’. A further confirmation of this rejuvenated market came with the data that property sales were 5% up each month this year, than the average monthly level for 2012. Despite this improvement, they still remain well below the pre-crisis levels.
Which factors have contributed to this tentative recovery? Most households require a mortgage to purchase a house and, given the central role that the housing market played in the financial crisis with companies engaging in excessive lending as a means of expanding their mortgage books, the availability of mortgages fell. The number of mortgage approvals is likely to feed through to affect the number of house sales and these have improved in the first few months of 2013. Interest rates offered by lenders have also fallen, making mortgages more affordable, thus boosting demand. Furthermore, government assistance is available to help individuals put a deposit down on a house, by offering them an equity loan. Further measures are due to come into effect in January 2014, with the aim of providing a further boost to the housing market. The chief economist at Nationwide, Robert Gardner said:
Widespread expectations that the economy will continue to recover gradually in the quarters ahead, that interest rates will remain low, and the ongoing impact of policy measures aimed at supporting the availability and lowering the cost of credit all provide reasons for optimism that activity will continue to gain momentum in the quarters ahead.
Despite the optimism, the situation is different across the UK, with some areas benefiting more than others. London and the South-East are driving this 0.4% rise, whereas other areas may be in need of further assistance to keep pace (see The UK housing market: good in parts).
Although these latest data may be a sign of things to come, it is also possible that things could go the opposite way. Incomes remain low; employment data are hardly encouraging; and the spectre of inflation is always there. Perhaps most importantly, consumer confidence remains fragile and until that gains momentum, uncertainty will continue to plague the UK marketplace. The following articles consider this issue.
Articles
UK house prices again up in May, says Nationwide The Guardian, Hilary Osborne (30/5/13)
Housing market could boost retail industry, Kingfisher says The Telegraph, Graham Ruddick (30/5/13)
UK house prices see modest rise, says Nationwide BBC News (30/5/13)
Hugh’s Review: House prices in spotlight BBC News, Hugh Pym with Yolande Barnes of Savills and Matthew Pointon of Capital Economics (31/5/13)
House prices are racing ahead as stimulus for the market kicks in Independent, Russell Lynch (31/5/13)
’Pick up’ in house prices recorded in sign of market confidence, says Nationwide Independent, Vicky Shaw (30/5/13)
House prices at highest level for nearly two years as confidence in UK economy grows and mortgages get cheaper This is Money, Matt West (30/5/13)
Stamp duty is ‘choking’ housing market as it rises seven times faster than inflation over last 15 years Mail Online, Tara Brady (28/5/13)
Nationwide launches Help to Buy mortgages The Telegraph, William Clarke (29/5/13)
UK home prices rise most in 18 months, Nationwide says Bloomberg, Jennifer Ryan (30/5/13)
House price data
Links to house price data The Economics Network
Statistical data set – Property transactions Department of Communities and Local Government
Nationwide house price index Nationwide Building Society
Halifax House Price Index Lloyds Banking Group
Lending to individuals – November 2012 Bank of England
Questions
- How is the equilibrium determined in the housing market? Using a demand and supply diagram, illustrate the equilibrium. Make sure you think about the shapes of the curves you’re drawing.
- Which factors affect the demand for and supply of housing?
- Why are there regional variations in house prices?
- Why is the housing market a good indicator of the strength of the economy?
- Why have house prices risen throughout 2013? Is the trend likely to continue?
- If the housing market does indeed gain momentum, how might this affect the rest of the economy? Which sectors in particular are likely to benefit?
- Explain why the government’s intervention in the housing market could be seen to have a multiplier effect?
- Concerns have been raised that the government’s schemes to help the housing market may create a house price bubble. Why might this be the case?
Despite the prolonged stagnation in the UK, unemployment has not soared. In fact, over the past two years the ILO unemployment rate (see here for a definition) has fallen slightly – from 8.6% in October 2011 to around 8.0% today. What is more, the claimant count rate is considerably lower than the ILO rate – at around 4.4%.
Many employers use such contracts, including many voluntary-sector and public-sector organisations, including the NHS, local councils and Buckingham Palace. They are also used by many small and medium-sized enterprises and many well-known large companies, such as Sports Direct, Amazon, JD Wetherspoon and Cineworld. It gives them the flexibility to adjust the hours they employ people. It allows them to keep people in employment when demand is low. It also makes them more willing to take on staff when demand rises, as it removes the fear of being over-staffed if demand then falls back.
Note that zero hours are not the only form of flexible working. Other examples include: ‘self-employed’ workers, contracted separately for each job they do for a company; people paid largely or wholly on commission; on-call working; part-time working, where the hours are specified in advance, but where these are periodically re-negotiated; overtime; people producing a product or service for a company (perhaps at home), where the company varies the amount paid per unit according to market conditions.
