The Conservatives have pledged that, if they win the next election, they will hold a referendum in 2017 on whether or not the UK should remain in the EU. The Prime Minister has also said that he will renegotiate the terms of UK membership and push for reforms to the EU to cut administrative costs, reduce intervention and make the EU more competitive. We are likely to be bombarded with arguments for and against membership over the coming months.
In a contribution to the debate, the CBI has just published research showing that membership of the EU benefits the UK by up to £78 billion per year – £3000 per household. It also conducted a poll of its members which shows that the vast majority (78%, including 77% of SMEs) want to remain part of the EU, believing that membership brings net benefits to their business and the economy more generally.
However, as the Director-General of the CBI, John Cridland, said:
But the EU isn’t perfect and there is a growing unease about the creeping extension of EU authority. Europe has to become more open, competitive and outward looking if we are to grow and create opportunities and jobs for all our citizens.
The following articles and documents look at the CBI’s arguments.
Articles
Britain must stay in the European Union, says CBI Independent, Margareta Pagano (4/11/13)
Britain must stay in EU, says business lobby group The Guardian, Katie Allen (3/11/13)
EU membership: what the CBI have said The Telegraph, Rebecca Clancy (4/11/13)
CBI says staying in EU ‘overwhelmingly’ best for business BBC News (4/11/13)
CBI documents
In with reform or out with no influence – CBI chief makes case for EU membership CBI Press Release (4/11/13)
Our Global Future: Factsheets CBI
Questions
- Distinguish between a free trade area, a customs union, a common market and a monetary union. Which is the EU?
- Itemise the arguments for and against membership of the EU.
- What types of reform to the EU are being advocated by the CBI?
- What factors will determine the negotiating power of the UK government with other EU governments?
- How is greater fiscal integration in the eurozone likely to affect the case for and against EU membership for the UK?
A bumper harvest should be good news for farmers – but not if it drives down prices. This is the position facing many Australian farmers. After a relatively wet summer a year ago and a mild winter this year, crop yields have soared. But the prices farmers can get in wholesale markets have been so low that many have resorted to setting up their own farm shops or selling in farmers’ markets or from the backs of ‘utes’ (utility vehicles, i.e. pickup trucks) or at roadside stalls.
And the supply problem is not just one of increased domestic supply: cheap food imports, often of inferior quality, have been flooding into Australia. Increasing food exports, 
especially to Asia, would help Australian farmers, but here again there is competition in these markets from other countries.
The problem of increased Australian supply is even more serious for Australian farmers in areas where harvests have not been so good. Australia is a huge country and conditions, although generally favourable this year, have been poor in some areas. Here farmers face the double disaster of low output and low prices.
Australian dairy farmers too are facing problems of falling prices. Price deregulation and the monopsony power of supermarkets have driven down 
the price of milk and other dairy products. Since deregulation in 2000, the number of dairy farms has halved, as many smaller family farms go out of business and larger ‘industrial-scale’ farms grow.
So are there any solutions? The BBC article looks at things being done in Tasmania to help small farmers, but questions whether small farmers have much of a future more generally in Australia?
Articles
Australia’s small farmers struggling with low prices BBC News, Phil Mercer (31/10/13)
Commodity prices edge lower in October Sky News Australia (1/11/13)
Low prices spoil perfect season for Australian farmers ABC News, Eric Tlozek and Courtney Wilson (18/9/13)
Agri-businesses taking over the farm The Guardian (Australia) (6/11/13)
Data
Commodity prices Index Mundi
Agriculture in Australia Wikipedia
Farm inputs & costs Dairy Australia
Questions
- How does the fallacy of composition relate to the ‘problem’ of good harvests?
- How price elastic is the demand for specific crops likely to be? Why may individual farmers face an elasticity of demand close to infinity?
- Illustrate the problem for small farmers in Australia with a demand and supply diagram.
- Is there any way in which farmers, either individually or collectively, can make their demand less elastic?
- Comment on the following statement by a sugar cane farmer: “We’ve got that much money tied up (in the business) we just can’t walk away”. Under what circumstances would it make sense to ‘walk away’?
- How does the monopsony power of supermarkets influence the prices farmers receive?
- Discuss ways in which the federal government in Australia could support farmers.
Each year in November, the Living Wage Foundation publishes figures for the hourly living wage that is necessary for people to meet basic bills. The rate for London is calculated by the Greater London Authority and for the rest of the UK by the Centre for Research in Social Policy at Loughborough University.
The 2013 update was published on 4 November. The Living Wage was estimated to be £8.80 in London and £7.65 in the rest of the UK.
Two things need to be noted about the Living Wage rate. The first is that the figure is an average and thus does not take into account the circumstances of an individual household. Clearly households differ in terms of their size, the number of wage earners and dependants, the local costs of living, etc. Second, the figures have been reduced from what is regarded as the ‘reference’ living wage, which is estimated to be £9.08 outside London. The reason for this is that people earning higher incomes have seen their living standards squeezed since 2009, with prices rising faster than average post-tax-and-benefit wages. Thus, the Living Wage is capped to reflect the overall decline in living standards. As the Working Paper on rates outside London explains:
From 2012 onwards, two kinds of limit have been put on the amount that the Living Wage as applied can rise in any one year. The first limits the increase in the net income (after taxes and benefits) requirement for each household on which the living wage calculation is based, relative to the rise in net income that would be achieved by someone on average earnings. The second limits the increase in the living wage itself (representing gross income) relative to the increase in average earnings.
Nevertheless, despite this capping of the living wage, it is still significantly higher than the UK National Minimum Wage, which currently stands at £6.31 for those aged 21 and over. This can be seen from the chart (click here for a PowerPoint).
Paying the Living Wage is voluntary for employers, but as The Guardian reports:
A total of 432 employers are now signed up to the campaign, up from 78 this time last year, including Legal & General, KPMG, Barclays, Oxfam, Pearson, the National Portrait Gallery and First Transpennine Express, as well as many smaller businesses, charities and town halls. Together they employ more than 250,000 workers and also commit to roll out the living wage in their supply chain.
But as The Observer reports:
The number of people who are paid less than a ‘living wage’ has leapt by more than 400,000 in a year to over 5.2 million, amid mounting evidence that the economic recovery is failing to help millions of working families.
A report for the international tax and auditing firm KPMG also shows that nearly three-quarters of 18-to-21-year-olds now earn below this level – a voluntary rate of pay regarded as the minimum to meet the cost of living in the UK. The KPMG findings highlight difficulties for ministers as they try to beat back Labour’s claims of a “cost of living crisis”.
According to the report, women are disproportionately stuck on pay below the living wage rate, currently £8.55 in London and £7.45 elsewhere. Some 27% of women are not paid the living wage, compared with 16% of men. Part-time workers are also far more likely to receive low pay than full-time workers, with 43% paid below living-wage rates compared with 12% of full-timers.
But although paying a living wage may be desirable in terms of equity, many firms, especially in the leisure and retailing sectors, claim that they simply cannot afford to pay the living wage and, if they were forced to, would have to lay off workers.
The point they are making is that it is not economical to pay workers more than their marginal revenue product. But this raises the question of whether a higher wage would encourage people to work more efficiently. If it did, an efficiency wage may be above current rates for many firms. It also raises the question of whether productivity gains could be negotiated in exchange for paying workers a living wage
These arguments are discussed in the following podcast.
Podcast
Higher ‘productivity’ will increase living wage BBC Today Programme, Priya Kothari and Steve Davies (4/11/13)
Articles
UK living wage rises to £7.65 an hour The Guardian (4/11/13)
More than 5 million people in the UK are paid less than the living wage The Observer, Toby Helm (2/11/13)
Increasing numbers of Scots are paid less than living wage Herald Scotland (2/11/13)
Labour would give tax rebates to firms that pay living wage Independent, Jane Merrick (3/11/13)
Employers praise Ed Miliband’s living wage proposal Independent, Andy McSmith (3/11/13)
Miliband’s living wage tax break will raise prices, warns CBI chief The Telegraph, Tim Ross (3/11/13)
Living Wage rise provides a boost for low paid workers BBC News (4/11/13)
Information and Reports
What is the Living Wage? Living Wage Foundation
The Living Wage Centre for Research in Social Policy, Loughborough University
Living wage Mayor of London
One in five UK workers paid less than the Living Wage KPMG News Release (3/11/13)
Number of workers paid less than the Living Wage passes 5 million KPMG News Release (3/11/13)
Living Wage Research for KPMG Markit (October 2012)
Questions
- How is the Living Wage calculated?
- What are the reasons for announcing a Living Wage figure that is lower than a reference living wage? Assess these reasons.
- If there are two separate figures for the Living Wage for London and the rest of the UK, would it be better to work out a living wage for each part, or even location, of the UK?
- Why might it be in employers’ interests to pay at least the Living Wage? Does this explain why more and more employers are volunteering to pay it?
- Assess the Labour Party’s pledge, if they win the next election, that ‘firms which sign up to the living wage will receive a tax rebate of up to £1000 for every low-paid worker who gets a pay rise, funded by tax and national insurance revenue from the higher wages’.
- Which is fairer: to pay everyone at least the Living Wage or to use tax credits to redistribute incomes to low-income households?
Compared with pre-financial crisis levels, the British pound is significantly weaker when measured against a basket of foreign currencies. In this blog we provide a further update of Appreciating a depreciating pound which was published back in early December 2012. The significance of the depreciation should be seen in the context of the UK as an open, island-economy where the ratio of exports to GDP in 2012 was close to 32%.
The competitiveness of our exports is, in part, affected by the exchange rate. Floating exchange rates are notoriously volatile. For example, some of the articles below show how sensitive the British pound can be latest news on the economy. However, since the autumn of 2007 we have observed a significant depreciation of the UK exchange rate. A depreciation helps to make our exports more competitive abroad and can potentially boost aggregate demand.
Rather than simply focus on bilateral exchange rates and so at the British pound separately against other foreign currencies, we can estimate an average exchange rate against a whole bundle of currencies. The average rate is calculated by weighting the individual exchange rates by the amount of trade between Britain and the other countries. This trade-weighted exchange rate is known as the effective exchange rate.
In analysing the competitiveness of the exchange rate, we can go one step further and adjust for the average (domestic currency) price of our exports relative to the average (foreign currency) price of those goods we import. Therefore, as well as the nominal (actual) effective exchange rate we can calculate a real effective exchange rate. If the average price of our exports rises relative to the average price of imports, the real effective exchange rate rises relative to the nominal rate. It means that we are able to obtain a larger volume of imports from selling a given volume of exports.
The chart shows the nominal (actual) and real effective exchange rate for the British pound since 2001. The chart shows clearly how from the autumn of 2007 the effective exchange rate fell sharply both in nominal and real terms.
Over the period from July 2007 to January 2009 the nominal effective exchange rate fell by 26.8 per cent while the real effective exchange rate fell by 26.6 per cent. In other words, the British pound depreciated more than one-quarter over an 18-month period. In comparison, the American dollar rose by 5.3 per cent in nominal terms and by 1.9 per cent in real terms. (Click here to download a PowerPoint of the chart.)
If we move the clock forward, we observe an appreciation of the British pound between July 2011 and September 2012. Over this period, the British pound appreciated by 7.0 per cent in nominal terms and by 7.3 per cent in real terms. However, this appreciation had effectively been wiped-out when by March 2013 the nominal rate had depreciated by 6.1 per cent and by 5.6 per cent in real terms. Subsequently, there has been a slight appreciation once more. As of September, the nominal rate had risen by 4.5 per cent and the real rate by 4.8 per cent.
While, as recent figures help to demonstrate, the British pound continues on its roller-coaster ride, there has been a very marked depreciation since the giddy-days prior to the financial crisis. The facts show that when comparing the effective exchange rate in September 2013 with July 2007 the British pound was 21.8 per cent lower in nominal terms and 18.3 per cent in real terms. Over the same period, the US dollar, for example, was only 1.3 per cent lower in nominal terms and 6.1 per cent in real terms. This constitutes a major competitive boost for our exporters. Nonetheless, there remain uncertainty about just how much British exporters can take advantage of this, the amount that it will boost British growth and the impact it will make on the country’s chronic balance of trade deficit in goods which was close to 7 per cent of GDP in 2012.
Data
Statistical Interactive Database – interest and exchange rate rates data Bank of England
BIS effective exchange rate indices Bank for International Settlements
Market Data: Currencies BBC News
Recent Articles
Unexpected drop in factory output dents sterling Reuters UK, Jessica Mortimer (9/10/13)
Pound Forecasts Soar as BOE’s Carney Signals Shift: Currencies Bloombeg, Lukanyo Mnyanda and Emma Charlton (19/10/13)
Pound Advances as U.K. Financial Optimism Improves; Gilts Rise Bloombeg, Emma Charlton (7/10/13)
Re-balancing and the re-industrialisation of Britain BBC News, Linda Yueh (13/10/13)
Signs of recovery abound but with little consensus on future course Financial Times, Chris Giles and Sarah O’Connor (31/10/13)
Previous Articles
Pound depreciates Vs dollar to lowest level since Aug 16 Bloomberg, Emma Charlton (5/2/13)
Pound advances against euro on Italy speculation; Gilts decline Bloomberg, Lucy Meakin and David Goodman Alice Ross (4/3/13)
Pounding of sterling risks a currency war Scotland on Sunday, Bill Jamieson (17/2/13)
Credit ratings, the pound, currency movements and you BBC News, Kevin Peachey (25/2/13)
The Bank of England can’t just go on doing down the pound Telegraph, Jeremy Warner (21/2/13)
Sterling will continue to go down BBC News, Jim Rogers (25/2/13)
Questions
- Explain how the foreign demand for goods and assets generates a demand for British pounds. How will this demand be affected by the foreign currency price of the British pound, i.e. the number of foreign currency units per £1?
- Explain how the demand by British residents for foreign goods and assets generates a supply of British pounds. How will this supply be affected by the foreign currency price of the British pound, i.e. the number of foreign currency units per £1?
- What factors are likely to shift the demand and supply curves for British pounds on the foreign exchange markets?
- Illustrate the effect of a decrease in the demand for British goods and assets on the exchange rate (i.e. the foreign currency price of the British pound) using a demand-supply diagram.
- What is the difference between a nominal and a real effective exchange rate? Which of these is a better indicator of the competitiveness of our country’s exports?
- What factors are likely to have caused the depreciation of the British pound since 2007?
- What is meant by a deficit on the balance of trade in goods?
- What relationship exists between the demand and supply of currencies on the foreign exchange markets and the balance of payments?
As Elizabeth noted in Fuelling the Political Playing Field, there has been much debate recently about energy prices in the UK. Four of the ‘Big Six’ energy companies have now announced price rises. They average 9.1% – way above the rate of consumer price inflation and even further above the average rate of wage increases. What is more, they are considerably above the rate of increase in wholesale energy prices, which, according to Ofgem, have risen by just 1.7% in the past year.
The bosses of the energy companies have appeared before the House of Commons Energy and Climate Change Select Committee to answer for their large price increases. The energy companies claim that the increases are necessary to cover not only rising wholesale prices, but also green levies by the government and ‘network charges’ for investments in infrastructure. 
However, it is hard to see how, even taking into account all three of these possible sources of cost increases, the scale of price increases can be justified.
Another possible explanation for the price hikes is that they are partly the result of a system of transfer pricing (see). The energy industry is vertically integrated. Energy companies are not only retailers to customers, but also generators of electricity and wholesale shippers of gas. It is possible that, by the producing/shipping arms of these companies charging higher prices to their retailing arms, the retailers’ costs do indeed go up more than the wholesale market cost. The result, however, is higher profits for the producing arms of these businesses. In other words, a higher transfer price allows profits to be diverted from each company’s retailing arm to its producing arm.
This is an argument for making the wholesale market more competitive and for stopping the by-passing of this market by producing arms of companies selling directly to their retailing arms. What the companies are being accused of is an abuse of market power and possibly of colluding with each other, at least tacitly, to support the continuation of such a practice.
So is the answer a price freeze, as proposed by the Labour Party? Is it an investigation of the energy market by the Competition Commission? Or is it, at least as a first step, much more openness by the energy companies and transparency about their pricing practices? Or is it to encourage consumers to switch between energy companies, including the smaller ones, which at present account for less than 5% of energy supply? The videos, podcasts and articles consider these issues.
Webcasts and Podcasts
Energy bosses blame high bills on wholesale prices Channel 4 News, Gary Gibbon (29/10/13)
Why are energy bosses being questioned? BBC News, Stephanie McGovern (29/10/13)
Key questions Big Six energy companies must answer The Telegraph, Ann Robinson (29/10/13)
Energy bosses offer excuses for prices rises The Telegraph (29/10/13)
Energy bosses face MPs over price rises BBC News, John Moylan (29/10/13)
Energy boss ‘can’t explain’ competitors’ price hikes The Telegraph (29/10/13)
Ovo boss: Competition Commission would take too long BBC News (30/10/13)
Dale Vince: Energy market is ‘dysfunctional’ BBC Today Programme (30/10/13)
Tony Cocker: Public mistrust energy industry BBC Today Programme (30/10/13)
Ed Davey: Energy deals not just for ‘internet savvy’ BBC Today Programme (31/10/13)
Articles
Energy giants ‘charge as much as they can get away with’ The Telegraph, Peter Dominiczak (29/10/13)
UK energy markets need perestroika Financial Times (27/10/13)
Britain’s energy utilities must embrace glasnost Reuters, John Kemp (29/10/13)
Small energy firms ‘escape levies’ BBC News (30/10/13)
Is the energy market structurally flawed? BBC news, Robert Peston (30/10/13)
The energy market needs a Competition Commission investigation Fingleton Associates, John Fingleton (12/10/13)
Energy firms raised prices despite drop in wholesale costs The Guardian, Rowena Mason (29/10/13)
Only full-scale reform of our energy market will prevent endless price rises The Observer, Phillip Lee (26/10/13)
Energy Giants Blame Rising Bills On Green ‘Stealth Taxes’ Huffington Post, Asa Bennett (29/10/13)
Big Six energy firms ‘like cartel’ Belfast Telegraph (30/10/13)
Energy boss says he hasn’t done sums on green levies The Telegraph, Georgia Graham (30/10/13)
Graphic: How your energy bills have soared in ten years The Telegraph, Matthew Holehouse (30/10/13)
British energy suppliers’ explanations for price hikes just don’t add up The Guardian, Larry Elliott (31/10/13)
The 18th energy market investigation since 2001: Will this one be different? The Carbon Brief, Ros Donald (31/10/13)
Energy: Is there enough competition in the market? BBC News, Hugh Pym (26/11/13)
Information and Reports
Wholesale [electricity] market Ofgem
Wholesale [gas] market Ofgem
Response on wholesale energy costs Ofgem Press Release (29/10/13)
Response to Government’s Annual Energy Statement Ofgem Press Release (31/10/13)
Real Energy Market Reform The Labour Party
Questions
- Why may the costs of energy paid by the energy retailers to energy producers/shippers have risen more than the wholesale price?
- Explain what is meant by transfer pricing. How could transfer pricing be used to divert profits between the different divisions of a business?
- How can transfer pricing be designed by multinational companies to help them minimise their tax bills?
- Why is policing transfer pricing arrangements notoriously difficult?
- What evidence is there to show that switching between retailers by customers can help to drive retail energy prices down?
- How did the old electricity pool system differ from the current wholesale system?
- Should electricity companies be forced to pool the electricity they generate and not sell it to themselves through bilateral deals?
- Comment on the following: “The current electricity trading arrangements ‘create the very special incentive for the oligopolists. …The best of all possible worlds is where nobody invests. As supply and demand close up, the price spikes upwards, and supernormal profits result.'”
