Most people, when asked, would like to earn more and many people are prepared to make sacrifices to do so. They may devote considerable time to obtaining qualifications; work much harder in order to gain promotion; work longer hours. What is more, when people do earn more, they take on extra commitments: a bigger house with a bigger mortgage; sending their kids to a private school; getting used to a more luxurious lifestyle. In fact, many people have to spend more on things such as home help, convenience foods and all sorts of labour-saving devices in order to cope with their longer hours.
Some people get so fed up with this pressurised lifestyle that they say ‘enough is enough; let me off this merry-go-round’. They may be happy to take a cut in income to live a simpler life and have more leisure time. Others, however, find that the merry-go-round just keeps going faster and faster and that they cannot get off; except, perhaps, if they make themselves ill, or worse still, die!
Now, if you are struggling as a student to make ends meet and find your debts are inexorably mounting, you may have little sympathy for people earning six-figure salaries! But are you in danger of trying to achieve this lifestyle for yourself? Do you see the main goal of your degree as getting you a better-paid job? What would count as ‘rational behaviour’ here and what would an economist advise you to do?
Then there is the question of whether the high paid are worth their high salaries. Are these salaries a reflection of the value of their output and the sacrifices they make? Or do they reflect economic power, custom and practice or asymmetry of information? And what do we mean by ‘worth’?
The following articles look at some of the highest paid people in the public sector. Some 38,000 public-sector employees earn more than £100,000. In the private sector the figures are much higher: some 545,000 people.
Articles
The perils of earning a £100,000 salary BBC News Magazine, Jon Kelly (22/9/10)
Ranking the pay packets of the public sector’s top dogs BBC Panorama programme, Vivian White (19/9/10)
Public Sector pay: The numbers BBC News (20/9/10)
Over 9,000 in public sector earn more than David Cameron, survey claims Guardian, Nicholas Watt (19/9/10)
On the inequality myth The Economist blogs (20/9/10)
Data
Portal to Annual survey of hours and earnings (ASHE) Office for national Statistics
Family Spending – A report on the 2008 Living Costs and Food Survey (see Chapter 3) Office for national Statistics
Income inequality Office for national Statistics (10/6/10)
The effects of taxes and benefits on household income, 2008/09 Statistical Bulletin (ONS) (10/6/10)
Data: The effects of taxes and benefits on household income, 2008/09 Office for national Statistics
Questions
- Use Gini coefficients to examine what has happened to income distribution in the UK in recent years.
- Are high-paid earners ‘worth’ what they are paid? How would set about establishing what they are worth?
- Is it rational to seek a higher paid job if it involves longer hours and more stress? Why may it be difficult to make a ‘rational’ decision?
- Should the Prime Minister be the highest paid public-sector employee? Explain your answer.
- What factors will you take into account when deciding what jobs to apply for?
- To what extent can imperfect information explain people’s choices about work-life balance?
- To what extent can marginal productivity explain the huge salaries and bonuses paid to top executives in both the public and the private sectors?
With the full impact of the fiscal austerity measures yet to come, the fall in unemployment revealed in the latest ONS labour market release is probably a lull before the storm. Nonetheless, in the three months to July unemployment fell by 8,000 to 2.467 million, while the rate of unemployment – the number of people unemployed expressed as a percentage of those economically active – fell from 7.9% from 7.8%. But, within the ONS release we again saw an increase in the number of people who are long-term unemployed.
The number of people aged 16 or over who have been unemployed for at least 12 months stood at 797,000 in the three months to July. This represents an increase of 15,000 over the previous 3 months. While the pace of increase appears to have slowed – the number had risen by 100,000 in the three months to April – the pool of people who can be described as long-term unemployed is undoubtedly of much concern. To put this number into perspective, it means that of the 2.467 million people unemployed 32.3% have been so for at least a year. In effect, one-third of the pool of unemployed can now be thought of as long-term unemployed.
Of the long-term unemployed, 547,000 or 69% are male. This is the highest number of males described as long-term unemployed since the three months to May 1997 – the month when the Labour government of Tony Blair came to power. But, the historical context for female long-term unemployment is even bleaker. A further increase of 4,000 over the 3 months to July means that the number of females who are long-term unemployed has risen to 250,000. The last time long-term female unemployment was higher than this was in the three months to September 1995.
An obvious concern with the expectation that the total unemployment figure will grow in the not too distant future is that the number of long-term unemployed people will carry on growing. Of course, this not only has unfortunate implications for these individuals but for society and the economy more generally. Consequently, it raises some important and very difficult economic and social policy questions. One important economic question, for instance, is how we tackle the erosion of human capital as more and more individuals are divorced for longer and longer from the labour market. An erosion of human capital affects individuals and society not only in the present, but in the future too.
Articles
UK unemployment falls by 0.1 pct to 7.8 pct Associated Press (16/9/10)
Wasteland: Europe stalked by spectre of mass unemployment Independent, Alistair Dawber (16/9/10)
Job fears despite employment rise Telegraph, Angela Monaghan (16/9/10)
Part-time jobs fuel record rise in employment Express, Macer Hall (16/9/10)
UK unemployment falls to 2.47 million BBC News (15/9/10)
Data
Latest on employment and unemployment Office for National Statistics (15/9/10)
Labour Market Statistics, September 2010 Office for National Statistics (15/9/10)
Labour market data 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
- If the overall number of unemployed people is falling why is the number of long-term unemployed rising?
- The current unemployment rate is 7.8%. But, what do we mean by the unemployment rate?
- Draw up a list of the problems that you think arise out of long-term unemployment.
- Use your list to draw up a series of potential policies to tackle these problems.
- Why do some economists think the current fall in unemployment is a ‘lull before the storm’? What impact might this have on the number of people long-term unemployed?
UK unemployment now stands at 2.47 million, which is a fall of 34,000 people in the three months to May. Meanwhile, the claimant count, which measures the number of individuals claiming Jobseeker’s Allowance, fell by 20,800 between May and June to stand at 1.46 million.
The total number in employment increased by some 160,000 in the three months to May to reach 28.98 million. The increase in the number of individuals in work is largely due to an increase in the number of part-time workers, which now stands at some 27%. The development of the flexible firm has played a huge role in creating more and more part-time jobs.
Although declining unemployment is good news, and the jobless rate of 7.8% is now comparable with the EU and the US, there are suggestions that it may rise again next year. Indeed, unemployment is expected to peak at nearly 3 million in 2012 (10%) and an employer’s group has said that the UK may face serious job deficits for the next decade. As more and more jobs are lost in the public sector, estimates suggest that the economy must grow by 2.5% per year from now until 2015, in order to compensate these losses with extra jobs in the private sector.
As John Philpott, the Chief Economic Adviser at the CIPD said:
“A slightly milder growth outcome – which many would consider a decent recovery in output given the various strong headwinds at present facing the economy – is easily as imaginable as the OBR’s central forecast and would leave unemployment still close to 2.5 million by 2015, meaning Britain faces at least half a decade of serious prolonged jobs deficit.”
So, although the fall in the jobless rate is undoubtedly good news, the uncertain future for unemployment in the UK, will put a slight dampener on this news.
Articles
UK unemployment declines to 2.47m BBC News (14/7/10)
Economy Tracker BBC News (14/7/10)
Unemployment to peak at 3m by 2012 Telegraph (14/7/10)
Labour market report to show outlook for jobs worse than OBR projections Guardian, Katie Allen (14/7/10)
Part-time work boosts UK employment rate Sky News, Hazel Tyldesley (14/7/10)
Unemployment figures: what the experts say Guardian, Katie Allen (14/7/10)
Data
Labour market statistics latest: Employment ONS
Labour Market Statistical Bulletin – July 2010 ONS
Labour market statistics: portal page ONS
Questions
- How is unemployment measured in the UK? Which is the most accurate method?
- What is the flexible firm and how has it allowed more part-time jobs to be created?
- Why is unemployment expected to rise again in the next few years?
- The ONS has reported that wage growth has eased sharply. How will this, along with falling unemployment rates, affect household incomes and consumption? Will one effect offset the other?
- Brendan Barber in the Guardian article, ‘Unemployment figures – what the experts say’, wrote that unemployment lags behind the rest of the economy. Why is this?
- What type of unemployment are we experiencing in the UK? Illustrate this on a diagram.
- Consider the government’s plans in terms of spending cuts. How are they likely to affect the rate of unemployment in the UK?
What’s going to happen to stock market prices? If we knew that, we could be very rich! Nevertheless, financial analysts constantly try to predict the movements of shares in order to decide when to buy and when to sell. One thing they do is to look at charts of price movements and look for patterns. These ‘chartists’, as they are sometimes called, refer to something known as the ‘death cross’ or ‘dark cross’.
So what is the death cross? Imagine a chart of the movements of share prices, such as the FTSE 100 in the UK or the Dow Jones Industrial Average and S&P 500 in the USA. These movements can be shown as a moving average. In other words, for each day you plot the average of the past so many days. Typically, 200-day (sometimes 100-day) and 50-day moving averages are plotted. The 200-day (or 100-day) is taken as the long-term moving average and the 50-day as the short-term moving average. In a falling market, if the short-term moving average crosses below the long-term moving average, this is called the ‘death cross‘ as it signifies growing downward pressure in the market. The fall in the long-term average in these circumstances will indeed lag behind the fall in the short-term moving average.
Markets around the world are experiencing the death cross. So should be be worried? Or is this like looking for patterns in tea leaves, or the stars, and using them to make bogus predictions? So: science or mumbo jumbo?
First the science: the death cross indicates a fall in confidence. And at present, there is much for investors to worry about. Burgeoning debts, austerity measures and fears of a double-dip recession are spooking markets.
Now the mumbo jumbo. Just because markets are falling at the moment, this does not prove that they will go on falling. Markets are often spooked, only to recover when ‘sanity’ returns. People may soon start to believe that a second credit crunch will not return, given all the regulatory and support measures put in place, the huge amount of liquidity waiting to be invested and the support packages from the ECB and IMF for Greece and, potentially, for other eurozone countries having difficulties servicing their debts. In other words, patterns may repeat themselves, but not necessarily. It depends on circumstances.
Articles
Market’s Swoon Prompts Fears Of the Dreaded ‘Death Cross’ CNBC, Jeff Cox (1/7/10)
Death Cross in S&P 500 May Not Lead to Rout: Technical Analysis Bloomberg Businessweek, Alexis Xydias (30/6/10)
Are the markets about to encounter the”Death Cross”? BBC News, Jamie Robertson (1/7/10)
MarketBeat Q&A: Debunking the ‘Death Cross’ Wall Street Journal blogs, Matt Phillips (30/6/10)
Technical analysis and market data
Moving Average Crossovers TradingDay.com, Alan Farley
Death Cross Investopedia
FTSE 100 historical prices Yahoo Finance
S&P 500 historical prices Yahoo Finance
Dow Jones historical prices Yahoo Finance
Questions
- Explain what is meant by the death cross and use a diagram to illustrate it. What is menat by the golden cross. Again, use a diagram to illustrate it.
- Under what circumstances would speculation against stock market price movements be (a) stabilising and (b) destabilising?
- What is the implication for stock market prices of a ‘wall of money’?
- How much faith should be put in chartist explanations of stock market prices? Do criticisms of chartism apply to all time-series analysis that is used for forecasting?
- Look back at newspaper articles from a year ago and see what they were predicting about stock market prices. Have their preductions been borne out? If so, why? If not, why not?
‘Austerity’ seems to be the buzzword, as more and more countries across Europe make steps towards reducing substantial budget deficits. The UK has implemented £6.2 billion of cuts, with cuts of £50 billion expected by 2015 to tackle a budget deficit of over 10% of GDP. Portugal’s deficit stands at 8% of GDP and this will be tackled with rises in income, corporate and VAT tax, together with spending cuts aimed at halving the budget deficit by next year. Ireland’s austerity package includes public-sector pay cuts of up to 20%, plus reductions in child benefit, tax rises, and several key services facing cuts in employment, including emergency service and teachers. And, of course, we can’t forget Greece, with a budget deficit 12.2% of GDP, a national debt of 124.9% of GDP, and a forecast to remain in recession this year and the next. The Greek economy faces hard times with a huge austerity drive, including 12% civil service pay cuts, a large privatisation programme, and substantial pension cuts.
Greece is already in receipt of a €110bn rescue package. The Hungarian economy has already received €20bn aid from the EU, IMF and World Bank and spending cuts have been implemented, as markets began to fear that Hungary would become the next Greece. Germany is the most recent country to announce austerity measures, including plans to cut €10 billion annually until 2016.
But, what does this all mean? For years, many countries have spent beyond their means and only with the global recession did this growing problem really rear its ugly head. The only way to eliminate the budget deficit and restore confidence in the economy and ensure future prosperity is to raise taxes and/or to implement spending cuts. As the German Finance Minister said: “The main concern of citizens is that the national deficit could take on immeasurable proportions”. Unfortunately, this has already happened in some counties.
Although austerity measures are undoubtedly needed over the medium term in order to get deficits down, the impact of them is already being felt across the EU. Strikes have already occurred in massive proportions across Greece in response to the austerity package and tens of thousand of workers in Spain and Denmark also took to the streets in protest. There was anger from industry, trade unions and the media in response to €86 billion of cuts ordered in Germany between 2011 and 2014. The UK has already seen a number of strikes and more could be to come with further spending cuts in the pipeline. The Public and Commercial Services Union is threatening to re-launch strikes which began in March involving 200 000 civil servants (the action was suspended for the election.) A spokesman said: “If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable.”
EU governments have announced public spending cuts of €200 billion, together with a €500 billion safety blanket for the euro. Although these cuts are unlikely to have any positive effects for the everyday person for perhaps many years to come, in order to restore confidence and ensure a future economy that is both prosperous and stable, these austerity measures are deemed by many as essential. As Guy Verhofstadt (the former Belgian Prime Minister) said: “We’re entering a long period of economic stagnation. That will be the main problem for years. Europe is the new Japan.”
But will reduced aggregate demand resulting from the cuts lead to a double-dip recession and a (temporarily) worsening deficit from automatic fiscal stabilisers? We wait with baited breath.
EU austerity drive country-by-country BBC News (7/6/10)
Europe embraces the cult of austerity but at what cost? The Observer, Toby Helm, Ian Traynor and Paul Harris (13/6/10)
Germany joins EU austerity drive with €10bn cuts Guardian, Helena Smith (6/6/10)
G20 to endorse EU crisis strategy Reuters (28/5/10)
The Global recovery? It’s each state for itself Guardian, Jonathan Fenby (9/6/10)
Austerity angers grow in Europe AFP (9/6/10)
Austerity Europe: who faces the cuts? Guardian, Ian Traynor and Katie Allen (12/6/10)
Is this the end of the European welfare state? New Statesman (10/6/10)
Questions
- Are spending cuts or tax rises the best method to reduce a budget deficit? Explain your answer.
- What are the economic costs of the austerity packages across Europe?
- Who is likely to gain from the debt crisis in Europe?
- If austerity packages had not been initiated to the extent that they have, how do you think the rest of the world have reacted?
- Using the BBC News article and the Guardian article ‘Austerity measures: who faces the cuts?’, which country do you think is (a) in the best state and (b) in the worst state?
- How will you be affected by the austerity measures?