First the good news. Employment is rising and unemployment is falling. Both claimant count rates and Labour Force Survey rates are down. Compared with a year ago, employment is up 279,092 to 29,869,489; LFS unemployment is down from 7.87% to 7.69%; and the claimant count rate is down from 4.7% to 4.0%.
Now the bad news. Even though more people are in employment, real wages have fallen. In other words, nominal wages have risen less fast than prices. Since 2009, real wages have fallen by 7.6% and
have continued to fall throughout this period. The first chart illustrates this. It shows average weekly wage rates in 2005 prices. (Click here for a PowerPoint of the chart.)
The fall in real wages is an average for the whole country. Many people, especially those on low incomes, have seen their real wages fall much faster than the average. For many there is a real ‘cost of living’ crisis.
But why have real wages fallen despite the rise in employment? The answer is that output per hour worked has declined. This is illustrated in the second chart, which compares UK output per worker with that of other G7 countries. UK productivity has fallen both absolutely and relative to other G7 countries, most of which have had higher rates of investment.
The falling productivity in the UK requires more people to be employed to produce the same level of output. Part of what seems to be happening is that many employers have been prepared to keep workers on in return for lower real wages, even if demand from their customers is falling. And many workers have been prepared to accept real wage cuts in return for keeping their jobs.
Another part of the explanation is that the jobs that have been created have been largely in low-skilled, low-wage sectors of the economy, such as retailing and other parts of the service sector.
But falling productivity is only part of the reason for falling real wages. The other part is rising prices. A number of factors have contributed to this. These include a depreciation of the exchange rate back in 2008, the effects of which took some time to filter through into higher prices in the shops; a large rise in various commodity prices; and a rise in VAT and various other administered prices.
So what is the answer to falling real wages? The articles below consider the problem and some of the possible policy alternatives.
Articles
Inflation, unemployment and UK ‘misery’ BBC News, Linda Yueh (16/10/13)
Employment is growing, but so are the wage slaves The Guardian, Larry Elliott (16/10/13)
Living standards – going down and, er, up BBC News, Nick Robinson (26/7/13)
Revealed: The cost of living is rising faster in the UK than anywhere in Europe, with soaring food and energy bills blamed Mail Online, Matt Chorley (16/10/13)
Cutting prices to raise living standards is just a waste of energy The Telegraph, Roger Bootle (6/10/13)
Downturn sees average real wages collapse to a record low Independent, Ben Chu (17/10/13)
Why living standards and public finances matter Financial Times, Gavin Kelly (29/9/13)
Social Mobility Tsar Alan Milburn Calls on Government to Boost Wages to End UK Child Poverty International Business Times, Ian Silvera (17/10/13)
Do incorrect employment growth figures explain low UK productivity? The Guardian, Katie Allen (23/10/13)
Data
Unemployment data ONS
Average Weekly Earnings dataset ONS
Consumer Prices Index ONS
International Comparison of Productivity ONS
Questions
- How are real wages measured?
- Why have real wage rates fallen in the UK since 2009?
- What factors should be included when measuring living standards?
- Why has employment risen and unemployment fallen over the past two years?
- What factors could lead to a rise in real wages in the future?
- What government policies could be adopted to raise real wages?
- Assess these policies in terms of their likely short-term success and long-term sustainability.
Investment is essential for the growth of any economy, but none more so for an economy recovering from a severe downturn, such as the UK. Not only will it bring in much needed money and then create jobs for UK residents, but it will also continue to build ties between the UK and the world’s fastest growing economy.
George Osborne has been in China promoting business opportunities for investment in the UK and one such investment is into Manchester Airport. The ‘Airport City’ Project will be a combined effort, or a Joint Venture, between the Greater Manchester Pension Fund, the UK’s Carillion Plc and Beijing Construction Engineering Group. The plan is to create offices, hotels, warehouses and manufacturing firms, bringing in thousands of jobs in the process, thus providing a much needed boost to the British economy. Britain is already one of the top nations attracting Chinese investment, with more than double the amount of any other European nation. George Osborne is clearly in favour of further improving business ties with China, saying:
I think it shows that our economic plan of doing more business with China and also making sure more economic activity in Britain happens outside the City of London is working…That’s good for Britain and good for British people.
However, the benefit of such investment from China into the UK, is not just of benefit to our domestic economy. China will also reap benefits from its involvement in projects, such as the development of Manchester’s airport. The Managing Director of BCEG, Mr Xing Yan, said:
To be included in such an interesting and unique development is a real honour…We see our involvement in Airport City as an extension of the memorandum of understanding between China and the UK, where we have been looking to further explore joint infrastructure opportunities for some time.
The airport investment by China is only one of many of its recent forays into the UK economy. Other investments include plans to rebuild London’s Crystal Palace and plans to create a third financial district near London’s City Airport.
Some may see more Chinese involvement in UK business as a threat, but for most it is viewed as an opportunity. An opportunity that both Boris Johnson and George Osborne will undoubtedly exploit as far as possible, with the hope that it will generate income, employment and growth. The following articles consider this investment opportunity.
Manchester Airport Group announces jobs boost The Telegraph, David Millward (13/10/13)
China’s BCEG joins UK Manchester airport joint venture Reuters (13/10/13)
Manchester Airport to receive investment from China BBC News (13/10/13)
George Osborne hails China’s airport investment The Telegraph (13/10/13)
Chinese group in $1.2bn British airport development deal The Economic Times (13/10/13)
China in £800m Manchester airport deal Financial Times, Elizabeth Rigby and Lucy Hornby (13/10/13)
Boris and Osborne in China to push trade Sky News, Mark Stone (13/10/13)
What does China own in Britain? BBC News (14/10/13)
Questions
- What is a joint venture? What are the advantages and disadvantages of a joint venture relative to other business structures?
- How important are political ties with China?
- Do you view Chinese investment in the UK as an opportunity or a threat? Make a list for each side of the argument, ensuring you offer explanations for each reason.
- What macroeconomic benefits will the development of the Manchester Airport bring to the city?
- Will there be wider economic benefits to the rest of the UK, despite the investment being located in Manchester?
- Using the AD/AS model, illustrate and explain why investment is so important to the recovery of the UK economy.
As we saw in the news item The difficult exit from cheap money, central banks around the world have been operating an extremely loose monetary policy since the beginning of 2009. Their interest rates have been close to zero and trillions of dollars of extra money has been injected into the world economy through various programmes of quantitative easing.
For the past few months the Federal Reserve has been purchasing bonds under its most recent programme dubbed QE3, and thereby increasing narrow money, by $85 billion per month. Since the start of its QE programme in 2009, it has pumped around $2.8 trillion of extra money into the US and world economies. This huge increase in money supply has boosted the demand for assets worldwide and world stock markets have risen. Much of the money has flowed into developing countries, such as India, and has acted as a boost to their economies.
Once the US economy is growing strongly again, the aim is to taper off, and ultimately end or even reverse, the QE programme. It was expected that the Fed would decide to start this tapering off process at its meeting on 18 September – perhaps reducing bond purchases initially by some $10 billion. (Note that this would still be an increase in money supply, just a slightly smaller one.) Over the past few days, US bond prices have been falling (and yields increasing) in anticipation of such a move.
As it turned out, the Fed decided to delay tapering off. It will continue with its assets purchase programme of $85 billion per month for the time being. The reason given was that the US economy was still too fragile and needed the monthly injections of money to stay at the current level.
Normally it might be expected that the announcement of a more fragile recovery would cause the US stock market, and others worldwide, to fall. In fact the opposite occurred, with investors relieved that the extra money, which allows extra asset purchases, would continue at the same rate.
But this then raises the question of just what will be the effect when tapering off does actually occur. Will stock markets then go into a tailspin? Or will they merely stop rising so fast. That depends very much on the role of speculation.
Webcasts
Bernanke’s Own Words on Asset Purchases, Economy Bloomberg (18/9/13)
Bernanke: Fed to delay bond tapering PBS Newshour on YouTube (full speech plus questions) (18/9/13)
No tapering announced by Fed CNBC on Yahoo Finance (18/9/113)
The impact of US stimulus moves at home and abroad BBC News, Stephanie Flanders (18/9/13)
Is the upturn reaching Americans? BBC World, Stephanie Flanders (17/9/13)
Shares hit high as Federal Reserve maintains stimulus BBC News, Stephanie Flanders (18/9/13)
US Fed decision to delay tapering was a relief ET Now (India), Bimal Jalan (19/9/13)
Articles
Federal Reserve surprises markets by delaying QE tapering The Telegraph, Katherine Rushton (18/9/13)
Federal Reserve delays QE tapering: the full statement The Telegraph (18/9/13)
Q&A: What is tapering? BBC News (18/9/13)
Fed delay is no reason to celebrate The Guardian, Larry Elliott (19/9/13)
Federal Reserve tapering decision has baffled the markets The Guardian, Larry Elliott (19/9/13)
Taper tiger The Economist (21/9/13)
Everything You Need to Know About the Fed’s Decision Not to Taper QE3 The Atlantic, Matthew O’Brien (18/9/13)
Fed’s dovish turn leaves Wall Street economists mulling taper timing: poll Reuters, Chris Reese (18/9/13)
Good news and bad news from the Fed BBC News, Stephanie Flanders (19/9/13)
Is the Fed frightened of its shadow? BBC News, Robert Peston (19/9/13)
The Federal Reserve and Janet Yellen face a tough task with insufficient tools The Guardian, Mohamed A. El-Erian (14/10/13)
Questions
- Why might a slowing down in the increase in US money supply cause asset prices to fall, rather than merely to rise less quickly?
- Why has the US QE programme led to a rise in asset prices overseas?
- Distinguish between stabilising and destabilising speculation. Which type of speculation has been occurring as a result of the US QE programme?
- How has QE affected unemployment in the UK and USA? How is the participation rate and the flexibility of labour markets relevant to the answer?
- Explain the following two statements by Stephanie Flanders and Robert Peston respectively. “The market conditions argument has a circularity to it: talk of tapering leads to higher market rates, which in turn puts the taper itself on hold.” “The Fed simply hinting that less money would be created, means that there will be no reduction in the amount of money created (for now at least).”
- Why have US long-term interest rates, including mortgage rates, risen since May of this year?
- What impact have higher US long-term interest rates had on economies in the developing world? Explain.
On 15 September 2008, Lehman Brothers, the fourth-largest investment bank in the USA, filed for bankruptcy. Although the credit crisis had been building since mid 2007, the demise of Lehmans was a pivotal event in the unfolding of the financial crisis and the subsequent severe recession in most developed economies. Banks were no longer seen as safe and huge amounts of government money had to be poured into banks to shore up their capital and prevent further bankruptcies. Partial nationalisation seemed the only way of rescuing several banks and with it the global financial system.
A deep and prolonged recession followed (see Chart 1: click here for a PowerPoint). In response, governments pursued expansionary fiscal policies – at least until worries about rising government deficits and debt caused a lurch to austerity policies. And central banks pursued policies of near zero interest rates and subsequently of quantitative easing. But all the time debate was taking place about how to reform banking to prevent similar crises occurring in the future.
Solutions have included reform of the Basel banking regulations to ensure greater capital adequacy. 
The Basel III regulations (see Chart 2) demand considerably higher capital ratios than the previous Basel II regulations.
Other solutions have included proposals to break up banks. Indeed, just this week, the Lloyds Banking Group has hived off 631 of its branches (one sixth of the total) into a newly reformed TSB. Another proposal is to ring-fence the retail side of banks from their riskier investment divisions. In both cases the aim has been to avoid the scenario where banks are seen as too big to fail and can thus rely on governments to bail them out if they run into difficulties. Such reliance can make banks much more willing to take excessive risks. Further details of the new systems now in place are given in the Robert Peston article below.
But many critics maintain that not nearly enough has been done. Claims include:
• The Basel III rules are not tough enough and banks are still being required to hold too little capital.
• Rewards to senior bankers and traders are still excessive.
• The culture of banking, as a result, is still too risk loving in banks’ trading arms, even though they are now much more cautious about lending to firms and individuals.
• This caution has meant a continuing of the credit crunch for many small businesses.
• Higher capital adequacy ratios have reduced bank lending and have thus had a dampening effect on the real economy.
• The so-called ring-fences may not be sufficient to insulate retail banking from problems in banks’ investment divisions.
• Banks are not being required to hold sufficient liquidity to allow them to meet customers’ demands for cash in all scenarios.
• Banks’ reliance on each other still leaves a systemic risk for the banking system as a whole.
• Fading memories of the crisis are causing urgency to tackle its underlying problems to diminish.
• Problems may be brewing in less regulated parts of the banking world, such as the growing banking sector in China.
The following articles look at the lessons of the banking crisis – those that have been learned and those that have not. They look at the measures put in place and assess whether they are sufficient.
Lehman Brothers collapse, five years on: ‘We had almost no control’ The Guardian, Larry Elliott and Jill Treanor (13/9/13)
Lehman Brothers collapse: five years on, we’re still feeling the shockwaves The Guardian, Larry Elliott (13/9/13)
Five years after Lehman, could a collapse happen all over again? The Observer, Larry Elliott and Jill Treanor (15/9/13)
Five years after Lehman, all tickety-boo? BBC News, Robert Peston (9/9/13)
What have we learned from the bank crash? Independent, Yalman Onaran, Michael J Moore and Max Abelson (14/9/13)
We’ve let a good financial crisis go to waste since Lehman Brothers collapsed The Telegraph, Jeremy Warner (12/9/13)
The Lehman legacy: Lessons learned? The Economist (9/9/13)
The dangers of debt: Lending weight The Economist (14/9/13)
The Lehman anniversary: Five years in charts The Economist (14/9/13)
Questions
- Why did Lehman Brothers collapse?
- Explain the role of the US sub-prime mortgage market in the global financial crisis of 2007/8.
- In the context of banking, what is meant by (a) capital adequacy; (b) risk-based capital adequacy ratios; (c) leverage; (d) leverage ratios?
- Explain the Basel III rules on (a) risk-based capital adequacy (see the textbook and the chart above); (b) non-risk-based leverage (introduced in 2013: see here for details).
- Explain and comment on the following statement by Adair Turner: ‘We created an over-leveraged financial system and an over-leveraged real economy. We created a system such that even if the direct cost of bank rescue was zero, the impact of their near-failure on the economy was vast.’
- Under what circumstances might the global financial system face a similar crisis to that of 2007/8 at some point in the future?
- Why is there an underlying conflict between increasing banks’ required capital adequacy and ensuring a sufficient supply of credit to consumers and business? What multiplier effects are likely to occur from an increase in the capital adequacy ratio?
The 2020 Olympics has just been awarded to Tokyo, beating Madrid and Istanbul. Concerns over the safety of the games in Tokyo, with the city being perceived as relatively close to the Fukushima nuclear plant, were overcome with the help of an address by the Japanese Prime Minister, Shinzo Abe. So, what are the economic implications of this latest development in the sporting world?
When London was awarded the 2012 Olympic Games, estimates suggested that it would generate a £16.5 billion contribution to GDP. With many new construction projects, there was the inevitable injection of government expenditure. This led to the creation of new jobs and thus successive employment multiplier effects were generated. This is also likely to be true for Tokyo, with current proposals suggesting that ten new permanent sites will be built to host the various sports of the Games. This will undoubtedly generate new jobs and will provide an almost certain boost to the construction industry. This, in turn, will generate further multiplier effects across a multitude of industries and across the rest of the country.
There will also be further economic effects, for example on Japanese investment and stocks and shares, with a boost in confidence and optimism. A Tokyo-based fund manager, Hiroshi Fujumonto, said:
Olympics-related stocks are yet to fully price in the decision, even though they’ve already outperformed … In the short term the entire Japanese share market will get a boost from celebratory buying and expectations for the event’s economic impact.
This was also confirmed by Shinzo Abe, when he commented after the victory was announced that ‘I want to make the Olympics a trigger for sweeping away 15 years of deflation economic shrinkage.’ 
The Japanese economy has been struggling for many years and this may be the much needed boost to the country’s optimism, infrastructure and economy.
As the world’s third largest economy, this economic boost is also likely to have knock-on effects on other countries across the world, though it is more likely to be the long-term impact that is important here. Just as it was with the London Olympics, the final effect and cost will only be known some years after the Olympics are held, but for now the work will start for Japan.
Olympics 2020: Tokyo wins race to host games BBC Sport (7/9/13)
Tokyo Olympics win seen boosting infrastructure, recovery Bloomberg, Yoshiaki Nohara and Satoshi Kawano (8/9/13)
Tokyo wins bid to host 2020 Olympic Games Telegraph, Ben Rumsby (8/9/13)
Tokyo chosen as ‘safe pair of hands’ to host 2020 Olympics Financial Times, Benedict Mander (8/9/13)
Japanese bid’s passion earns Tokyo the 2020 Olympic Games Guardian, Owen Gibson (7/9/13)
Olympics 2020: Why Tokyo is a ‘safe pair of hands’ to host Games BBC News, David Bond (8/9/13)
Questions
- What is the multiplier effect and how is it calculated?
- How can the overall economic benefits of the Olympic Games be estimated?
- Which industries in Tokyo are likely to be the ones that benefit from the Olympic Games?
- Outline a cost–benefit analysis of the Olympic Games.
- Why are share prices likely to go up in Japan based on this news? Look at both the demand and supply factors that will affect share prices.
- Is it possible that there will be wider multiplier effects on other countries besides Japan?
First the good news. Employment is rising and unemployment is falling. Both claimant count rates and Labour Force Survey rates are down. Compared with a year ago, employment is up 279,092 to 29,869,489; LFS unemployment is down from 7.87% to 7.69%; and the claimant count rate is down from 4.7% to 4.0%.
