Category: Essential Economics for Business 7e and 6e

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The state of the labour market in the UK

Figures for employment and unemployment give an incomplete picture of the state of the labour market. Just because a person is employed, that does not mean that they are working the number of hours they would like.

Some people would like to work more hours, either by working more hours in their current job, or by switching to an alternative job with more hours or by taking on an additional part-time job. Such people are classed as ‘underemployed’. On average, underemployed workers wanted to work an additional 11.3 hours per week in 2014 Q2. Underemployment is a measure of slack in the labour market, but it is not picked up in the unemployment statistics.

Other people would like to work fewer hours (at the same hourly rate), but feel they have no choice – usually because their employer demands that they work long hours. Some, however, would like to change to another job with fewer hours even if it involved less pay. People willing to sacrifice pay in order to work fewer hours are classed as ‘overemployed’.

Statistics released by the Office for National Statistics show that, in April to June 2014, 9.9%, or 3.0 million, workers in the UK were underemployed; and 9.7%, or 2.9 million, were overemployed.

The figures for underemployment vary between different groups:

• 11.0% of female workers 8.9% of male workers
• 19.6% of 16-24 year olds 9.9% of all workers
• 21.1% of people in elementary occupations (e.g. cleaners, shop assistants and security guards) 5.4% of people in professional occupations (e.g. doctors, teachers and accountants)
• 11.5% of people in the North East of England (in 2013) 9.2% of people in the East of England (in 2013)
• 22.1% of part-time workers 5.4% of full-time workers

As far as the overemployed are concerned, professional people and older people are more likely want shorter hours

The ONS data also show how under- and overemployment have changed over time: see chart (click here for a PowerPoint). Before the financial crisis and recession, overemployment exceeded underemployment. After the crisis, the position reversed: underemployment rose from 6.8% in 2007 to a peak of 10.8% in mid-2012; while overemployment fell from 10.5% in 2007 to a trough of 8.8% in early 2013.

More recently, as the economy has grown more strongly, underemployment has fallen back to 9.9% (in 2014 Q2) and overemployment has risen to 9.7%, virtually closing the gap between the two.

The fact that there is still significant underemployment suggests that there is still considerable slack in the labour market and that this may be acting as a brake on wage increases. On the other hand, the large numbers of people who consider themselves overemployed, especially among the professions and older workers, suggests that many people feel that they have not got the right work–life balance and many may be suffering consequent high levels of stress.

Articles

Rise in number of UK workers who want to cut back hours, ONS says The Guardian, Phillip Inman (25/11/14)
Data reveal slack and stretch in UK workforce Financial Times, Sarah O’Connor (25/11/14)
Will you graduate into underemployment? The Guardian, Jade Grassby (30/9/14)
Three million people would take pay cut to work shorter hours: Number who say they feel overworked rises by 10 per cent in one year Mail Online, Louise Eccles (26/11/14)
ONS: Rate of under-employment in Scotland lower than UK average Daily Record, Scott McCulloch (25/11/14)

ONS Release

Underemployment and Overemployment in the UK, 2014 ONS (25/11/14)

Questions

  1. Distinguish between unemployment (labour force survey (LFS) measure), unemployment (claimant count measure), underemployment (UK measure), underemployment (Eurostat measure) and disguised unemployment.
  2. Why is underemployment much higher amongst part-time workers than full-time workers?
  3. How do (a) underemployment and (b) overemployment vary according to the type of occupation? What explanations are there for the differences?
  4. Is the percentage of underemployment a good indicator of the degree of slack in the economy? Explain.
  5. How is the rise in zero hours contracts likely to have affected underemployment?
  6. How could the problem of overemployment be tackled? Would it be a good idea to pass a law setting a maximum number of hours per week that people can be required to do in a job?
  7. Would flexible working rights be a good idea?
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Supermarket price wars and the effect on suppliers

The retail food industry is an oligopoly – a market dominated by a few big firms, with interdependence between them. This means that each firm considers the reaction of all its competitors when making any decision. Pricing is one of those key decisions and this is one of the reasons why price wars tend to break out in this industry.

For consumers, price wars are usually seen as a good thing, as it means prices in the supermarkets get forced downwards, thus reducing the cost of living. Low prices in this case are one of the key benefits of competition. However, there are costs of such fierce competition for suppliers. As final prices to customers are pushed down, small competitors are likely to feel the squeeze and may be forced out of the market. The other losers are suppliers. The big supermarkets are likely to pay lower prices to their suppliers, thus adversely affecting their livelihood. Research suggests that throughout 2014, 146 food producers entered insolvency, which is significantly higher than last year.

Accountancy firm, Moore Stephens, has blamed the supermarket price war for this rise in insolvencies in the food production sector. Duncan Swift from this firm said:

“The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder…Supermarkets have engaged in questionable buying practices for years, but it’s getting worse and clearly wreaking havoc on the UK food production sector.”

The British Retail Consortium has said that placing the blame in this way was too simplistic. A commentator suggested that many suppliers have long-standing relationships with the supermarkets they deal with, suggesting that relations were good and sustainable. Furthermore, it was suggested that the demise of these producers may be due to many other factors and the data on insolvencies did not show that those firms affected were suppliers to the supermarkets. There is a Groceries Code Adjudicator in place to ensure that the supermarkets do not abuse their power when it comes to dealing with their suppliers, but the power of this person is limited, leaving suggestions remaining that suppliers are vulnerable. The following articles consider both the good and bad of price wars.

Articles

Questions

  1. What are the characteristics of an oligopoly? Why do price wars tend to break out in oligopolies, such as the supermarket industry?
  2. Apart from the supply-chain pressure from supermarkets, what other factors could have caused so many small food producers to become insolvent?
  3. How does the supermarket supply chain work and why have the price wars led to suppliers being squeezed?
  4. Use a diagram to illustrate the impact of the price war on (a) the supermarkets and (b) the suppliers.
  5. How important is the Groceries Code Adjudicator and should she be doing more to protect suppliers?
  6. If supermarkets are cutting prices, is this an indicator of unfair competition or good competition?
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The Royal Mail

With Christmas approaching, sales will once again begin to rise and cards will be written. Mail services will be at their busiest as we post millions of cards and parcels every day. But, the question is: will they arrive? Workers in the supply chain at Royal Mail have voted to strike over pay.

Since the part privatisation of Royal Mail, many criticisms have emerged, ranging from the price at which shares were sold, the efficiency of the Royal Mail, suggestions of varying prices for delivery depending on location, and now over pay. As with any labour market, there is a demand and a supply of workers and the intersection of these curves creates our equilibrium wage. If the wage is forced up above the equilibrium wage by the actions of trade unions, then there is the potential for unemployment to be created.

The Communications Workers Union (CWU) feels that their pay is insufficient. Dave Ward, Deputy General Secretary of CWU said:

“Thanks entirely to the unreasonable attitude of Post Office management, a pre-Christmas national strike is looking inevitable…The workforce has made a major contribution to the company’s success and have every right to their fair share.”

However, the head of the supply chain at Royal Mail has responded to the threats of strike, referring to the 5% pay rise promised to its workers over the next three years, saying:

“We are undertaking the biggest modernisation programme in UK retail history to ensure we become commercially viable and reduce our reliance on public money…We urge the CWU to reconsider their unrealistic demands and discuss an affordable pay deal rather than call strike action which can only cost our people money.”

The row over pay is not the only way that job losses could emerge. A major criticism levelled at the Royal Mail is its lack of efficiency, especially in terms of cost reductions and work flexibility. The Royal Mail has become increasingly concerned by competition, especially as its low-cost competitors can choose to whom they deliver. Those living in built up areas receive mail, but for those living in more rural areas, some of Royal Mail’s competitors will not deliver there, because of the higher costs. Royal Mail does not have this luxury and hence must deliver to loss-making places. Royal Mail says that this is creating unfair pressure to its business and is calling for these competitors to be forced to deliver to rural areas and small businesses. However, one such company, Whistl, has said that the figures from Royal Mail suggest that ‘productivity is not a sufficiently high enough management priority.

If the strike does go ahead in the build up to Christmas, then the management priorities of Royal Mail will certainly be under scrutiny. The following articles consider the current situation.

Articles

Questions

  1. 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?
  2. Is strike action completely pointless?
  3. What actions could workers take, other than strike action, to achieve a resolution of their grievances? Discuss what employers could offer in an attempt to resolve the situation?
  4. What are the arguments for making Royal Mail’s competitors deliver to all places, just as the Royal Mail must do?
  5. The efficiency of the Royal Mail has been called into question. If efficiency improved, would this mean that pay rises were more or less feasible?
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Deflation danger

The articles linked below look at the dangers of deflation and policies of central banks to counter it.

Deflation in economics has three meanings. The first is falling prices: i.e. negative inflation. The second, more traditional meaning, is a fall in real aggregate demand, resulting in lower output, higher unemployment and lower inflation – and quite possibly an actual fall in the price level. These first two definitions describe what is generally seen as an undesirable situation. The third is a slowing down in the growth of real aggregate demand, perhaps as a result of a deliberate act of fiscal and/or monetary policy. This third meaning could describe a desirable situation, where unsustainable growth is reduced and inflation is reduced from an above-target level.

Here we focus on the first definition. The first two articles look at the dangers of a fall in the price level. The chart below shows falling inflation, although not actually deflation, in China, France, Germany and the UK (click here for a PowerPoint). Several European countries, however, are experiencing actual deflation. These include: Greece, Spain, Hungary, Poland and Sweden. Inflation in the eurozone for 2014 is expected to be a mere 0.5%.

The most obvious danger of deflation (or expected deflation) is that people will delay spending on durable goods, such as cars, furniture and equipment, hoping to buy the items cheaper later. The result could be a fall in aggregate demand and a fall in output and employment.

For retailers, this is all spelling Christmas doom. Already the runup to the most crucial time of the year for shops is being characterised by a game of chicken. Shoppers are wondering how long they can leave their festive buying in the hope of late bargains.

Interest rates may be low, but for people with debts, this is being offset by the fact that inflation is no longer reducing the real value of that debt. For people with credit card debt, personal loans and most mortgages, the interest rate they pay is significantly above the rate of inflation. In other words, the real interest rate on their debt is still significantly positive. This may well discourage people from borrowing and spending, further dampening aggregate demand. And, with a Bank Rate of just 0.5%, there is virtually no scope for lowering the official interest rate further.

At least in the UK, economic growth is now positive – for the time being at any rate. The danger is becoming more serious, however, in many eurozone countries, which are already back in recession or close to being so. The ECB, despite its tentative steps to ease credit conditions, it moving closer to the day when it announces full-blown quantitative easing and buys sovereign bonds of eurozone countries. The Bank of Japan has already announced that it is stepping up it QE programme – a vital ingredient in getting Abenomics back on track and pulling Japan out of its latest recession.

In the USA, by contrast, there is little danger of deflation, as the US economy continues to grow strongly. The downside of this, has been a large rise in consumer debt (but not mortgages) – the ingredients of a possible future bubble and even a new financial crisis.

Forget what central bankers say: deflation is the real monster The Observer, Katie Allen (23/11/14)
Why Deflation Is Such A Big Worry For Europe NPR, Jim Zarroli (31/10/14)
Exclusive: China ready to cut rates again on fears of deflation – sources Reuters, Kevin Yao (23/11/14)
Central Banks in New Push to Prime Pump Wall Street Journal Jon Hilsenrath, Brian Blackstone and Lingling Wei (21/11/14)
Are Central Banks Panicking? Seeking Alpha, Leo Kolivakis (21/11/14)

Questions

  1. What are (a) the desirable and (b) the undesirable consequences of deflation? Does the answer depend on how deflation is defined?
  2. What is meant by a ‘deflationary gap’? In what sense is ‘deflationary’ being used in this term?
  3. Why have oil prices been falling? How desirable are these falls for the global economy?
  4. Is there an optimal rate of inflation? If so, how would this rate be determined?
  5. The chart shows that inflation in Japan is likely to have risen in 2014. This in large part is the result to a rise in the sales tax earlier this year. If there is no further rise in the sales tax, which there will probably not be if Mr Abe’s party wins the recently called election, what is likely to be the effect of the 2014 tax rise on inflation in 2015?
  6. If the Bank Rate is below the rate of inflation, why are people facing a positive real rate of interest? Does this apply equally to borrowers and savers?
  7. In what sense is there a cultural revolution at the Bank of England?
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Paying for a public good: will it Wash?

Much of the east coast of England is subject to tidal flooding. One such area is the coastline around the Wash, the huge bay between Norfolk and Lincolnshire. Most of the vulnerable shorelines are protected by sea defences, usually in the form of concrete walls or earth embankments, traditionally paid for by the government. But part of the Norfolk shoreline is protected by shingle banks, which require annual maintenance.

Full government funding for maintaining these banks ended in 2013. According to new government rules, only projects that provide at least £8 of benefits for each £1 spent would qualify for such funding to continue. The area under question on the Norfolk cost of the Wash does not qualify.

Between 2013 and 2015 the work on the shingle banks is being paid for by the local council charging levies. After that, the plan is for a partnership-funding approach, where the government will make a (small) contribution as long as the bulk of the funding comes from the local community. This will involve setting up a ‘community interest company’, which will seek voluntary contributions from local residents, landowners and businesses.

Sea defences are a public good, in that it is difficult to exclude people benefiting who choose not to pay. In other words, there is a ‘free rider’ problem. However, in the case of the Wash shoreline in question, one borough councillor, Brian Long, argues that it might be possible to maintain the flood defences to protect those who do contribute while ignoring those who do not.

Not surprisingly, many residents and businesses argue that the government ought to fund the defences and, if it does have to be financed locally, then everyone should be required to pay their fair share.

Radio podcast

Holding back the sea BBC Radio 4, David Shukman (19/11/14)

Articles

What is the price of holding back the sea? BBC News, David Shukman (19/11/14)
Firms will have to pay towards cost of sea defences between Heacham and Wolferton in West Norfolk EDP24, Chris Bishop (1/8/14)
Businesses between Snettisham and Hunstanton will have to pay for flood defences. EDP24, Chris Bishop (19/11/14)
Wash and west Norfolk sea defence repairs now under way BBC News (13/12/13)

Consultation document

Managing our coastline Borough Council of King’s Lynn and West Norfolk, Environment Agency

Questions

  1. What are the two main features of a public good? Are sea defences a pure public good?
  2. Is there a moral hazard if people choose to live in a coastal area that would be subject to flooding without sea defences?
  3. Who is the ‘public’ in the case of sea defences? Is it the whole country, or the local authority or just all those being protected by the defences?
  4. What are the problems with relying on voluntary contributions to fund, or partly fund, sea defences? How could the free-rider problem be minimised in such a funding model?
  5. Discuss the possible interpretations of ‘equity’ when funding sea defences.
  6. If ‘flood defences could be built or maintained to protect those who do contribute while ignoring those who do not’, does this mean that such defences are not a public good?
  7. Find out how sea defences are funded in The Netherlands. Should such a funding model be adopted in the UK?