Many people are attracted to work in the private sector, with expectations of greater opportunities for promotion, more variation in work and higher salaries. However, according to the Office for National Statistics, it may be that the oft-talked-of pay differential is actually in the opposite direction. Data from the ONS suggests that public sector workers are paid 14.5% more on average than those working in the private sector.
As is the case with the price of a good, the price of labour (that is, the wage rate) is determined by the forces of demand and supply. Many factors influence the wages that individuals are paid and traditional theory leads us to expect higher wages in sectors where there are many firms competing for labour. With the government acting as a monopsony employer, it has the power to force down wages below what we would expect to see in a perfectly competitive labour market. However, the ONS data suggests the opposite. What factors can explain this wage differential?
Jobs in the public sector, on average, require a higher degree of skills. There tend to be entry qualifications, such as possessing a university degree. While this is the case for many private-sector jobs as well, on average it is a greater requirement in the public sector. The skills required therefore help to push up the wages that public-sector workers can demand. Another explanation could be the size of public-sector employers, which allows them to offer higher wages. When the skills, location, job specifications etc. were taken into account, the 14.5% average hourly earnings differential declined to between just 2.2% and 3.1%, still in favour of public-sector workers. It then reversed to give private-sector workers the pay edge, once the size of the employer was taken out.
Further analysis of the data also showed that, while it may pay to be in the public sector when you’re starting out on your career, it pays to be in the private sector as you move up the career ladder. Workers in the bottom 5% of earners will do better in the public sector, while those in the top 5% of earners benefit from private-sector employment. The ONS said:
Looking at the top 5%, in the public sector earnings are greater than £31.49 per hour, while in the private sector, the top 5% earn more than £33.63 per hour… The top 1% of earners in the private sector, at more than £60.21 per hour, earns considerably more than the top 1% of earners in the public sector, at more than £49.65 per hour.
The data from the ONS thus suggest a reversal in the trend of average public-sector pay being higher than private sector pay, once all the relevant factors are taken into account.
This will naturally add to debates about living standards, which are likely to take on a stronger political slant as the next election approaches. It is obviously partly down to the public-sector pay freeze that we saw in 2010 and also to a reversal, at least in part, of the previous trend from 2008, where public-sector pay 
had been growing faster than private-sector pay. However, depending on the paper you read or the person you listen to, they will offer very different views as to who gets paid more. All you need to do in this case is look at the titles of the newspaper articles written by the Independent and The Telegraph! Whatever the explanation, these new data provide a wealth of information about relative prospects for pay for everyone.
Data
Public and Private Sector Earnings Office for National Statistics (March 2014)
Annual Survey of Hours and Earnings, 2013 Provisional Results Office for National Statistics (December 2013)
Articles
Austerity bites as private sector pay rises above the public sector for the first time since 2010 Independent, Ben Chu (10/3/14)
Public sector workers still better paid despite the cuts The Telegraph, John Bingham (10/3/14)
Public sector hourly pay outstrips private sector pay BBC News (10/3/14)
Public sector workers are biggest losers in UK’s post-recession earnings squeeze The Guardian, Larry Elliott (11/3/14)
New figures go against right-wing claims that public sector workers are grossly overpaid Independent, Ben Chu (10/3/14)
Public sector pay sees biggest shrink on 2010, figures suggest LocalGov, Thomas Bridge (11/3/14)
Public sector staff £2.12 an hour better off The Scotsman, David Maddox (11/3/14)
Questions
- Illustrate the way in which wages are determined in a perfectly competitive labour market.
- Why does monopsony power tend to push wages down?
- Why does working for a large company suggest that you will earn a higher wage on average?
- Using the concept of marginal revenue product of labour, explain the way in which higher skills help to push up wages.
- How significant are public-sector pay freezes in explaining the differential between public- and private-sector pay?
- Why is there a difference between the bottom and top 5% of earners? How does this impact on whether it is more profitable to work in the public or private sector?
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?
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?
In December 2013, Uruguay passed a law permitting the growing, distribution and consumption of marijuana. The legislation comes into effect in April 2014. The state will regulate the industry to ensure good quality strains of the crop are grown and sold. It will also tax the industry.
Uruguay is the first country to legalise cannabis, but in July 2012, Colorado and Washington states in the USA passed laws permitting the sale and possession of small amounts of the drug for recreational use. (It was already legal to possess the drug for medical use.) The laws took effect a few months later. It is heavily taxed, however, especially in Washington, where it is taxed at a rate of 25% three times over: when it is sold to the processor; when the processor sells it to the retailer; and when the retailer sells it to the consumer. In Massachusetts, Nevada and Oregon, medical cannabis shops will be permitted to open this year. In the Netherlands, although the sale of cannabis is still illegal, ‘coffee shops’ are permitted to sell people up to 5 grams per day.
So should cannabis be legalised? People have very strong views on the subject and this can make a calm assessment of the issue more difficult. The economist’s approach to legalising cannabis involves seeking to identify and measure the costs and benefits of doing so. If the benefits exceed the costs, then it should be legalised; if not, it should remain illegal (or made illegal). The problem is that the size of the costs and benefits are not easy calculate as they involve estimates of things such as consumption levels, tax revenues, crime reduction, the effects on the consumption of other drugs, including legal drugs such as alcohol and tobacco.
Nevertheless, various estimates of these costs and benefits have been made and provide a basis for discussion.
Possible benefits of cannabis legalisation include: increased tax revenues for the government; reduction in crime, and hence reduction in law enforcement and prison costs; encouraging people with addiction problems to seek help, as they would not fear arrest; reduction in the price, benefiting users; regulating quality of the drug; reducing the consumption of alcohol and more dangerous drugs if these are substitutes for cannabis; moral arguments concerning freedom of individuals to choose their lifestyle.
Possible costs include: increased consumption of cannabis, with attendant health and social side effects; increased consumption of other drugs if they are complements, or if cannabis is an ‘entry level’ drug to harder drugs; moral objections to drug taking.
Clearly some of these costs and benefits are easier to measure than others. Moral arguments are almost impossible to assess quantitatively, even when various underlying moral standpoints are agreed.
The following articles look at recent events and at the arguments, both economic and non-economic.
Articles
As Uruguay moves to legalise cannabis, is the ‘war on drugs’ finished? Metro (20/1/14)
Regulating the sale of marijuana: Global perspective Journalist’s Resource, John Wihbey (17/1/14)
Next Step in Uruguay: Competitive, Quality Marijuana Independent European Daily Express (IEDE) (12/1/14)
U.S. support for legalization of marijuana at an all-time HIGH Mail Online, Anna Edwards (7/1/14)
14 Ways Marijuana Legalization Could Boost The Economy Huffington Post, Harry Bradford (7/11/12)
Colorado pot legalization: 30 questions (and answers) The Denver Post, John Ingold (13/12/12)
Economists Predict Marijuana Legalization Will Produce ‘Public-Health Benefits’ Forbes, Jacob Sullum (1/11/13)
Papers
Economics of Cannabis Legalization Hemp Today, Dale Gieringer (10/10/93)
Pros & Cons of Legalizing Marijuana About.com: US Liberal Politics, Deborah White
Would Marijuana Legalization Increase the Demand for Marijuana? About.com: Economics, Mike Moffatt
Time to Legalize Marijuana? – 500+ Economists Endorse Marijuana Legalization About.com: Economics, Mike Moffatt
A cost benefit analysis of cannabis legalisation Institute for Social and Economic Research, University of Essex
Licensing and regulation of the cannabis market in England and Wales: Towards a cost–benefit analysis Institute for Social and Economic Research, University of Essex, Mark Bryan, Emilia Del Bono and Stephen Pudney (9/13)
What Can We Learn from the Dutch Cannabis Coffeeshop Experience? Rand Drug Policy Research Center, Robert J. MacCoun (7/10)
Podcast
Licensing and regulating the cannabis market in England and Wales Institute for Social and Economic Research, University of Essex, Stephen Pudney (15/9/13)
Questions
- If a country legalises cannabis, what is likely to happen to the price of cannabis? Use a demand and supply diagram to illustrate your argument, considering the effects on both demand and supply. How are the price elasticities of demand and supply relevant to your answer?
- What externalities are there from drug use?
- What externalities are there from making cannabis illegal?
- Distinguish between complementary and substitute goods for cannabis? How is the demand for these likely to be affected by legalising cannabis?
- Go through each of the benefits and costs of legalising cannabis and identify difficulties that might be experienced in quantifying these costs and benefits?
- If cannabis were legalised, how would you set about determining the optimum rate of tax on cannabis production, processing, distribution and sale?
- Consider the arguments for and against legalising cannabis from the perspective of (a) a free-market liberal and (b) a social democrat who sees government intervention as an important means of achieving various social goals.
According to the supply and demand model, we would expect the price of turkeys to be high at this time of year. After all, last Christmas in the UK over 10 million turkeys were consumed and, therefore, this high level of demand should cause prices to rise. This is certainly what happens in other markets when there is a substantial increase in demand.
However, evidence from Thanksgiving in the USA suggests that this might not be the case. According to this article from the New York Times, data suggests that the price of frozen turkeys in the US falls by around 9% between October and November, coinciding with the substantial increase in demand for Thanksgiving celebrations. The article then goes on to suggest a number of plausible demand and supply-side explanations for this fall in price.
Turkey Economics 101: Why turkeys are so darn cheap this time of year Culinate (25/11/13)
Why Does Turkey Get Cheaper Around Thanksgiving? Slate, Matthew Yglesias (21/11/12)
Questions
- How elastic do you think the demand for turkeys will be at Christmas?
- What type of products are well suited to being used as loss-leaders?
- Which of the explanations for the increase in prices do you find most convincing?
- What evidence might be useful to distinguish between the different explanations?
Many people are attracted to work in the private sector, with expectations of greater opportunities for promotion, more variation in work and higher salaries. However, according to the Office for National Statistics, it may be that the oft-talked-of pay differential is actually in the opposite direction. Data from the ONS suggests that public sector workers are paid 14.5% more on average than those working in the private sector.
had been growing faster than private-sector pay. However, depending on the paper you read or the person you listen to, they will offer very different views as to who gets paid more. All you need to do in this case is look at the titles of the newspaper articles written by the Independent and The Telegraph! Whatever the explanation, these new data provide a wealth of information about relative prospects for pay for everyone.
