Unemployment and employment are concepts that are often talked about in the media. Indeed, the 7% unemployment target referred to by the Governor of the Bank of England has been a constant feature of recent headlines. However, rather than targeting an unemployment rate of 7%, George Osborne has now called for ‘full employment’ and believes that tax and welfare changes are key to meeting this objective.
Reducing the unemployment rate is a key macroeconomic objective and the costs of unemployment are well-documented. There are obviously big costs to the individual and his/her family, including lower income, dependency, stress and potential health effects. There are also costs to the government: lower income tax revenues, potentially lower revenues from VAT through reduced consumer expenditure and the possibility of higher benefit payments. There are other more ‘economic’ costs, namely an inefficient use of resources. Unemployment represents a cost to the economy, as we are operating below full capacity and we therefore see a waste of resources. It is for this reason that ‘full employment’ is being targeted.
Traditional economic theory suggests that there is a trade-off between unemployment and inflation, illustrated by the well-known Phillips curve. In the past, governments have been willing to sacrifice unemployment for the purpose of reducing inflation. There have also been attempts to boost the economy and create jobs through increased borrowing. However, George Osborne has said:
Unemployment is never a price worth paying, but artificial jobs paid for with borrowed money doesn’t work either.
A figure representing full employment hasn’t been mentioned, so it remains unclear what level of unemployment would be acceptable, as despite the name ‘full employment’, this doesn’t mean that everyone has a job. There are several definitions of full employment, in both an economic and political context. In the period of reconstruction after the Second World War, William Beveridge, architect of the welfare state, defined full employment as where 3% of people would be unemployed.
In more recent times, other definitions have been given. In the era of monetarism in the 1970s, the term ‘natural rate of unemployment’ was used to define the unemployment rate to which economies tend in the long run – after inflationary expectations have adjusted. Keynesians use the term the ‘non-accelerating-inflation rate of unemployment (NAIRU)’, where unemployment is confined to equilibrium unemployment and where there is no excess or deficiency of aggregate demand. Both the natural rate and the NAIRU relate to the rate of unemployment at which the long-run Phillips curve is vertical.
In its Economic and Fiscal Outlook of March 2013, the Office for Budget Responsibility estimated the UK’s NAIRU to be 5.4%. George Osborne has not specified a particular rate. Rather, his speech refers to creating the ‘highest employment rate of any of the world’s leading economies’. He said the ambition was to make the UK:
…the best place in the world to create a job; to get a job; to keep a job; to be helped to look for another job if you lose one…A modern approach to full employment means backing business. It means cutting the tax on jobs and reforming welfare.
Therefore, while it appears that there is no target figure for unemployment, it seems that a new Conservative objective will be to focus on sustainable job creation and eliminate disequilibrium unemployment. This represents a move very much into Labour territory. Meeting the objective will be no easy task, given the past few years and such high levels of youth unemployment, as Labour were quick to point out, but the unemployment figures are certainly moving in the right direction. The following articles consider the objective of full employment.
Articles
Britain’s Osborne changes tone on economy with “full employment” target Reuters, William James (31/3/14)
George Osborne commits to ‘fight for full employment’ BBC News (including video) (1/4/14)
What does full employment mean? The Guardian (1/4/14)
What is full employment? The Telegraph, Peter Dominiczak (31/3/14)
’Jobs matter’, says George Osborne as he aims for full employment Independent, Andrew Grice (31/3/14)
Liam Bynre: Labour would aim for ‘full employment’ BBC News (17/5/13)
Osborne pledges full employment for UK Sky News (31/3/14)
Osborne commits to full employment as election looms Bloomberg, Svenja O’Donnell (31/3/14)
Whatever happened to full employment? BBC News, Tom de Castella and Caroline McClatchey (13/10/11)
Questions
- What is meant by full employment?
- Is it a good idea to target zero unemployment?
- Using a diagram, illustrate the difference between disequilibrium and equilibrium unemployment?
- How can full employment be achieved?
- What are the costs of unemployment?
- Use a diagram to illustrate the natural rate of unemployment and explain what it means in terms of the relationship between unemployment and inflation.
The growth of China over the past decade has been quite phenomenal, with figures recorded in double-digits. However, in the aftermath of the recession, growth has declined to around 7% – much higher than Western economies are used to, but significantly below the ‘norm’ for China. (Click here for a PowerPoint of the chart.)
The growth target for this year is 7.5%, but there appear to be some concerns about China’s ability to reach this figure and this has been emphasised by a recent Chinese policy.
A mini-stimulus package has been put in place, with the objective of meeting the 7.5% growth target. Government expenditure is a key component of aggregate demand and when other components of AD are lower than expected, boosting ‘G’ can be a solution. However, it’s not something that the Chinese government has had to do in recent years and the fact that this stimulus package has been put in place has brought doubts over China’s economic performance to the forefront , but has confirmed its commitment to growth. Mizuho economist, Shen Jianguang, said:
It’s very obvious that the leaders feel the need to stabilise growth…Overall, the 7.5 per cent growth target means that the government still cares a lot about economic growth.
Data suggest that growth in China is relatively weak and there are concerns that the growth target will be missed, hence the stimulus package. In the aftermath of the 2008 financial crisis, there was a large stimulus package in place in China. This latest investment by the government is in no way comparable to the size of the 2008 package, but instead will be on a smaller and more specific scale. Mark Williams of Capital Economics said:
It’s a bit of a rerun of what we saw last year – something less than a stimulus package and more of piecemeal measures to ensure they reach their growth target.
It is the construction of public housing and railways that will be the main areas of investment this time round. A sum of $120–180bn per year will be available for railway construction and $161bn for social housing, and tax breaks are being extended for small businesses.
The 2008 stimulus package saw debt increase to some 200% of GDP, which did cause growing concerns about the reliance on debt. However, this latest package will be financed through the issue of bonds, which is much more similar to how market economies finance spending.
The fact that the government has had to intervene with such a stimulus package is, however, causing growing concerns about the level of debt and the future of this fast growing economy, though the new method of financing is certainly seen as progress.
It should be noted that a decline in growth for China is not only concerning for China itself, but is also likely to have adverse consequences other countries. In the increasingly interdependent world that we live in, Western countries rely on foreign consumers purchasing their exports, and in recent years it has been Chinese consumers that have been a key component of demand. However, a decline in growth may also create some benefits – resources may not be used up as quickly and prices of raw materials and oil in particular may remain lower.
It is certainly too early for alarm bells, but the future of China’s growth is less certain than it was a decade ago. The following articles consider this issue.
China’s new mini-stimulus offers signs of worry and progress BBC News, Linda Yueh (3/4/14)
China puts railways and houses at hear of new stimulus measures The Guardian (3/4/14)
China unveils mini stimulus to to boost slowing economy The Telegraph (3/4/14)
China stimulus puts new focus on growth target Wall Street Journal, Bob Davis and Michael Arnold (3/4/14)
China embarks on ‘mini’ stimulus programme to kick-start economy Independent, Russell Lynch (3/4/14)
China takes first step to steady economic growth Reuters (2/4/14)
China unveils fresh stimulus The Autstralian (3/4/14)
China’s reformers can triumph again, if they follow the right route The Guardian, Joseph Stiglitz (2/4/14)
Questions
- How has Chinese growth reached double-digits? Which factors are responsible for such high growth?
- The BBC News article suggests that the stimulus package is cause for concerns but also shows progress. How can it do both?
- Using a diagram, illustrate how a stimulus package can boost economic growth.
- What are the advantages and disadvantages of high rates of growth for (a) China and (b) Western economies?
- Why does the method of financing growth matter?
- Railway and housing construction have been targeted to receive additional finance. Why do you think these sectors have been targeted?
Business performance is always affected by the economy and we can always look at the economic theory to explain why profits rise and fall. Some companies prosper during recession, whereas others decline and the key is to understand the economics behind the data. This blog takes a look at the performance of a variety of companies and asks you to think about the economic theory behind it.
The world of betting has grown significantly and the profits of companies in this market, while certainly linked to economic performance, is also dependent on sport results. Paddy Power has announced pre-tax profits of €141m for 2013, an increase from €139.2m, despite sporting results causing profit performance to fall. On the part of football clubs, Liverpool FC saw a loss emerge for the 2012-2013 financial year, whereas Newcastle’s profits rose by 900% to £9.9m. What factors can explain the vastly different performance (off and on the pitch) of these two clubs?
In the USA, Radio Shack has been forced to close 1100 stores. This is, in part, as a response to a change in the way we are shopping. More and more consumers are purchasing goods online and Radio Shack is therefore experiencing growing competition from online retailers. Sales fell by 10% last year and even during the fourth quarter sales continued to decline.
Companies based in the largest economy in Europe have also experienced declines in performance, showing that a strong performing country doesn’t imply the same for companies operating in it. RWE, Germany’s biggest energy provider, has not made a loss since 1949. However, in 2013, this company posted its first annual loss in over 60 years: a loss of £2.28bn. With energy being in constant demand and criticism being levelled at UK energy providers for the high profits they’re making, the economics behind these data is important.
In better news for a company, Thorntons has boasted a significant increase in pre-tax profits, with much of this due to strong trading in the months leading up to Christmas and a sensible business strategy, involving selling more in supermarkets. Thorntons has cut its number of stores, but its profitable position has been saved by a good business strategy and this is going to lead to significant investment by the company.
Another strong performance was recorded by Berkshire Hathaway, an investment firm run by Warren Buffett. The company made a profit of £11.6bn in 2013, a significant increase on its 2012 performance. It is the insurance, rail and energy parts of the business that have contributed to the big increase in profits.
These are just some recent examples of data on business performance and your job is to think about the economic theory that can be used to explain the varying performance of different companies.
Liverpool announce annual loss of £50m in new club accounts Guardian, David Conn (4/3/14)
Thorntons makes biggest manufacturing investment for 25 years Telegraph, Natalie Thomas (3/3/14)
Thorntons cashes in on the snowman Independent, Simon Neville (3/3/14)
Warren Buffett’s Berkshire Hathaway sees record profit BBC News (2/3/14)
Newcastle says ‘player trading’ helped increase profits to £9.9m BBC Sport (25/2/14)
RWE posts first annual net loss for over 60 years BBC News (4/3/14)
UK among RWE woes as it posts first annual loss since 1949 The Telegraph, Denise Roland (4/3/14)
Germany’s RWE slides into €2.8bn net loss for 2013 Financial Times, Jeevan Vasagar (4/3/14)
John Menzies profits hit by drop in magazine sales BBC News (4/3/14)
Fresnillo profits drop as gold prices and production falls The Telegraph, Olivia Goldhill (4/3/14)
Glencore 2013 profit rises 20% as copper production gains Bloomberg, Jesse Riseborough (4/3/14)
Questions
- In each of the cases above, explain the economic theory that can be used to explain the performance of the respective company.
- To what extent is a change in the market structure of an industry a contributing factor to the change in company performance?
- To what extent do you think a company’s performance is dependent on the performance of the economy in which it operates?
- Are the profits of a company a good measure of success? What else could be used?
Getting around London is pretty easy to do. Transport, though often criticized, is very effective in and around London – at least when the Underground is running uninterrupted. However, since 9pm on Tuesday 4th February until the morning of 7th February, the underground will be operating well below full capacity, as strike action affects many workers.
Transport for London has plans to cut many jobs, in particular through the closure of ticket office at all stations. Modernisation to the network is said to be essential, not just to improve the existing system, but also as it is predicted to save £50 million per year. Data suggests that only 3% of transactions involve people using ticket offices and thus the argument is that having offices manned is a waste of money and these workers would be better allocated to manning stations. David Cameron said:
I unreservedly condemn this strike. There is absolutely no justification for a strike. We need a modernised tube line working for the millions of Londoners who use it every day.
Workers on London Underground are naturally concerned about the impact this will have, in particular on their jobs, despite assurances that there will be no compulsory redundancies.
The impact of these strikes on workers in London is clearly evident by any pictures you look at. Buses were over-crowded, despite more than 100 extra being provided, pavements were packed with pedestrians and the roads were full of cyclists. At least the strike action has led to a little more exercise for many people! The disruption to business in London is likely to be relatively large and the loss in revenue due to the action will also be high, estimated by Business leaders to be tens of millions of pounds. It is perhaps for this reason that there is discussion as to whether the underground should be declared an ‘essential service’ as a means of minimising future disruptions.
Discussions have been ongoing between both sides to try to prevent this action and talks are likely to continue in the future. Boris Johnson has declared the strikes as ‘completely pointless’ and both sides have argued that the other has been unwilling to negotiate and discuss the ticket office closures. Boris Johnson said:
A deal is there to be done. I am more than happy to talk to Bob Crow if he calls off the pointless and unnecessary strike.
The impact on London and the economy will only be fully known after the strike action is over, but there are plans for further strikes next week. The greater the disruption the bigger the calls for further strikes on key services, such as the tube, to be prevented. In particular, this may mean new powers to curtail the rights of unions in these types of areas, which will require a minimum service to be provided. The following articles consider the strike action on the London Underground.
Articles
Questions
- If there is strike action in a labour market, what can we conclude about the market in question in terms of how competitive it is?
- If only 3% of transactions take place via ticket offices, is it an efficient use of resources to maintain the presence of ticket offices at every station?
- Is industrial action ‘completely pointless’?
- What other solutions are there besides strike action to problems of industrial dispute?
- What is the role of ACAS in negotiations?
- What is the economic impact of the strike on the London Underground? Think about the impact on businesses, revenues, sales and both micro and macro consequences.
- Should the tube be seen as an essential service such that strike action by its workers would be restricted?
The housing market is often a good indicator of the level of confidence in an economy. Prior to the credit crunch, there had been a house price bubble and as the financial crisis began and economies plunged into recession, house prices began to fall significantly. In the last few months, the housing market has begun its recovery and data from the ONS shows average property prices up by 5.4% across the UK in November, compared with a year earlier.
When we analyse the housing market, or any market, we have to give attention to both demand-side and supply-side factors. It is the combination of these factors that yields the equilibrium price. For most people, buying a house will represent their single biggest expenditure and so there are many factors that need to be considered.
The demand for housing is affected by incomes, by the availability of mortgages, the rate of interest and hence the cost of mortgages. Speculation also tends to be a key factor that influences the demand for houses, as people may buy houses if they believe that prices will soon rise. Of course, simply by responding to expectations about future price changes causes the price changes to happen – a classic case of self-fulfilling speculation.
The availability of mortgages has been one of the biggest factors increasing the demand for and hence price of houses in recent months. More individuals have been able to get onto the property ladder and, with confidence returning to the market, these factors have caused a rightward shift in the demand for owner-occupied houses.
Another key factor has been the growth in the demand for housing as an investment opportunity, in particular from the global super rich. This has been of particular concern in London, where there are fears of a housing bubble developing and of lower-income households being priced out of the market.
At the same time, there has been a growth in the supply or housing and thus a rightward shift of the supply curve. Ceteris paribus, this would push down average prices. However, the data suggest that house prices, especially in London, have increased, implying that the impact on price of the increase in demand has more than offset the downward force in prices from the increase in supply. Part of this can be explained by the demand-side factor of an increase in demand for top-end properties, which ‘has been distracting developers from the need for more affordable accommodation.’ When asked about the changes observed in the London housing market, Civitas said:
London is one of the most – if not the most – attractive property markets for international investors all over the world. It is also at the centre of an affordability crisis in the UK which is having serious consequences for younger people and the less well-off…For too many it [investment at the top end of the market] is providing financial shelter rather than human shelter.
With the upward pressure on house prices, many are now warning of another bubble developing in London. When comparing house prices in London with a Londoner’s income, Ernst and Young found that house prices were 11 times average annual income. Data like this were last seen prior to the financial crisis and it is this which has led to concerns of a post-crisis bubble.
There are suggestions that more action is needed to combat this bubble, such as imposing a limit in income multiples in relation to how much of a mortgage you are able to borrow. Another criticism levelled at the market is the government’s Help to Buy scheme, which critics argue is raising demand and pushing up prices, because there is no matched increase in supply.
So, with the rest of the market returning to some semblance of normality, it is currently just London showing signs of a bubble and we are all well aware of what the consequences might be if a bubble is allowed to grow and then eventually burst. The following articles consider the housing market.
Housing bubble forming in London, warns Ernst and Young BBC News (3/2/14)
London housing market shows new bubble sign – report Reuters, Andrew Winning (3/2/14)
Expert calls for stronger action to tame London housing bubble risks Independent (21/5/12)
London shows signs of house price ‘bubble’, experts warn The Telegraph, Scott Campbell (3/2/14)
Economic forecasters call for measures to cool down London’s property market The Guardian, Rupert Neate (3/2/14)
Think-tank calls for a ban on rich foreigners buying homes in London to puncture property bubble Mail Online, Lizzie Edmonds (2/2/14)
London property bubble to last until 2018 Sky News (3/2/14)
Questions
- What are the key factors that will affect (a) the demand for and (b) the supply of housing?
- Which factors explain why house prices in London have increased relative to prices across the country? Identify which factors are demand-side and which are supply-side.
- How has Help to Buy affected the housing market?
- What government policies could be implemented to ‘puncture’ the bubble?
- Why is a housing bubble a problem?
- Why has a house price bubble not emerged in the rest of the UK?
Unemployment and employment are concepts that are often talked about in the media. Indeed, the 7% unemployment target referred to by the Governor of the Bank of England has been a constant feature of recent headlines. However, rather than targeting an unemployment rate of 7%, George Osborne has now called for ‘full employment’ and believes that tax and welfare changes are key to meeting this objective.
