Category: Economics for Business: Ch 31

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Should the UK government reintroduce the furlough scheme?

During the pandemic, millions of people’s wages in the UK were paid by the government to prevent the closure of businesses and a surge in unemployment. The furlough scheme officially came to an end in September 2021. However, with the spread of the Omicron variant and the fear of further restrictions being put in place, there has been a call by many to re-introduce the furlough scheme.

The furlough scheme

The furlough scheme began when the government brought in, what was officially called the Coronavirus Job Retention Scheme (CJRS) in early 2020. This was when the pandemic first forced businesses across the country to close. The scheme worked by paying part of employees’ wages, preventing the need for businesses to make their staff redundant, therefore avoiding a rapid rise in unemployment along with the associated costs. It also avoided the financial and emotional costs of firing and then rehiring workers post pandemic. Under the scheme, furloughed workers received 80% of their wages, up to £2500 a month, if they couldn’t work because of the impact of coronavirus. Employees were able to maintain the security of employment and the payments helped furloughed workers pay their bills.

The scheme saw billions of pounds spent paying the wages of employees whose firms were forced to close temporarily. It could be argued that the expense of the scheme was a huge disadvantage. However, the alternative would have been for the government to pay unemployment-related benefits. Despite the furlough scheme being deemed necessary, it was not without its drawbacks for the structure of businesses. Rather than businesses adapting to changes in the economy and consumer demands, they could decide to claim the money and avoid the need to restructure. There was also concern about the length of the furlough scheme and the ability of businesses to bounce back post-pandemic.

Since the start of the scheme, the specifics of what was paid and who received it changed over time, especially once the economy started opening again. Initial steps were made to allow part-time return to work and the scheme started to wind down over the summer of 2021, with the government covering less of the wages and businesses covering more. From July, employers had to provide 10% of the wages of their furloughed staff, with the government paying the rest. This then increased to 20% in August with the CJRS coming to a complete end on 30 September 2021. At this point, there were around 1.6 million employees still receiving payment from the scheme.

Impact on Employment

With the end to the furlough scheme in September 2021, there were concerns that this would lead to a large number of redundancies. However, data indicate that has not happened and there is a record number of job vacancies. Official figures show that UK employment rose in October, confirming the strength of the labour market. The Office for National Statistics stated that the employment rate rose to 75.5% in the three months to October, up 0.2 percentage points on the previous quarter. This is believed to be driven by a rise in part-time work, which had dropped sharply during the pandemic. However, it is important to note that the strength in these numbers was prior to the emergence of the Omicron variant.

Omicron

In November, the government had ruled out once again bankrolling people’s wages at enormous expense. However, the Chancellor is now under pressure to respond to the latest announcements around the ever-changing landscape of the pandemic. The fast-spreading mutation of the Covid-19 virus, Omicron, is posing a fresh threat to the economy.

On the 8 December, the Prime Minister announced new ‘Plan B’ Covid rules for England. As part of these new rules to limit the spread of Omicron, people are being asked to work from home again if possible and face masks are compulsory in most public places. Covid passes or a negative Covid test result are also needed to get into nightclubs and large venues.

Scotland and Wales have brought in further restrictions. Scotland’s First Minister, Nicola Sturgeon, has asked people to limit socialising to three households at a time in the run-up to Christmas. Shops and hospitality venues in Scotland must bring back physical distancing and screens. In Wales, nightclubs will close after 26 December and social distancing will be reintroduced in shops.

Although the hospitality industry and retail sector remain open, they are facing a slump in trade thanks to the new restrictions and worries among the general public. With the work-from-home guidance and advice from health officials that people should limit their social interactions, pubs and restaurants have seen widespread cancellations in the run-up to Christmas. Trade is suffering and these mass cancellations come at a time when these sectors were hoping for bumper trade after a dismal last couple of years.

In light of these concerns, ministers are now being urged to guarantee support in case businesses have to shut. Despite the indication that it would be highly unlikely that the UK would experience a full return to the restrictions seen at previous stages of the crisis, the International Monetary Fund has stated that the UK government should be drawing up contingency plans. The IMF has called for a mini-furlough scheme in the event that the Omicron variant forces the government to close parts of the economy. The idea is that the mini-furlough scheme would see a limited version of the multi-billion-pound job subsidy scheme being rolled out if firms are forced to close.

There are strong calls for there to be targeted support, which this mini-furlough scheme could offer. The Resolution Foundation argued in mid-December that a furlough scheme tied solely to the hospitality industry would help prevent job loses in an industry that is currently suffering once again. It calculated that the cost of a hospitality-only furlough scheme would be £1.4 billion a month if it were pitched at the original level of 80% of wage support. If a January to March sector-specific scheme were to be introduced it is estimated to cost around £5 billion, a small cost in comparison to £46 billion spent on furlough so far.

Inflation

Any reintroduction of a furlough scheme would be a jolt for the government. This would mean a return to the 2020-style arguments around protecting livelihoods and businesses, a contrast to the recent messaging from the Treasury of restoring public finances. There is also concern about how this will all impact on current growth predictions and inflation concerns. The IMF expects the growth of the UK economy to be 6.8% in 2021 and 5% in 2022. However, the drawback from this is that the recovery would also be accompanied by rising inflation. It has been suggested, therefore, that interest rate increases from the Bank of England would be needed to keep inflation under control, while at the same time being not so great as to kill off growth.

It was widely expected that the Bank of England would again put off a rate hike in order to wait to see the economic impact of Plan B restrictions. However, on Thursday 16 December, interest rates were raised for the first time in more than three years. Despite the fears that Omicron could slow the economy by causing people to spend less, Bank Rate was raised from 0.1% to 0.25% . This came in the wake of data showing prices climbing at the fastest pace for 10 years.

Next Steps?

Government finances would take another huge hit if the furlough scheme were revived. But a version of such a scheme is likely to be necessary to avert an unemployment crisis and the attendant costs.

However, in resisting further measures, the government has argued that it has already acted early to help control the virus’s spread by rapidly rolling out booster jabs, while avoiding unduly damaging economic and social restrictions.

The government also argues that some of the measures from the total £400 billion Covid support package since the start of the pandemic will continue to help businesses into Spring 2022. Such measures include government-backed loans for small- and medium-sized businesses until June 2022, a reduction in VAT from 20% to 12.5% until March 2022 and business rates relief for eligible retail, hospitality, and leisure businesses until March 2022. Talks are ongoing with hospitality and and other business organisations directly affected by Covid restrictions.

The British Chambers of Commerce has argued that current measures are not enough and has called for VAT on hospitality and tourism to be cut back to its emergency rate of 5% and for the 100% business rates relief for retailers to return. The CBI has also called for any unspent local authority grants to be spent now to help affected firms and that further help, including business rates relief, should be on the table if restrictions continue after the government’s 5 January review date. The IMF said that with strong policy support, the economy had proved resilient, but it stressed that a return of some of the measures that prevented mass unemployment and large-scale business failures might soon be needed.

Conclusion

Infections caused by the new Omicron variant are rising rapidly, doubling every two to three days. It is expected to become the dominant variant in the UK soon with health officials warning it may be the most significant threat since the start of the pandemic. However, it is not yet known what the full extent of the impact of this new variant on the NHS will be, leaving the severity of future restrictions uncertain.

But what is evident is that the course of the pandemic has changed and there is a growing case for the government to start planning for new support packages. Although a reintroduction of the furlough scheme was hoped not to be needed on the path out of the pandemic, a short detour may be required in the form of a mini-furlough scheme. The size and reach of any support put in place will depend upon any further restrictions on economic activity.

Articles

Questions

  1. Should the level of support for business return to the levels in place earlier in 2021?
  2. What measures could a government put in place to curtail the spread of the Omicron variant that have only a minimal impact on business and employment?
  3. Compare the UK measures to curtail the spread of the virus with those used in some other European countries.
  4. What are the arguments for and against (a) re-introducing the furlough scheme as it was earlier in 2021; (b) introducing a version restricted to the hospitality sector?
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The energy crisis

The global battle for fuel is expected to peak this winter. The combination of rising demand and a tightening of supply has sparked concerns of shortages in the market. Some people are worried about another ‘winter of discontent’. Gas prices have risen fivefold in Europe as a whole.

In the UK, consumers are likely to find that the natural gas needed to heat their homes this October will cost at least five times more than it did a year ago. This surge in wholesale gas prices has seen several UK energy suppliers stop trading as they are unable to make a profit. This is because of an energy price cap for some consumers and various fixed price deals they had signed with their customers.

There are thus fears of an energy crisis in the UK, especially if there is a cold winter. There are even warnings that during a cold snap, gas supply to various energy-intensive firms may be cut off. This comes at a time when some of these industries are struggling to make a profit.

Demand and supply

The current situation is a combination of long- and short-term factors. In spring 2020, the demand for gas actually decreased due to the pandemic. This resulted in low gas prices, reduced UK production and delayed maintenance work and investment along global supply chains. However, since early 2021, consumer demand for gas has soared. First, there was an increased demand due to the Artic weather conditions last winter. This was then followed by heatwaves in the USA and Europe over the summer, which saw an increase in the use of air conditioning units. With the increased demand combined with calm weather conditions, wind turbines couldn’t supply enough power to meet demand.

There has also been a longer-term impact on demand throughout the industry due to the move to cleaner energy. The transitioning to wind and solar has seen a medium-term increase in the demand for gas. There is also a long-term impact of the target for net zero economies in the UK and Europe. This has hindered investors’ willingness to invest in developing supplies of fossil fuels due the fact they could become obsolete over the next few decades.

Nations have also been unable to build up enough supplies for winter. This is partly due to Europe’s domestic gas stocks having declined by 30% per cent in the past decade. This heightened situation is leading to concerns that there will be black-outs or cut-offs in gas this winter.

Importation of gas

A concern for the UK is that it has scant storage facilities with no long-term storage. The UK currently has very modest amounts of storage – less than 6% of annual demand and some five times less than the average in the rest of Europe. It has been increasingly operating a ‘just-in-time model’, which is more affected by short-term price fluctuations in the wholesale gas market. With wind power generation remaining lower than average during summer 2021, more gas than usual has been used to generate electricity, leaving less gas to go into storage.

However, some argue that the problem is not just the UK’s physical supply of gas but demand for gas from elsewhere. Around half of the UK’s supply comes from its own production sites, while the rest is piped in from Europe or shipped in as liquefied natural gas (LNG) from the USA, Qatar and Russia. In 2019, the UK imported almost 20% of its gas through LNG shipments. However, Asian gas demand has grown rapidly, expanding by 50% over the past decade. This has meant that LNG has now become much harder to secure.

The issue is the price the UK has to pay to continue receiving these supplies. Some in the gas industry believe the price surge is only temporary, caused by economic disruptions, while many others say it highlights a structural weakness in a continent that has become too reliant on imported gas. It can be argued that the gas crisis has highlighted the lack of a coherent strategy to manage the gas industry as the UK transitions to a net zero economy. The lack of any industry investment in new capacity suggests that there is currently no business case for new long-term storage in the UK, especially as gas demand is expected to continue falling over the longer term.

Impact on consumers and industry

Gas prices for suppliers have increased fivefold over the past year. Therefore, many companies face a considerable rise in their bills. MSome may need to reduce or pause production – or even cease trading – which could cause job losses. Alternatively, they could pass on their increased costs to customers by charging them higher prices. Although energy-intensive industries are particularly exposed, every company that has to pay energy bills will be affected. Due to the growing concerns about the security of winter gas supplies those industries reliant on gas, such as the fertiliser industry, are restricting production, threatening various supply chains.

Most big domestic gas suppliers buy their gas months in advance, meaning they will most likely pass on the higher price rises they have experienced in the past few months. The increased demand and decreased supply has already meant meant that customers have faced higher prices for their energy. The UK has been badly hit because it’s one of Europe’s biggest users of natural gas – 85% of homes use gas central heating – and it also generates a third of the country’s electricity.

The rising bills are particularly an issue for those customers on a variable tariff. About 15 million households have seen their energy bills rise by 12% since the beginning of October due to the rise in the government’s energy price cap calculated by the regulator, Ofgem. A major concern is that this increase in bills comes at a time when the need to use more heating and lighting is approaching. It also coincides with other price rises hitting family budgets and the withdrawal of COVID support schemes.

Government intervention – maximum pricing

If the government feels that the equilibrium price in a particular market is too high, it can intervene in the market and set a maximum price. When the government intervenes in this way, it sets a price ceiling on certain basic goods or services and does not permit the price to go above that set limit. A maximum price is normally set for reasons of fairness and to benefit consumers on low incomes. Examples include energy price caps to order to control fuel bills, rent controls in order to improve affordability of housing, a cap on mobile roaming charges within the EU and price capping for regional monopoly water companies.

The energy price cap

Even without the prospect of a colder than normal winter, bills are still increasing. October’s increase in the fuel cap means that many annual household fuel bills will rise by £135 or more. The price cap sets the maximum price that suppliers in England, Wales and Scotland can charge domestic customers on a standard, or default tariff. The cap has come under the spotlight owing to the crisis among suppliers, which has seen eleven firms fold, with more expected.

The regulator Ofgem sets a price cap for domestic energy twice a year. The latest level came into place on 1 October. It is a cap on the price of energy that suppliers can charge. The price cap is based on a broad estimate of how much it costs a supplier to provide gas and electricity services to a customer. The calculation is mainly made up of wholesale energy costs, network costs such as maintaining pipes and wires, policy costs including Government social and environmental schemes, operating costs such as billing and metering services and VAT. Therefore, suppliers can only pass on legitimate costs of supplying energy and cannot charge more than the level of the price cap, although they can charge less. A household’s total bill is still determined by how much gas and electricity is used.

  • Those on standard tariffs, with typical household levels of energy use, will see an increase of £139.
  • People with prepayment meters, with average energy use, will see an annual increase of £153.
  • Households on fixed tariffs will be unaffected. However, those coming to the end of a contract are automatically moved to a default tariff set at the new level.

Ordinarily, customers are able to shop around for cheaper deals, but currently, the high wholesale prices of gas means that cheaper deals are not available.

Despite the cap limiting how much providers can raise prices, the current increase is the biggest (and to the highest amount) since the cap was introduced in January 2019. As providers are scarcely making a profit on gas, there are concerns that a further increase in wholesale prices will cause more suppliers to be forced out of business. Ofgem said that the cap is likely to go up again in April, the next time it is reviewed.

Conclusion

The record prices being paid by suppliers and deficits in gas supply across the world have stoked fears that the energy crisis will get worse. It comes at a time when households are already facing rising bills, while some energy-intensive industries have started to slow production. This has started to dent optimism around the post-pandemic economic recovery.

Historically, UK governments have trusted market mechanisms to deliver UK gas security. However, consumers are having to pay the cost of such an approach. The price cap has meant the UK’s gas bills have until now been typically lower than the EU average. However, the rise in prices comes on top of other economic problems such as labour shortages and increasing food prices, adding up to an unwelcome rise in the cost of living.

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Articles

UK government/Ofgem

Questions

  1. Using a supply and demand diagram, illustrate what has happened in the energy market over the past year.
  2. What are the advantages and disadvantages of government intervention in a free market?
  3. Explain why it is necessary for the regulator to intervene in the energy market.
  4. Using the concept of maximum pricing, illustrate how the price cap works.
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Why is there a driver shortage in the UK?

Long queues at petrol pumps, with many filling stations running out of fuel; fears of shortages of food and various other items in supermarkets; orders by shops and warehouses unfilled or delayed. These have been some of the headlines in the UK in recent days.

The immediate problem is a shortage of over 100 000 lorry drivers, with thousands of drivers from EU countries, who were previously living and working in the UK, having returned to their home countries. Their numbers have not been replaced by British drivers, a problem exacerbated by a decline in HGV tests during the pandemic. Thus the supply of lorry drivers has fallen.

At the same time, as the economy recovers from the COVID-19 pandemic, aggregate demand has risen and with it the demand for lorry drivers.

The shortage is pushing up wages somewhat, but not enough to eliminate the shortage. What is more, the supply of lorry drivers is relatively wage inelastic: a higher wage does not attract many more drivers into the market. Also the demand is also relatively wage inelastic: a higher wage does not do much to dampen the demand for drivers.

But why has this happened? Why has the supply of drivers fallen and why is it inelastic? And what will happen in the coming months? The three main causes are Brexit, COVID-19 and working conditions.

Brexit

With Brexit, many EU workers left the UK, finding life and working conditions more conducive in the EU. Many EU drivers had faced discrimination and felt that they were not welcome in the UK. It has been difficult finding replacement drivers from the EU as the UK’s immigration system, which now applies to the EU as well as other countries, prioritises workers who are classified as high-skilled, and these do not include lorry drivers.

Those EU drivers who do want to stay as UK residents are finding that settled status or visas are not easy to achieve and involve filling in various documents, which can be an onerous and time-consuming process. As the writer of the first linked bog below, who is a Polish worker in the transport industry, states, ‘Would you rather come to Britain and jump through all the hoops, or choose any of the well-paying EU countries, for example, Germany that, if you live in Western Poland, is just a short drive across (virtually non-existent thanks to Schengen) border?’ Another problem is that with EU driving licences: it is harder for potential employers to check on their status and thus they may prefer to employ UK drivers. This, again, puts off EU drivers from seeking to stay in the UK.

Even in the case of EU drivers living in the EU but delivering to the UK there are problems. First there are the dangers for drivers of boarding ferries in France, where people from migrant camps seek to board lorries to get passage to the UK, often threatening drivers. If illegal migrants do succeed in boarding a trailer unseen by the driver, the driver can then be arrested in the UK. According to the Polish blogger, it’s ‘no surprise that I hear more and more drivers who, when taking on new jobs, demand guarantees from their employers that they won’t be sent to the UK’.

Then there is a decline in the system known as ‘cabotage’. This is where an EU driver delivers from the EU to destination A in the UK and takes back a load to the EU from destination B in the UK. To avoid having to travel empty between the two UK destinations, the driver could pick up a load to take from A to B. With a fall in imports and exports from and to the EU following Brexit, there are fewer EU lorries on UK roads. This means that there is now less capacity for transporting loads within the UK.

There has also been a large rise in ‘red tape’ associated with post-Brexit customs checks and border controls. This means that lorries can be held up at ports. This makes it much less attractive for EU haulage companies to export to the UK rather than to other EU countries, where paperwork is minimal. In addition, m many drivers are paid by the length of the journey rather than by the time spent, so delays result in them earning less per hour. Full checks have not been introduced yet. When they are, in January and July next year, the problem will be worse.

Tax changes make it more difficult for drivers to avoid taxes by claiming that they are self employed when they are in reality employees. This too is discouraging drivers from the EU from moving to or staying in the UK since many would now (since April 2021) be paying more tax.

COVID-19

Another contributing factor to the shortage of drivers has been COVID-19 and the government’s response to it. COVID rates are considerably higher in the UK than in most EU countries and, not surprisingly, many EU drivers are afraid to come to the UK.

The pandemic led to fewer HGV driver tests, with 25 000 fewer candidates passing their test in 2020 than in 2019. It takes time to train new drivers and then to test them. However, even if there had been no reduction in HGV drivers passing their tests, there would still be a significant shortage of qualified drivers.

A further problem with the effects of COVID-19 on the economy has been the initial recession and then the bounce back. The sheer size of the bounce back has exacerbated the problem of driver shortages, which otherwise would have been slower to develop, giving the market more time to respond. Real GDP grew by 5.5% from 2021 Q1 to 2021 Q2, giving an annual growth rate of 23.6%. Nevertheless, GDP was still some 3.3% below its 2019 Q3 level.

Pay and working conditions

Working conditions are very poor for many drivers. The following are common complaints:

  • Driving jobs are often very tightly controlled, with computer monitoring and little freedom for the driver. Some cabs have cameras aimed at the drivers so that they can be constantly monitored.
  • Drivers are subject to very stringent health and safety regulations, such as not being allowed to drive longer than a certain time, even when they are queuing in congested traffic. Whilst many of these regulations are desirable to protect both the public’s and the driver’s safety, they can discourage drivers from entering or staying in the industry. And some regulations are hard to justify on safety grounds (see second linked article below, point 13).
  • Just-in-time deliveries at supermarkets, regional distribution centres (warehouses) or factories make timing very important and add considerable stress to drivers who may face abuse if they are late, even though it was not their fault, with their employer perhaps facing a fine. And yet on other occasions they might have to wait a long time to offload if drivers before them have been delayed, and often the conditions in waiting areas are poor with few if any facilities.
  • Drivers often feel a lack of respect from employers, trainers and the general public.
  • Rest and refreshment facilities are often very poor in the UK and generally much worse than in the EU. In the EU, motorway service areas have better parking, toilets, showers and shops. Restaurants are better and cheaper. Dedicated truck stops have supermarkets, laundrettes, showers or even open-air gyms dedicated to making drivers’ lives easier and more pleasant. The UK by contrast often has very poor facilities. Unlike in most EU motorway services, drivers have to pay to park and are faced with poor toilet and eating facilities. ‘Meanwhile, a typical British truck stop is some dusty yard full of potholes on the side of some industrial estate with a portaloo and a “greasy spoon” burger van parked next to it.’
  • Hours are long. Even though driving hours are restricted to 10 hours per day (recently extended to 11 hours), the average working day may be much longer as drivers have to wait at distribution centres, fill in increasing amounts of paperwork and help load or unload their vehicle. Also drivers may have to work variable shifts, which leads to disturbed sleeping patterns.
  • The work is often physically demanding, especially when a large part of the job involves loading and unloading and moving items from the lorry to where the customer wants them.
  • Many vehicles are hard and unpleasant to drive, with leased vehicles often low-spec, dirty, uncomfortable and poorly maintained.
  • Many of the jobs are agency jobs that do not offer stable employment.

Although pay is higher than in some parts of the labour market where there are shortages, such as social care and hospitality, pay per hour is still relatively poor when compared with many industries which have better conditions of employment.

The future

The government is allowing more foreign workers into the UK from this month (October); more training places will be offered for potential drivers and the number of driving tests will increase; the government is also encouraging retired drivers or those who have left driving for other jobs to return to the industry.

However, there are shortages of drivers in other EU countries and so it will be difficult to attract additional drivers to the UK from the EU. What is more, with wages and working conditions remaining poor and the labour market remaining tight in other sectors, it might be hard to fill new training places and encourage workers to return to driving. Also, with the average age of drivers being 55, it is likely that the outflow of workers from driving jobs could be large in the coming years.

Articles

Questions

  1. Why are the supply of and demand for lorry drivers relatively wage inelastic?
  2. Use a marginal productivity diagram to explain the current situation in the market for lorry drivers.
  3. What policy measures could be adopted to increase the supply of lorry drivers? How successful would these be?
  4. Is it ‘rational’ for consumers to ‘panic buy’ fuel and other products in short supply?
  5. Find out why there is a shortage of lorry drivers in the EU. Are any of the explanations similar to those in the UK?
  6. What are the macroeconomic implications of a shortage of lorry drivers and other key workers?
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Is capitalism changing?

The coronavirus pandemic and the climate emergency have highlighted the weaknesses of free-market capitalism.

Governments around the world have intervened massively to provide economic support to people and businesses affected by the pandemic through grants and furlough schemes. They have also stressed the importance of collective responsibility in abiding by lockdowns, social distancing and receiving vaccinations.

The pandemic has also highlighted the huge inequalities around the world. The rich countries have been able to offer much more support to their people than poor countries and they have had much greater access to vaccines. Inequality has also been growing within many countries as rich people have gained from rising asset prices, while many people find themselves stuck in low-paid jobs, suffering from poor educational opportunities and low economic and social mobility.

The increased use of working from home and online shopping has accelerated the rise of big tech companies, such as Amazon and Google. Their command of the market makes it difficult for small companies to compete – and competition is vital if capitalism is to benefit societies. There have been growing calls for increased regulation of powerful companies and measures to stimulate competition. The problem has been recognised by governments, central banks and international agencies, such as the IMF and the OECD.

At the same time as the world has been grappling with the pandemic, global warming has contributed to extreme heat and wildfires in various parts of the world, such as western North America, the eastern Mediterranean and Siberia, and major flooding in areas such as western Europe and China. Governments again have intervened by providing support to people whose property and livelihoods have been affected. Also there is a growing urgency to tackle global warming, with some movement, albeit often limited, in implementing policies to achieve net zero carbon emissions by some specified point in the future. Expectations are rising for concerted action to be agreed at the international COP26 climate meeting in Glasgow in November this year.

An evolving capitalism

So are we seeing a new variant of capitalism, with a greater recognition of social responsibility and greater government intervention?

Western governments seem more committed to spending on socially desirable projects, such as transport, communications and green energy infrastructure, education, science and health. They are beginning to pursue more active industrial and regional policies. They are also taking measures to tax multinationals (see the blog The G7 agrees on measures to stop corporate tax avoidance). Many governments are publicly recognising the need to tackle inequality and to ‘level up’ society. Active fiscal policy, a central plank of Keynesian economics, has now come back into fashion, with a greater willingness to fund expenditure by borrowing and, over the longer term, to use higher taxes to fund increased government expenditure.

But there is also a growing movement among capitalists themselves to move away from profits being their sole objective. A more inclusive ‘stakeholder capitalism’ is being advocated by many companies, where they take into account the interests of a range of stakeholders, from customers, to workers, to local communities, to society in general and to the environment. For example, the Council for Inclusive Capitalism, which is a joint initiative of the Vatican and several world business and public-sector leaders, seeks to make ‘the world fairer, more inclusive, and sustainable’.

If there is to be a true transformation of capitalism from the low-tax free-market capitalism of neoclassical economists and libertarian policymakers to a more interventionist mixed market capitalism, where capitalists pursue a broader set of objectives, then words have to be matched by action. Talk is easy; long-term plans are easy; taking action now is what matters.

Articles and videos

Questions

  1. How similar is the economic response of Western governments to the pandemic to their response to the financial crisis of 2007–8?
  2. What do you understand by ‘inclusive capitalism’? How can stakeholders hold companies to account?
  3. What indicators are there of market power? Why have these been on the rise?
  4. How can entrepreneurs contribute to ‘closing the inequality gap for a more sustainable and inclusive form of society’?
  5. What can be done to hold governments to account for meeting various social and environmental objectives? How successful is this likely to be?
  6. Can inequality be tackled without redistributing income and wealth from the rich to the poor?
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Will a four-day week increase productivity?

In a post at the end of 2019, we looked at moves around the world to introduce a four-day working week, with no increase in hours on the days worked and no reduction in weekly pay. Firms would gain if increased worker energy and motivation resulted in a gain in output. They would also gain if fewer hours resulted in lower costs.

Workers would be likely to gain from less stress and burnout and a better work–life balance. What is more, firms’ and workers’ carbon footprint could be reduced.

In New Zealand, Unilever has begun a one-year experiment to allow all 81 of its employees to work one day less each week and no more hours per day. This, it argues, might boost productivity and improve employees’ work-life balance.

The biggest experiment so far has been in Iceland. From 2015 to 2019 more than 2500 people took part in a pilot programme (about 1 per cent of Iceland’s working population). This involved reducing the working week to four days and reducing hours worked from 40 hours per week to 35 or 36 hours with no reduction in weekly pay.

Analysis of the results of the trial, published in July 2021, showed that output remained the same or improved in the majority of workplaces.

As a result of agreements struck with unions since the end of the pilot programme, 86% of Iceland’s workforce have either moved to shorter hours for the same pay or will gain the right to do so.

Many companies and public-sector employers around the world are considering reducing hours or days worked. With working patterns having changed for many employees during the pandemic, employers may now be more open to rethinking ways of deploying their workforce more productively. And this may involve rethinking worker motivation and welfare.

Articles

Report

Questions

  1. Distinguish between different ways of measuring labour productivity.
  2. Summarise the results of the Iceland pilot.
  3. In what ways may reducing working hours reduce a firm’s total costs?
  4. What are the advantages and disadvantages of the government imposing (at some point in the future) a maximum working week or a four-day week?
  5. What types of firm might struggle in introducing a four-day week or a substantially reduced number of hours for full-time employees?
  6. What external benefits and costs might arise from a shorter working week?