Artificial Intelligence (AI) is transforming the way we live and work, with many of us knowingly or unknowingly using some form of AI daily. Businesses are also adopting AI in increasingly innovative ways. One example of this is the use of pricing algorithms, which use large datasets on market conditions to set prices.
While these tools can drive innovation and efficiency, they can also raise significant competition concerns. Subsequently, competition authorities around the world are dedicating efforts to understanding how businesses are using AI and, importantly, the potential risks its use may pose to competition.
How AI pricing tools can enhance competition
The use of AI pricing tools offers some clear potential efficiencies for firms, with the potential to reduce costs that can potentially translate into lower prices for consumers.
Take, for instance, industries with highly fluctuating demand, such as airlines or hotels. Algorithms can enable businesses to monitor demand and supply in real time and respond more quickly, which could help firms to respond more effectively to changing consumer preferences. Similarly, in industries which have extensive product ranges, like supermarkets, algorithms can significantly reduce costs and save resources that are usually required to manage pricing strategies across a large range of products.
Furthermore, as pricing algorithms can monitor competitors’ prices, firms can more quickly respond to their rivals. This could promote competition by helping prices to reach the competitive level more quickly, to the benefit of consumers.
How AI pricing tools can undermine competition
However, some of the very features that make algorithms effective can also facilitate anti-competitive behaviour that can harm consumers. In economic terms, collusion occurs when firms co-ordinate their actions to reduce competition, often leading to higher prices. This can happen both explicitly or implicitly. Explicit collusion, commonly referred to as illegal cartels, involves firms agreeing to co-ordinate their prices instead of competing. On the other hand, tacit collusion occurs when firms’ pricing strategies are aligned without a formal agreement.
The ability for these algorithms to monitor competitors’ prices and react to changes quickly could work to facilitate collusion, by learning to avoid price wars to maximise long-term profits. This could result in harm to consumers through sustained higher prices.
Furthermore, there may be additional risks if competitors use the same algorithmic software to set prices. This can facilitate the sharing of confidential information (such as pricing strategies) and, as the algorithms may be able to predict the response of their competitors, can facilitate co-ordination to achieve higher prices to the detriment of consumers.
This situation may resemble what is known as a ‘hub and spoke’ cartel, in which competing firms (the ‘spokes’) use the assistance of another firm at a different level of the supply chain (e.g. a buyer or supplier that acts as a ‘hub’) to help them co-ordinate their actions. In this case, a shared artificial pricing tool can act as the ‘hub’ to enable co-ordination amongst the firms, even without any direct communication between the firms.
In 2015 the CMA investigated a cartel involving two companies, Trod Limited and GB Eye Limited, which were selling posters and frames through Amazon (see linked CMA Press release below). These firms used pricing algorithms, similar to those described above, to monitor and adjust their prices, ensuring that neither undercut the other. In this case, there was also an explicit agreement between the two firms to carry out this strategy.
What does this mean for competition policy?
Detecting collusion has always been a significant challenge for the competition authorities, especially when no formal agreement exists between firms. The adoption of algorithmic pricing adds another layer of complexity to detection of cartels and could raise questions about accountability when algorithms inadvertently facilitate collusion.
In the posters and frames case, the CMA was able to act because one of the firms involved reported the cartel itself. Authorities like the CMA depend heavily on the firms involved to ‘whistle blow’ and report cartel involvement. They incentivise firms to do this through leniency policies that can offer firms reduced penalties or even complete immunity if they provide evidence and co-operate with the investigation. For example, GB eye reported the cartel to the CMA and therefore, under the CMA’s leniency policy, was not fined.
But it’s not all doom and gloom for competition authorities. Developments in Artificial Intelligence could also open doors to improved detection tools, which may have come a long way since the discussion in a blog on this topic several years ago. Competition Authorities around the world are working diligently to expand their understanding of AI and develop effective regulations for these rapidly evolving markets.
Articles
Questions
- In what types of markets might it be more likely that artificial intelligence can facilitate collusion?
- How could AI pricing tools impact the factors that make collusion more or less sustainable in a market?
- What can competition authorities do to prevent AI-assisted collusion taking place?
You may have recently noticed construction workers from different businesses digging up the roads/pavements near where you live. You may also have noticed them laying fibre optic cables. Why has this been happening? Does it make economic sense for different companies to dig up the same stretch of pavement and lay similar cables next to one another?
For many years the UK had one national fixed communication network that was owned by British Telecom (BT) – the traditional phone landline made from copper wire. This is now operated by OpenReach – part of the BT group but a legally separate division. In addition to this national infrastructure, Virgin Media (formed in 2007 from the merged cable operators, Telewest and NTL) has gradually built up a rival fixed broadband network that now covers just over 50 per cent of the country.
Although customers have only had very limited choice over which fixed communication network to use, they have had far greater choice over which Internet service provider (ISP) to sign up for. This has been possible as the industry regulator, Ofcom, forces OpenReach to provide rival ISPs such as Sky Broadband, TalkTalk and Zen with access to its network.
Expansion of the fibre optic network
Recent government policy has tried to encourage and incentivise the replacement of the copper wire network with one that is fully fibre. This is often referred to as Fibre to the Premises (FTTP) or Fibre to the Home (FTTH). A fixed network of fully fibre broadband enables much faster download speeds and many argue that it is vital for the future competitiveness of the UK economy.
Replacing the existing fixed communication network with fibre optic cables is expensive. It can involve major civil works: i.e. the digging up of roads and pavements to install new ducts to lay the fibre optic cables inside.
Over a hundred companies, that are not part of either OpenReach or Virgin Media O2 (the parent company of Virgin Media), have recently been digging up pavements/roads and laying new fibre optic cables. Known as alternative network providers (altnets) or independent networks, these businesses vary in size, with many of them securing large loans from banks and private investors. By the middle of 2023, 2.5 million premises in the UK had access to at least two or more of these independent networks.
After a slow initial response to the altnets, OpenReach has recently responded by rapidly installing FTTP. The business is currently building 62 000 connections every week and plans to have 25 million premises connected by the end of 2026. In July 2022, Virgin Media O2 announced that it was establishing a new joint venture with InfraVia Capital Partners. Called Nexfibre, this business aims to connect 5 million premises to FTTP by 2026.
Is the fibre optic network a natural monopoly?
Some people argue that the fixed communication network is an example of a natural monopoly – an industry where a single firm can supply the whole market at a lower average cost than two or more firms. To what extent is this true?
An industry is a natural monopoly where the minimum efficient scale of production (MES) is larger than the market demand for the good/service. This is more likely to occur where there are significant economies of scale. Digging up roads/pavements, installing new ducts and laying fibre optic cable are clear examples of fixed costs. Once the network is built, the marginal cost of supplying customers is relatively small. Therefore, this industry has significant economies of scale and a relatively large MES. This has led many people to argue that building rival fixed communication networks is wasteful duplication and will lead to higher costs and prices.
However, when judging if a sector is a natural monopoly, it is always important to remember that a comparison needs to be made between the MES and the size of the market. An industry could have significant economies of scale, but not be an example of a natural monopoly if the market demand is significantly larger than the MES.
In the case of the fixed communication network, the size of the market will vary significantly between different regions of the country. In densely populated urban areas, such as large towns and cities, the demand for services provided via these networks is likely to be relatively large. Therefore, the MES could be smaller than the size of the market, making competition between network suppliers both possible and desirable. For example, competition may incentivise firms to innovate, become more efficient and reduce costs.
Research undertaken for the government by the consultancy business, Frontier Economics, found that at least a third of UK households live in areas where competition between three or more different networks is economically desirable.
By contrast, in more sparsely populated rural areas, demand for the services provided by these networks will be smaller. The fixed costs per household of installing the network over longer distances will also be larger. Therefore, the MES is more likely to be greater than the size of the market.
The same research undertaken by Frontier Economics found that around 10 per cent of households live in areas where the fixed communication network is a natural monopoly. The demand and cost conditions for another 10 per cent of households meant it is not commercially viable to have any suppliers.
Therefore, policies towards the promotion of competition, regulation, and government support for the fixed communication network might have to be adjusted depending on the specific demand and cost conditions in a particular region.
Articles
Review
Questions
- Explain the difference between fixed and wireless communication networks.
- Draw a diagram to illustrate a profit-maximising natural monopoly. Outline some of the implications for allocative efficiency.
- Discuss some of the issues with regulating natural monopolies, paying particular attention to price regulation.
- The term ‘overbuild’ is often used to describe a situation where more than one fibre broadband network is being constructed in the same place. Some people argue that incumbent network suppliers deliberately choose to use this term to imply that the outcome is harmful for society. Discuss this argument.
- An important part of government policy in this sector has been the Duct and Pole Access Strategy (DPA). Illustrate the impact of this strategy on the average cost curve and the minimum efficient scale of production for fibre broadband networks.
- Draw a diagram to illustrate a region where (a) it is economically viable to have two or more fibre optic broadband network suppliers and (b) where it is commercially unviable to have any broadband network suppliers without government support.
- Some people argue that network competition provides strong incentives for firms to innovate, to become more efficient and reduce costs. Draw a diagram to illustrate this argument.
- Explain why many ‘altnets’ are so opposed to OpenReach’s new ‘Equinox 2’ pricing scheme for its fibre network.
Politicians, business leaders, climate scientists, interest groups and journalists from across the world have been meeting in Dubai at the COP28 climate summit (the 28th annual meeting of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC)). The meeting comes at a time when various climate tipping points are being reached or approached – some bad, but some good. Understanding these tipping points and their implications for society and policy requires understanding not only the science, but also the various economic incentives affecting individuals, businesses, politicians and societies.
Tipping points
A recent report (see first reference in articles section below) identified various climate tipping points. These are when global temperatures rise to a point where various domino effects occur. These are adverse changes to the environment that gather pace and have major effects on ecosystems and the ability to grow food and support populations. These, in turn, will have large effects on economies, migration and political stability.
According to the report, five tipping points are imminent with the current degree of global warming (1.2oC). These are:
- Melting of the Greenland ice sheet;
- Melting of the West Antarctic ice sheet;
- Death of warm-water coral reefs;
- Collapse of the North Atlantic Subpolar Gyre circulation, which helps to drive the warm current that benefits Western Europe;
- Widespread rapid thawing of permafrost, where tundra without snow cover rapidly absorbs heat and releases methane (a much more powerful source of global warming than CO2).
With global warming of 1.5oC, three more tipping points are likely: the destruction of seagrass meadows, mangrove swamps and the southern part of the boreal forests that cover much of northern Eurasia. As the temperature warms further, other tipping points can interact in ways that drive one another, resulting in tipping ‘cascades’.
But the report also strikes an optimistic note, arguing that positive tipping points are also possible, which will help to slow global warming in the near future and possibly reverse it further in the future.
The most obvious one is in renewable energy. Renewable power generation in many countries is now cheaper than generation from fossil fuels. Indeed, in 2022, over 80% of new electricity generation was from solar and wind. And as it becomes cheaper, so this will drive investment in new renewable plants, including in small-scale production suitable for use in developing countries in parts not connected to a grid. In the vehicle sector, improved battery technology, the growth in charging infrastructure and cheaper renewable sources of electricity are creating a tipping point in EV take-up.
Positive tipping points can take place as a result of changing attitudes, such as moving away from a meat-intensive diet, avoiding food waste, greater use of recycling and a growth in second-hand markets.
But these positive tipping points are so far not strong enough or quick enough. Part of the problem is with economic incentives in market systems and part is with political systems.
Market failures
Economic decisions around the world of both individuals and firms are made largely within a market environment. But the market fails to take into account the full climate costs and benefits of such decisions. There are various reasons why.
Externalities. Both the production and consumption of many goods, especially energy and transport, but also much of agriculture and manufacturing, involve the production of CO2. But the costs of the resulting global warming are not born directly by the producer or consumer. Instead they are external costs born by society worldwide – with some countries and individuals bearing a higher cost than others. The result is an overproduction or consumption of such goods from the point of view of the world.
The environment as a common resource. The air, the seas and many other parts of the environment are not privately owned. They are a global ‘commons’. As such, it is extremely difficult to exclude non-payers from consuming the benefits they provide. Because of this property of ‘non-excludability’, it is often possible to consume the benefits of the environment at a zero price. If the price of any good or service to the user is zero, there is no incentive to economise on its use. In the case of the atmosphere as a ‘dump’ for greenhouse gases, this results in its overuse. Many parts of the environment, however, including the atmosphere, are scarce: there is rivalry in their use. As people increase their use of the atmosphere as a dump for carbon, so the resulting global warming adversely affects the lives of others. This is an example of the tragedy of the commons – where a free resource (such as common land) is overused.
Inter-generational problems. The effect of the growth in carbon emissions is long term, whereas the benefits are immediate. Thus consumers and firms are frequently prepared to continue with various practices, such as driving, flying and using fossil fuels for production, and leave future generations to worry about their environmental consequences. The problem, then, is a reflection of the importance that people attach to the present relative to the future.
Ignorance. People may be contributing to global warming without realising it. They may be unaware of which of the goods they buy involve the release of carbon in their production or how much carbon they release when consumed.
Political failures
Governments, whether democratic or dictatorships, face incentives not to reduce carbon emissions – or to minimise their reduction, especially if they are oil producing countries. Reducing carbon involves short-term costs to consumers and this can make them unpopular. It could cost them the next election or, in the case of dictatorships, make them vulnerable to overthrow. What is more, the oil, coal and gas industries have a vested interest in continuing the use of fossil fuels. Such industries wield considerable political power.
Even if governments want the world to reduce carbon emissions, they would rather that the cost of doing so is born less by their own country and more by other countries. This creates a prisoner’s dilemma, where the optimum may be for a large global reduction in carbon emissions, but the optimum is not achieved because countries individually are only prepared to reduce a little, expecting other countries to reduce more. Getting a deal that is deemed ‘fair’ by all countries is very difficult. An example is where developing countries, may feel that it is fair that the bulk of any cuts, if not all of them, should be made by developed countries, while developed countries feel that fixed percentage cuts should be made by all countries.
Policy options
If the goal is to tackle climate change, then the means is to reduce the amount of carbon in the atmosphere (or at the least to stop its increase – the net zero target). There are two possibilities here. The first is to reduce the amount of carbon emissions. The second is to use carbon capture and storage or carbon sequestration (e.g. through increased forestation).
In terms of reducing carbon emissions, the key is reducing the consumption of carbon-producing activities and products that involve emissions in their production. This can be achieved through taxes on such products and/or subsidies on green alternatives (see the blog ‘Are carbon taxes a solution to the climate emergency?‘). Alternatively carbon-intensive consumption can be banned or phased out by law. For example, the purchase of new petrol or diesel cars cold be banned beyond a certain date. Or some combination of taxation and regulation can be used, such as in a cap-and-trade system – for example, the EU Emissions Trading System (EU ETS) (see the blog ‘Carbon pricing in the UK‘). Then there is government investment in zero carbon technologies and infrastructure (e.g. electrifying railways). In practice, a range of policy instruments are needed (see the blog ‘Tackling climate change: “Everything, everywhere, all at once”‘).
With carbon capture, again, solutions can involve a mixture of market mechanisms and regulation. Market mechanisms include subsidies for using carbon capture systems or for afforestation. Regulation includes policies such as requiring filters to be installed on chimneys or banning the felling of forests for grazing land.
The main issue with such policies is persuading governments to adopt them. As we saw above, governments may be unwilling to bear the short-term costs to consumers and the resulting loss in popularity. Winning the next election or simple political survival may be their number-one priority.
COP28
The COP28 summit concluded with a draft agreement which called for the:
transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science.
This was the first COP summit that called on all nations to transition away from fossil fuels for energy generation. It was thus hailed as the biggest step forward on tackling climate change since the 2015 Paris agreement. However, there was no explicit commitment to phase out or even ‘phase down’ fossil fuels. Many scientists, climate interest groups and even governments had called for such a commitment. What is more, there was no agreement to transition away from fossil fuels for transport, agriculture or the production of plastics.
If the agreement is to be anything more than words, the commitment must now be translated into specific policy actions by governments. This is where the real test will come. It’s easy to make commitments; it’s much harder to put them into practice with policy measures that are bound to impose costs on various groups of people. What is more, there are powerful lobbies, such as the oil, coal and steel industries, which want to slow any transition away from fossil fuels – and many governments of oil producing countries which gain substantial revenues from oil production.
One test will come in two years’ time at the COP30 summit in the Amazonian city of Belém, Brazil. At that summit, countries must present new nationally determined commitments that are economy-wide, cover all greenhouse gases and are fully aligned with the 1.5°C temperature limit. This will require specific targets to be announced and the measures required to achieve them. Also, it is hoped that by then there will be an agreement to phase out fossil fuels and not just to ‘transition away’ from them.
Reasons for hope
Despite the unwillingness of many countries, especially the oil and coal producing countries, to phase out fossil fuels, there are reasons for hope that global warming may be halted and eventually even reversed. Damage will have been done and some tipping points may have been reached, but further tipping points may be averted.
The first reason is technological advance. Research, development and investment in zero carbon technologies is advancing rapidly. As we have seen, power generation from wind and solar is now cheaper than from fossil fuels. And this cost difference is likely to grow as technology advances further. This positive tipping point is becoming more rapid. Other technological advances in transport and industry will further the shift towards renewables and other advances will economise on the use of power.
The second is changing attitudes. With the environment being increasingly included in educational syllabuses around the world and with greater stress on the problems of climate change in the media, with frequent items in the news and with programmes such as the three series of Planet Earth, people are becoming more aware of the implications of climate change and how their actions contribute towards the problem. People are likely to put increasing pressure on businesses and governments to take action. Growing awareness of the environmental impact of their actions is also affecting people’s choices. The negative externalities are thus being reduced and may even become positive ones.
Articles
- Global Tipping Points
University of Exeter, Global Systems Institute, Timothy M. Lenton et al. (6/12/23)
- Report: Pivotal moment for humanity as tipping point threats and opportunities accelerate
Phys.org (6/12/23)
- Earth is closing in on catastrophic climate ‘tipping points’, over 200 scientists warn
Independent, Vishwam Sankaran (6/12/23)
- Earth on verge of five catastrophic climate tipping points, scientists warn
The Guardian, Ajit Niranjan (6/12/23)
- Cop28: King Charles warns of ‘vast, frightening experiment’ on natural world
The Guardian, Fiona Harvey, Nina Lakhani, Aletha Adu, Damian Carrington, Patrick Greenfield and Oliver Milman (1/12/23)
- UK likely to miss Paris climate targets by wide margin, analysis shows
The Guardian, Fiona Harvey (5/12/23)
- Water and the High Price of Bad Economics
Project Syndicate, Mariana Mazzucato , Partha Dasgupta, Nicholas Stern, and Johan Rockström (1/12/23)
- Fossil fuels: Can humanity really kick its addiction?
BBC News, Justin Rowlatt (10/12/23)
- Five climate change solutions under the spotlight at COP28
BBC News, Mark Poynting (6/12/23)
- COP28: Five reasons for optimism on climate
BBC News, Matt McGrath (8/12/23)
- COP28 Agreement Signals “Beginning of the End” of the Fossil Fuel Era
UN Climate Press Release (13/12/23)
- COP28 climate summit ends with deal to transition away from fossil fuels
CNBC, Ruxandra Iordache and Sam Meredith (13/12/23)
- Cop28 landmark deal agreed to ‘transition away’ from fossil fuels
The Guardian, Adam Morton, Fiona Harvey and Patrick Greenfield (13/12/23)
- COP28 draft agreement drops phaseout of fossil fuels
Financial Times, Attracta Mooney, Aime Williams and Alice Hancock (13/12/23)
- Examining COP28’s potential impact on climate change
BBC News, Matt McGrath (13/12/23)
- Cop28 failed to halt fossil fuels’ deadly expansion plans – so what now?
The Guardian, Damian Carrington (14/12/23)
- The momentum of the solar energy transition
Nature Communications, Femke Nijsse, Jean-Francois Mercure, Nadia Ameli, Francesca Larosa, Sumit Kothari, Jamie Rickman, Pim Vercoulen and Hector Pollitt (17/10/23)
COP28: Bill Gates on climate optimism, wealth and the human conditionBBC News on YouTube, Bill Gates (2/12/23)
- From the Paris agreement to COP28, how oil and gas giants try to influence the global climate agenda
The Conversation, Alain Naef (8/12/23)
- COP28: Phasedown or Phaseout, Fossil Fuels Must be Addressed to Meet 1.5C Goal
Forbes, Felicia Jackson (5/12/23)
Questions
- Use a diagram to demonstrate the effects of negative externalities in production on the level of output and how this differs from the optimum level.
- Use another diagram to demonstrate the effects of negative externalities in consumption on the level of consumption and how this differs from the optimum level.
- What was agreed at COP28?
- What incentives were included in the agreement to ensure countries stick to the agreement? Were they likely to be sufficient?
- What can governments do to encourage positive environmental tipping points?
- How may carbon taxes be used to tackle global warming? Are they an efficient policy instrument?
- What can be done to change people’s attitudes towards their own carbon emissions?
You’ve had a busy day at work. You check your watch; it’s almost 5pm. You should be packing soon – except, your boss is still in their office. You shouldn’t really be seen leaving before your boss, should you? You don’t want to be branded as ‘that guy’ – the one who is ‘not committed’, ‘not willing to go the extra mile’, ‘not flexible enough’, first out of the door’ – you don’t want to have that label pinned on your performance appraisal. After all, your boss is still hard at work, and so are your other colleagues.
So you wait, pretending to work, although you do not really do much – perhaps you’re checking Facebook, reading the news or similar. And so does your boss, not wanting to be seen leaving before anyone else. But what example is this going to set for you and your other colleagues. You all wait for someone to make the first move – a prisoner’s dilemma situation. The only difference is that it’s you who is the prisoner in this situation.
Presenteeism
What we have described is an example of presenteeism. But how would we define it? If you search the term on Google Scholar or Scopus, you will come across a number of articles in the fields of health and labour economics that define presenteeism as a phenomenon in which employees who feel physically unwell choose to go to work, or stay on at work, rather than asking for time off to get better (see, for instance, Hansen and Andersen, 2008 and several others). This is also known as sickness presenteeism.
According to Cooper and Lu (2016), however, the use of the term can be extended to describe a wider situation in which a worker is physically present at their workplace but not functioning (by reason of tiredness, physical illness, mental ill-health, peer pressure or whatever else). As explained in Biron and Saksvik (2009):
Cooper’s conceptualisation of presenteeism implied that presenteeism was a behaviour determined by specific determinants (i.e. long working hours and a context of uncertainty). This tendency to stay at work longer than required to display a visible commitment is what Simpson (1998) calls ‘competitive presenteeism’ where people compete on who will stay in the office the longest.
The effect of presenteeism
Unsurprisingly, the effect of presenteeism on the wellbeing of workers and the economic performance of firms has been looked at extensively from different angles and disciplines – including health economists, organisational behaviour and labour economists – for a recent and comprehensive review of the literature on this topic see Lohaus and Habermann (2019).
Most of these studies agree that the effects of presenteeism are negative; in particular, they identify significant negative effects on the physical health of workers (Skagen and Collins, 2016); emotional exhaustion and mental health issues (Demerouti et al, 2009); persistent productivity loss (Warren et al, 2011); lower work engagement and negative feelings (Asfaw et al, 2017) – among several others. There seems, therefore, to be plenty of convincing evidence that presenteeism is bad for everyone – business owners, managers and staff.
So next time that you find yourself stuck at work working silly hours, feeling totally unproductive and just staying to be seen, email this blog to your boss and other colleagues – and ask them if they wish to join you for a drink or a walk.
You’re welcome!
(By the way, there’s a saying that in the UK the last one to leave the office is seen as the hardest working, whereas in Germany the last one to leave the office is seen as the least efficient!)
Articles
- The problem with presenteeism
Personnel Today, Nerys Williams (5/12/13)
- Presenteeism and Why You Should Care
Linkedin, Jeffrey Smagacz (25/9/23)
- When so much at work has changed, why can’t we shake presenteeism?
BBC News, Josie Cox (24/7/23)
- What is presenteeism? Counting the cost of presenteeism in the workplace
Enhesa, Lauren Payne (4/10/23)
- Presenteeism at Work
Health Assured (20/1/20 – since updated)
- Turning the tide on presenteeism: how employers can combat the growing problem
The HR Director Magazine, David Bourne (22/5/19)
- Do I really have to be here? The curse of workplace presenteeism
RTE, Kevin Murphy (29/5/19)
- Working when sick is rising and harms you and your employer. This is why
World Economic Forum Agenda, Douglas Broom (2/5/20)
- Majority of absence and presenteeism could be addressed by ‘targeted’ employer support
Occupational health & wellbeing: Personnel Today, Ashleigh Webber (15/4/19)
- How To Break The Chains Of Presenteeism
Forbes, Jack Kelly (25/7/23)
- Eradicating Presenteeism, Absenteeism, and Leavism in the Workplace
SpiceWorks, Jonathan Munnery (7/6/23)
References
- Going ill to work–what personal circumstances, attitudes and work-related factors are associated with sickness presenteeism?
Social science & medicine, Vol 67(6), pp.956–64, Claus D Hansen and Johan Hviid Andersen (June 2008)
- Presenteeism as a global phenomenon
Cross Cultural & Strategic Management, Vol 23(2) pp.216–31, Cary L Cooper and Luo Lu (April 2016)
- Sickness presenteeism and attendance pressure factors: Implications for practice
International handbook of work and health psychology, Chapter 5, Caroline Biron and Per Øystein Saksvik (11/12/09)
- Presenteeism, Power and Organizational Change: Long Hours as a Career Barrier and the Impact on the Working Lives of Women Managers
British Journal of Management, Vol 9(1) pp.37–50, Ruth Simpson (September 1998)
- Presenteeism: A review and research directions
Human Resource Management Review, Vol 29(1), pp.43–58, Daniela Lohaus and Wolfgang Habermann (March 2019)
- The consequences of sickness presenteeism on health and wellbeing over time: A systematic review
Social Science & Medicine, Vol 161, pp.169–77, Kristian Skagen and Alison M.Collins (July 2016)
- Present but sick: a three‐wave study on job demands, presenteeism and burnout
Career Development International, Vol 14(1), pp.50–68, Evangelia Demerouti, Pascale M Le Blanc, Arnold B Bakker, Wilmar B Schaufeli and Joop Hox (2009)
- Cost burden of the presenteeism health outcome: Diverse workforce of nurses and pharmacists
Journal of Occupational and Environmental Medicine, Vol 53(1), pp.90–9, Carol L Warren, Shelley White-Means, Mona Wicks, Cyril F Chang, Dick Gourley and Muriel Rice (January 2011)
- Potential Economic Benefits of Paid Sick Leave in Reducing Absenteeism Related to the Spread of Influenza-Like Illness
Journal of occupational and environmental medicine Vol 59(9), pp.822–9, Abay Asfaw, Roger Rosa and Regina Pana-Cryan (September 2017)
Questions
- ‘Presenteeism leads to lower productivity and firm performance and should be discouraged by business owners and managers’. Discuss.
- Jack Ma, the Chinese billionaire and owner of Ali Baba, has defended his ‘996 work model’ (working 9am to 9pm for 6 days a week) as a ‘huge blessing’. Find and review some articles on this topic, and use them to write a response. Your response should be substantiated using relevant economic theory and empirical research.
- Have you or anyone you know found yourself guilty of presenteeism? Share your experience with the rest of the class, focusing on effects on productivity and your attitude towards your employer and work colleagues.
In two previous posts, one at the end of 2019 and one in July 2021, we looked at moves around the world to introduce a four-day working week, with no increase in hours on the days worked and no reduction in weekly pay. Firms would gain if increased worker energy and motivation resulted in a gain in output. They would also gain if fewer hours resulted in lower costs.
Workers would be likely to gain from less stress and burnout and a better work–life balance. What is more, firms’ and workers’ carbon footprint could be reduced as less time was spent at work and in commuting.
If the same output could be produced with fewer hours worked, this would represent an increase in labour productivity measured in output per hour.
The UK’s poor productivity record since 2008
Since the financial crisis of 2007–8, the growth in UK productivity has been sluggish. This is illustrated in the chart, which looks at the production industries: i.e. it excludes services, where average productivity growth tends to be slower. (Click here for a PowerPoint of the chart.)
Prior to the crisis, from 1998 to 2007, UK productivity in the production industries grew at an annual rate of 6.1%. From 2007 to the start of the pandemic in 2020, the average annual productivity growth rate in these industries was a mere 0.5%.
It grew rapidly for a short time at the start of the pandemic, but this was because many businesses temporarily shut down or went to part-time working, and many of these temporary job cuts were low-wage/low productivity jobs. If you take services, the effect was even stronger as sectors such as hospitality, leisure and retail were particularly affected and labour productivity in these sectors tends to be low. As industries opened up and took on more workers, so average productivity fell back. In the four quarters to 2022 Q3 (the latest data available), productivity in the production industries fell by 6.8%.
If you project the average productivity growth rate from 1998 to 2007 of 6.1% forwards (see grey dashed line), then by 2022 Q3, output per hour in the production industries would have been 21/4 times (125%) higher than it actually was. This is a huge productivity gap.
Productivity in the UK is lower than in many other competitor countries. According to the ONS, output per hour in the UK in 2021 was $59.14 in the UK. This compares with an average of $64.93 for the G7 countries, $66.75 in France, £68.30 in Germany, $74.84 in the USA, $84.46 in Norway and $128.21 in Ireland. It is lower, however, in Italy ($54.59), Canada ($53.97) and Japan ($47.28).
As we saw in the blog, The UK’s poor productivity record, low UK productivity is caused by a number of factors, not least the lack of investment in physical capital, both by private companies and in public infrastructure, and the lack of investment in training. Other factors include short-termist attitudes of both politicians and management and generally poor management practices. But one cause is the poor motivation of many workers and the feeling of being overworked. One solution to this is the four-day week.
Latest evidence on the four-day week
Results have just been released of a pilot programme involving 61 companies and non-profit organisations in the UK and nearly 3000 workers. They took part in a six-month trial of a four-day week, with no increase in hours on the days worked and no loss in pay for employees – in other words, 100% of the pay for 80% of the time. The trial was a success, with 91% of organisations planning to continue with the four-day week and a further 4% leaning towards doing so.
The model adopted varied across companies, depending on what was seen as most suitable for them. Some gave everyone Friday off; others let staff choose which day to have off; others let staff work 80% of the hours on a flexible basis.
There was little difference in outcomes across different types of businesses. Compared with the same period last year, revenues rose by an average of 35%; sick days fell by two-thirds and 57% fewer staff left the firms. There were significant increases in well-being, with 39% saying they were less stressed, 40% that they were sleeping better; 75% that they had reduced levels of burnout and 54% that it was easier to achieve a good work–life balance. There were also positive environmental outcomes, with average commuting time falling by half an hour per week.
There is growing pressure around the world for employers to move to a four-day week and this pilot provides evidence that it significantly increases productivity and well-being.
Articles
- Results from world’s largest 4 day week trial bring good news for the future of work
4 Day Week Global, Charlotte Lockhart (21/2/23)
- Four-day week: ‘major breakthrough’ as most UK firms in trial extend changes
The Guardian, Heather Stewart (21/2/23)
- Senedd committee backs four-day working week trial in Wales
The Guardian, Steven Morris (24/1/23)
- ‘Major breakthrough’: Most firms say they’ll stick with a four-day working week after successful trial
Sky News, Alice Porter (21/2/23)
- Major four-day week trial shows most companies see massive staff mental health benefits and profit increase
Independent, Anna Wise (21/2/23)
- Four-day week: Which countries have embraced it and how’s it going so far?
euronews, Josephine Joly and Luke Hurst (23/2/23)
- Firms stick to four-day week after trial ends
BBC News, Simon Read, Lucy Hooker & Emma Simpson (21/2/23)
- The climate benefits of a four-day workweek
BBC Future Planet, Giada Ferraglioni and Sergio Colombo (21/2/23)
- Four-day working week: why UK businesses and workers will continue with new work pattern, plus pros and cons
National World, Rochelle Barrand (22/2/23)
- Most companies in UK four-day week trial to continue with flexible working
Financial Times, Daniel Thomas and Emma Jacobs (21/2/23)
- The pros and cons of a four-day working week
Financial Times, Editorial (13/2/23)
- Explaining the UK’s productivity slowdown: Views of leading economists
VoxEU, Ethan Ilzetzki (11/3/20)
- Why the promised fourth industrial revolution hasn’t happened yet
The Conversation, Richard Markoff and Ralf Seifert (27/2/23)
Questions
- What are the possible advantages of moving to a four-day week?
- What are the possible disadvantages of moving to a four-day week?
- What types of companies or organisations are (a) most likely, (b) least likely to gain from a four-day week?
- Why has the UK’s productivity growth been lower than that of many of its major competitors?
- Why, if you use a log scale on the vertical axis, is a constant rate of growth shown as a straight line? What would a constant rate of growth line look like if you used a normal arithmetical scale for the vertical axis?
- Find out what is meant by the ‘fourth industrial revolution’. Does this hold out the hope of significant productivity improvements in the near future? (See, for example, last link above.)