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?
It is rising inflation that typically causes problems for countries, whether it is demand-pull or cost-push. However, one country that has not been subject to problems of rising prices is Japan. Instead, this economy has been suffering from the gloom of deflation for many years and many argue that this is worse than high inflation.
Falling prices are popular among consumers. If you see a product whose price has fallen from one day to the next, you can use your income to buy more goods. What’s the problem with this? The Japanese economy has experienced largely stagnant growth for two decades and a key cause has been falling prices. When the prices of goods begin to fall over and over again, people start to form expectations about the future direction of prices. If I expect the price of a good to fall next week, then why would I buy now, if I can buy the same good next week at a lower price? 
But, when next week arrives and the price has fallen as expected, why would I purchase the product, if I think that the price fall is set to continue? The problem of deflation is that with continuously falling prices, consumers stop spending. Aggregate demand therefore declines and economic growth all but disappears. This is the problem that the Japanese economy has been faced with for more than 20 years.
However, the latest data from Japan shows core consumer prices growing faster than expected in December 2013, compared to the previous year. This figure was above market forecasts and was the fastest rate of growth in the past 5 years. These data, together with those on unemployment have given the economy a much needed boost.
Recent government policy has been focused on boosts in government spending, with an aim of reducing the value of the currency (click here for a PowerPoint of the chart). Such policies will directly target aggregate demand and this in turn should help to generate an increase in national output and push up prices. If the price trend does begin to reverse, consumers will start to spend and again aggregate demand will be stimulated.
The future of the economy remains uncertain, though the same can be said of many Western economies. However, the signs are good for Japan and if the recovery of other economies continues and gathers pace, Japan’s export market will be a big contributor to recovery. The following articles consider the Japanese economy.
Japan inflation rises at fastest pace in over five years BBC News (31/1/14)
Benchmark Japan inflation rate hits 1.3% Financial Times, Jonathan Soble (31/1/14)
Japan’s inflation accelerates as Abe seeks wage gains Bloomberg, Chikako Mogi, Masahiro Hidaka and James Mayger (31/1/14)
Japan inflation quickens to over 5-year high, output rebounds Reuters, Leika Kihara and Stanley White (31/1/14)
Japaense inflation rises at fastest pace in over five years at 1.3% in December 2013 Independent, Russel Lynch (31/1/14)
Why Abenomics holds lessons for the West BBC News, Linda Yueh (18/12/13)
Questions
- Why is deflation a problem?
- Using an AD/AS diagram, illustrate the problem of expectations and how this contributes to stagnant growth.
- How will a lower currency help Japan?
- What is the likely effect of a sales tax being imposed?
- Does the fact that unemployment has declined support the fact that consumer prices are beginning to rise?
- What government policies would you recommend to a government faced with stagnant growth and falling prices?
- How important are expectations in creating the problem of deflation?
Christine Lagarde, managing director of the IMF, has warned of the danger of deflation in the eurozone. She also spoke of the risks of a slowdown in the developing world as the Fed tapers off its quantitative easing programme – a programme that has provided a boost to many emerging economies.
Speaking at the World Economic Forum, in the Swiss Alps, she did acknowledge signs of recovery across the world, but generally her speech focused on the risks to economic growth.
Some of these risks are old, such as a lack of fundamental bank reform and a re-emergence of risky behaviour by banks. Banks have taken steps towards recapitalisation, and the Basel III rules are beginning to provide greater capital buffers. But many economists believe that the reforms do not go far enough and that banks are once again beginning to behave too recklessly.
Some of the risks are new, or old ones resurfacing in a new form. In particular, the eurozone, with inflation of just 0.8%, is dangerously close to falling into a deflationary spiral, with people holding back on spending as they wait for prices to fall.
Another new risk concerns the global impact of the Fed tapering off its quantitative easing programme (see Tapering off? Not yet). This programme has provided a considerable boost, not just to the US economy, but to many emerging economies. Much of the new money flowed into these economies as investors sought better returns. Currencies such as the Indian rupee, the Brazilian real and the Turkish lira are now coming under pressure. The Argentinean peso has already been hit by speculation and fell by 11% on 24/1/14, its biggest one-day fall since 2002. Although a fall in emerging countries’ currencies will help boost demand for their exports, it will drive up prices in these countries and put pressure on central banks to raise interest rates.
Christine Lagarde was one of several speakers at a session titled, Global Economic Outlook 2014. You can see the complete session by following the link below.
Articles
Lagarde warns of risks to global economic recovery TVNZ (27/1/14)
Lagarde Cautions Davos on Global Deflation Risk Bloomberg News, Ian Katz (26/1/14)
Davos 2014: Eurozone inflation ‘way below target’ BBC News (25/1/14)
IMF fears global markets threat as US cuts back on cash stimulus The Guardian, Larry Elliott and Jill Treanor (25/1/14)
Davos 2014: looking back on a forum that was meant to look ahead The Guardian, Larry Elliott (26/1/14)
Speeches at the WEF
Global Economic Outlook 2014 World Economic Forum (25/1/14)
Questions
- Why is deflation undesirable?
- What are the solutions to deflation? Why is it difficult to combat deflation?
- What are the arguments for the USA tapering off its quantitative easing programme (a) more quickly; (b) less quickly?
- How is tapering off in the USA likely to affect the exchange rates of the US dollar against other currencies? Why will the percentage effect be different from one currency to another?
- What are Japan’s three policy arrows (search previous posts on this site)? Should the eurozone follow these three policies?
Politicians often make use of economic statistics to promote their point of view. A good example is a claim made by the UK Prime Minister on 23 January 2014. According to the latest statistics, he said, most British workers have seen their take-home pay rise in real terms. The Labour party countered this by arguing that incomes are not keeping up with prices.
So who is right? Studying economics and being familiar with analysing economic data should help you answer this question. Not surprisingly, the answer depends on just how you define the issue and what datasets you use.
The Prime Minister was referring to National Statistics’ Annual Survey of Hours and Earnings (ASHE). This shows that in April 2013 median gross weekly earnings for full-time employees were £517.5, up 2.25% from £506.10 in 2012, and mean gross weekly earnings for full-time employees were £620.30, up 2.06% from £607.80 in 2012 (see Table 1.1a in the dataset). CPI inflation over this period was 2.4%, representing a real fall in median gross weekly earnings of 0.15% and mean gross weekly earnings of 0.34%.
But when adjustments are made for increases in personal income tax allowances, then, according to the government, except for the richest 10% of the working population, people had an average increase in real take-home pay of 1.1%.
But does this paint the complete picture? Critics of the government’s claim that people are ‘better off’, make the following points.
First, the ASHE dataset is for the year ending April 2013. The ONS publishes other datasets that show that real wages have fallen faster since then. The Earnings and Working Hours datasets, published monthly, currently go up to November 2013. 
The chart shows real wages from January 2005 to November 2013 (with CPI = 100 in December 2013). You can see that the downward trend resumed after mid 2013. In the year to November 2013, nominal average weekly earnings rose by 0.9%, while CPI inflation was 2.1%. Thus real weekly earnings fell by 1.2% over the period (click here for a PowerPoint of the chart).
Second, there is the question of whether CPI or RPI inflation should be used in calculating real wages. RPI inflation was 2.9% (compared to CPI inflation of 2.4%) in the year to April 2013. The chart shows weekly earnings adjusted for both CPI and RPI.
Third, if, instead of looking at gross real wages, the effect of income tax and national insurance changes are taken into account, then benefit changes ought also to be taken into account. Some benefits, such as tax credits and child benefit were cut in the year to April 2013.
Fourth, looking at just one year (and not even the latest 12 months) gives a very partial picture. It is better to look at a longer period and see what the trends are. The chart shows the period from 2005. Real wages (CPI adjusted) are 8.0% lower than at the peak (at the beginning of 2009) and 5.0% lower than at the time of the election in 2010. The differences are even greater if RPI-adjusted wages are used.
But even if the claim that real incomes are rising is open to a number of objections, it may be that as the recovery begins to gather pace, real incomes will indeed begin to rise. But to assess whether this is so will require a careful analysis of the statistics when they become available.
Articles
UK pay rising in real terms, says coalition BBC News (24/1/14)
Are we really any better off than we were? BBC News, Brian Milligan (24/1/14)
Government take-home pay figures ‘perfectly sensible’ BBC Today Programme, Paul Johnson (24/1/14)
Take-Home Pay ‘Rising Faster Than Prices’ Sky News, Darren McCaffrey (25/1/14)
David Cameron hails the start of ‘recovery for all’ The Telegraph, Peter Dominiczak (23/1/14)
Is take-home pay improving? The answer is anything but simple The Guardian, Phillip Inman and Katie Allen (24/1/14)
Cameron’s ‘good news’ about rising incomes is misleading says Labour The Guardian, Rowena Mason (24/1/14)
The Tories’ claim that living standards have risen is nonsense on stilts New Statesman, George Eaton (24/1/14)
FactCheck: Conservative claims on rising living standards Channel 4 News, Patrick Worrall (25/1/14)
Living standards squeeze continues in UK, says IFS BBC News (31/1/14)
Richest have seen biggest cash income squeeze but poorest have faced higher inflation IFS Press Release (31/1/14)
Data
Average Weekly Earnings dataset ONS (22/1/14)
Annual Survey of Hours and Earnings, 2013 Provisional Results ONS (12/12/13)
Consumer Price Inflation, December 2013 ONS (14/1/14)
Inequality and Poverty Spreadsheet Institute for Fiscal Studies
An Examination of Falling Real Wages, 2010 to 2013 ONS (31/1/14)
Questions
- Why are mean weekly earnings higher than median weekly earnings?
- Explain the difference between RPI and CPI. Which is the more appropriate index for determining changes in real incomes?
- Find out what benefit changes have taken place over the past two years and how they have affected household incomes.
- How have gross weekly earnings changed for the different income groups? (The ASHE gives figures for decile groups.)
- Which is better for assessing changes in incomes: weekly earnings or hourly earnings?
- How would you define a change in living standards? What data would you need to be able to assess whether living standards have increased or decreased?
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.
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.
