Youth unemployment has been one of the main headlines for some months, with data showing a record number of young people out of work.
As part of the government’s £1bn Youth Contract that aims to help young people back into work and help those unable to find employment, Nick Clegg has announced wage subsidies to firms hiring 18-24 year olds will be paid earlier.
Some of the costs of unemployment are obvious. For the individual who is unemployed, it means a lack of income and hence inability to buy goods and services. This then has wider implications for the economy. If people are unable to purchase goods and services, this contributes to a lower level of aggregate demand, which in times of recession, is hardly ideal.
Unemployment also means an inefficient use of resources, meaning the economy is operating below full capacity. Fewer people in work also implies lower tax revenues for the government, at the same time as higher unemployment benefit payments, contributing towards a growing budget deficit. This point is of particular concern, when it is young workers claiming benefits, as it could mean a life of dependency.
There are also some longer-term consequences, in particular for those who have been out of work for some time. They lose their skills, making it harder to find a job and this can pose costs to employers and further costs to the government through re-training. As such, government initiatives to tackle youth unemployment have never been more important.
The wage subsidies that were announced back in November will now be paid when young people have been out of work for six months, instead of nine. This initiative aims to help reduce youth unemployment in areas where it is at its worst. Twenty local authorities have been identified as priorities for the government and will benefit from this scheme. As Nick Clegg said to CBI summit:
“Three months can make all the difference. When you feel like your banging your head against a brick wall, when you live in an area where opportunities are already few and far between, another 12 weeks of rejection letters, of being cut off, of sitting at home waiting, worrying, that can seriously knock the stuffing out of you, making it extremely difficult to pick yourself up …
So jobcentres will be able to make use of the subsidy before people are referred to the Work Programme, capitalising on their links with local employers, and they’ll also intensify support, so more training, more regular coaching, spending more time with young people to knock a CV into shape or prep ahead of an interview.”
There are critics of the scheme, who argue that it is too little, too late and that it will simply displace older workers, thereby creating worse unemployment for another group. Until the economy begins to grow and confidence returns to the markets, unemployment is likely to remain a frequent headline. The following articles consider the wage subsidy and the state of unemployment in the UK.
Wage subsidy could mean more jobs Independent Online, Business Report, Pierre Heistein (14/6/12)
Wage subsidies scheme moved forward The Press Association (27/6/12)
Wage subsidy plan for young workers brought forward BBC News (27/6/12)
Wage subsidies scheme moved forward Independent, Alan Jones (27/6/12)
Nick Clegg announces extra help for jobless in 20 troublespots Guardian, Juliette Jowit (27/6/12)
Young people’s prospects have ‘nose-dived’ says report BBC News, Judith Burns (25/6/12)
Economic gap between young and old significantly worse since 2008 – study Guardian, James Ball and Helene Mulholland (25/6/12)
Questions
- Why is unemployment such a big concern for the UK economy? What is so important about youth unemployment?
- Which factors have contributed towards such high youth unemployment?
- How will the wage subsidy encourage firms to take on more young people? Think about how a rational firm behaves when choosing between 2 workers.
- Why does the wage subsidy cause concern for organisations supporting the employment of older workers?
- To what extent do you agree with the Guardian article that says that young people have borne the brunt of the recession and subsequent government cuts?
- What other things have been undertaken in a bid to reduce unemployment and stimulate the economy?
- Think about the costs of unemployment. Categorise them into costs to (a) the individual, (b) friends and family, (c) the government and (d) the economy.
Recently there have been calls from business leaders and Conservative politicians to scrap the UK’s 50% income tax rate, which is paid on taxable incomes over £150,000. The 50% income tax rate is thus paid by top earners, who comprise around just 1% of taxpayers.
And yet the government receives about 30% of income tax revenue from this 1% – and this was before the introduction of the 50% rate in April 2010. (In fact, with the marginal national insurance rate of 2%, top earners are paying an effective marginal rate of 52%.)
One argument used by those who favour reducing the 50% rate is that the rich would pay more income tax, not less. There are four reasons given for this. The first is that people would be encouraged to work harder and/or seek promotion if they knew they would keep more of any rise in income. The second is that fewer rich people would be encouraged to leave the country or to relocate their businesses abroad. The third is that more people would be encouraged to work in or set up businesses in the UK. The fourth is that there would be less temptation to evade taxes by not declaring all income earned or to find clever ways of avoiding tax.
These arguments were put forward in the 1980s by Art Laffer, an adviser to President Reagan. His famous ‘Laffer curve’ (see Economics (8th edition) Box 10.3 or Economics (7th edition) Box 10.4) illustrated that tax revenues are maximised at a particular tax rate. The idea behind the Laffer curve is very simple. At a tax rate of 0%, tax revenue will be zero – but so too at a rate of 100%, since no-one would work if they had to pay all their income in taxes. As the tax rate rises from 0%, so tax revenue would rise. And so too, as the tax rate falls from 100%, the tax rate would rise. It follows that there will be some tax rate between 0% and 100% that maximises tax revenue.
Those arguing that a cut in the top rate of income tax would increase tax revenue are arguing that the 50% rate is beyond the peak of the Laffer curve. But this is an empirical issue. In other words, to assess the argument you would need to look at the evidence as, theoretically, the peak of the Laffer curve could be below or above 50%. Indeed, some argue that the peak is more likely to be at around 75%.
The following podcasts and articles consider the arguments. As you will see, the authors are not all agreed! Consider carefully their arguments and try to identify any flaws in their analysis.
Update
On 27 June 2012, Arthur Laffer appeared on the BBC Today Programme to discuss the Laffer curve and its implications for UK income tax policy. You can hear it from the link below
Podcasts
Should the 50p tax rate be ditched? BBC Today Programme, John Redwood and Paul Johnson (3/3/12)
Arthur Laffer: Tax rate should ‘provide for growth’ BBC Today Programme (27/6/12)
Articles
Where’s the High Point on the Laffer Curve? And Where Are We? Business Insider, Angry bear Blog (3/3/12)
Tax cuts: we can have our cake and eat it The Telegraph, Ruth Porter (22/2/12)
‘Scrap the 50p tax rate’ say 500 UK entrepreneurs Management Today, Rebecca Burn-Callander (1/3/12)
The Laffer Curve Appears in the UK Forbes, Tim Worstall (22/2/12)
Memo to 50p tax trashers: Laffer Curve peaks at over 75 per cent Left Foot Forward, Alex Hern (1/3/12)
Questions
- Explain how a cut in income tax could lead to an increase in tax revenue.
- Distinguish between the income effect and the substitution effect of a tax cut. Which would have to be bigger if a tax cut were to increase tax revenue?
- If, in a given year, the top rate of tax were raised and tax revenue fell, would this prove that the economy was now past the peak of the Laffer curve?
- What would cause the Laffer curve to shift/change shape? To what extent could the government affect the shape of the Laffer curve?
- If the government retains the 50% top tax rate, what can it do to increase the revenue earned from people paying the top rate?
- What other objectives might the government have for having a high marginal income tax rate on top earners?
- Investigate the marginal income tax and national insurance (social protection) rates in other countries. How progressive are UK income taxes compared with those in other countries?
Academic research is encouraged by universities. Indeed, the number and quality of research publications is the most important criterion for promotion in many universities.
Periodically university research in the UK is publicly assessed. The latest assessment is known as the Research Excellence Framework (REF) and will be completed in 2014. Most research that will be considered by the REF is published in peer-reviewed journals. Most of these journals are subscription based. Universities pay large amounts of money in subscriptions.
In recent years there has been much criticism by both academics and universities about the high cost of such subscriptions. In a movement dubbed the Academic Spring, pressure has mounted for journal articles to be made available free of charge – i.e. on open access.
The government too has been concerned that the results of publicly-funded research has been disappearing behind ‘paywalls’ and hence not available free to people outside the universities which subscribe to such journals. Indeed, no single university can afford licences for all the 25,000 peer-reviewed journals currently being published. As a result, the government set up a committee under the chair of Professor Janet Finch to examine alternative ways of making research more accessible. The committee has just published its report.
It advocates an expansion of open-access journals:
The principle that the results of research that has been publicly funded should be freely accessible in the public domain is a compelling one, and fundamentally unanswerable…
Instead of relying on subscription revenues provided by or on behalf of readers, most [open-access journals] charge a fee to authors…before an article is published. Access for readers is then free of charge, immediately on publication, and with very few restrictions on use and re-use.
Under this model, universities would essentially pay to have their academics’ articles published rather than paying to purchase the journal. Alternatively, research councils could fund the publication of articles based on research already funded by them.
Many people go further. They argue that authors ought to be able to have their published research in any journal made freely available, after an embargo period, through their university’s website.
So is the current pricing model the best for encouraging research and for disseminating its findings? Or is open access a better model – and if so, of what form? Or would it discourage publishers and lead, in the end, to less being published or to a less rigorous peer review process? The questions are ones of pricing, incentives, choices and investment – the questions that economists are qualified to consider.
Articles
Open access may require funds to be rationed Times Higher Education, Paul Jump (21/6/12)
Set science free from publishers’ paywalls New Scientist, Stephen Curry (19/6/12)
Scientists must make research an open book Independent, Martin Hickman (18/6/12)
Report calls on government to back open access science BBC News, Pallab Ghosh (19/6/12)
Open access is the future of academic publishing, says Finch report Guardian, Alok Jha (19/6/12)
Open access to science – its implications discussed in UK raport ZME Science (19/6/12)
UK move to ‘open access’ in publishing Phys.Org, Justin Norrie (20/6/12)
Report
Finch Group Report: Overview Research Information Network (June 2012)
Finch Group Report: Executive Summary Research Information Network (June 2012)
Finch Group Report: Full Report Research Information Network (June 2012)
Questions
- Explain the difference between the ‘gold’ and ‘green’ models of open-access journal article publishing?
- What externalities are involved in journal publication? What are the implications of this for socially efficient pricing?
- How could journal publication be made profitable under an open-access system?
- What are the incentive effects for (a) academics and (b) universities of ranking journals? Does the REF, whereby research articles are judged on their own merits, overcome problems of ranking journals?
- Does the existence of journal rankings allow the top journals in each discipline to maintain a position of market power? How is this likely to impact on journal or article pricing?
- How would university finances be affected by a move towards gold open access journals (a) in the short term; (b) in the long term?
- Would it be in universities’ interests to produce their own open-access journals?
The pensions crisis is one area of social policy that has been the focus of attention for some years. With an ageing population, more people entering higher education and a rather substantial deficit facing the government, pension reform has been high on the agenda and not just in the UK.
A number of factors have contributed towards the so-called pensions crisis: rising life expectancy; the ‘baby-boomers’ retiring; more people staying in education for longer; an ageing population. All of these have led to a dependency ratio that is becoming worse – fewer workers to support every pensioner. Over the past few years, strikes have taken place in protest to government pension plans, especially for public sector workers, who see the proposals as making them worse off once they retire. Doctors are the latest group to strike in protest over having to work longer before retiring and having to pay higher national insurance contributions.
So, are the doctors justified in their protests? They are currently on a final-salary pension scheme, which is a very generous scheme, although it is being phased out and replaced with a career average scheme, which will have big implications for doctors’ pensions. Furthermore, there was an overhaul of their pensions in 2008, thus the criticism that further changes are now being made to make them even worse off. Doctors do pay higher national insurance contributions than other occupations, such as teachers and they will naturally receive a higher pension than other NHS workers, such as nurses simply because they earn more. However, this does have big implications for their future.
Inequality is a big issue across the UK and this doesn’t only refer to income. Those earning higher salaries are more likely to live longer than the average worker. So, we see life expectancy inequality as well. The consequence of this is that once an individual retires at say 60, if your life expectancy is 85, then you have 25 years to live in retirement receiving whatever pension you have accumulated throughout your working life. If, however, your life expectancy is only 75, perhaps because of your background, your occupation, your health, then you will only spend 15 years in retirement. The person that lives longer therefore receives significantly more in pension payments and if this differing life expectancy is related to your occupation and thus your salary, then inequality of income clearly has some very wide implications for pension schemes and rates of contribution.
There are, of course, wider effects of any industrial action by doctors. Whilst some may agree with their view that this further pension reform is unfair, if any strike action does take place there will be wider economic effects. Those in need of treatment may have to delay it and if that means more people taking sick days, then the economic cost to the economy could be significant. The following articles consider the latest controversy in public-sector pensions.
Report
Independent Public Service Pensions Commission Final Report HM Treasury, Pensions Commission March 2011
Articles
Doctors’ strike: how the cost of NHS pensions soared Telegraph, Matthew Holehouset (21/6/12)
Are doctors’ pensions too generous Guardian, Hillary Osborne and Jill Insley (21/6/12)
Lansley: ‘Doctors’ pension scheme is generous’ BBC News (21/6/12)
Doctors get a nasty taste of Gordon Brown’s pension medicine Telegraph, Philip Johnston (18/6/12)
Doctors wrong on pensions, says Hutton Financial Times, Sarah Neville and Norma Cohen (19/6/12)
BMA ‘Inherent unfairness’ in doctor pensions BBC Radio 4 Today (21/6/12)
Reluctant move against intransigent government Scotsman, Dr Brian Keighley (21/6/12)
Will you be affected by the doctors’ strikes? BBC News (15/6/12)
Questions
- Explain the main factors that are contributing towards the so-called pensions crisis. In each case, is it a demand-side or supply-side issue?
- What are the main proposals to tackling the pensions crisis (not just for Doctors)?
- What is the difference between a career average and a final salary pension scheme? Which is better for (a) those on a higher salary at the end of their career and (b) those who are on a relatively lower salary at the end of their career? Make sure you explain your thinking!!
- What are the arguments both for and against this new round of pension reforms for doctors? Do you think the doctors are justified in taking strike action?
- What are the wider implications of industrial action? Think about the effect on individuals and on the economic performance of the wider economy.
- To what extent is it equitable that public sector workers should pay more in contributions and retire at the same age as the state pension age?
- How might higher contributions affect the incentive to work? What could we see happen to labour supply? Think about both income and substitution effects.
Countries differ considerably in terms of the number of hours people work.
Despite the criticisms levelled at Greece, with some claiming that Greek workers are ‘lazy’, according to 2010 figures, the average worker in Greece worked 2109 hours per year – more than in any other European country. The average German worker worked 1419 hours and the average Dutch worker only 1377.
Internationally, amongst developed countries, Korea has the highest number of working hours per worker at 2193 per year. In the USA, the figure is 1778 hours and in the UK it’s 1647. (Click on chart below for a larger version.)
But working long hours does not mean working more productively. Generally the countries in which people work longer hours have lower output per hour.
The following podcast and articles look at the relationship between hours worked and productivity and consider which way the causality lies. They also look at related issues such as the proportion of part-time working and the length of annual paid holidays.
Podcast
Hardest Working Nations (also at) More or Less: BBC Radio 4, Tim Harford talks to Jon Messenger from the ILO (18/5/12)
Articles
Who works the longest hours? BBC News Magazine, Wesley Stephenson (23/5/12)
Are Greeks the hardest workers in Europe? BBC News Magazine, Charlotte McDonald (26/2/12)
Book
Working Time around the World ILO, Sangheon Lee, Deirdre McCann and Jon C. Messenger (Routledge, 2007)
Data
International Comparisons of Productivity – 2010 – Final Estimates: Statistical Bulletin ONS (6/3/12)
International Comparisons of Productivity – 2010 – Final Estimates: Data ONS (6/3/12)
Productivity Statistics OECD
Table 8: Average annual working time: Hours per worker Employment and Labour Markets, OECD
Questions
- Which countries tend to work the longest hours?
- Would cutting working hours, either through legislation or by agreement with companies, allow more people to be employed? Explain why it might be more complicated than this.
- What is the relationship between labour productivity per hour and the average number of hours worked per worker? Do people work longer hours because they are less productive or are they less productive because they work longer hours?
- Why factors determine labour productivity?
- Why may average hours worked be deceptive in terms of assessing how hard people are working?
- Why do US workers work more hours per year on average than UK workers?
There are also some longer-term consequences, in particular for those who have been out of work for some time. They lose their skills, making it harder to find a job and this can pose costs to employers and further costs to the government through re-training. As such, government initiatives to tackle youth unemployment have never been more important.