There’s been a lot of bad news about the economy, but perhaps things are looking up. Inflation is now at 4% and the latest data suggests that unemployment has fallen, with more jobs being created in the private sector. An estimated 143,000 jobs were created, many of which were full-time and the ILO measure if unemployment is down by some 17,000. There is still some doom and gloom, as growth in annual average earnings has fallen slightly and this will undoubtedly affect retail sales. Numbers claiming JSA have also increased marginally to 1.5 million and youth unemployment has seen a small increase to 20.4%. A big area of concern is that unemployment might rise in the coming months due to the time lag. Growth in the last quarter of 2010 was negative and this could increase unemployment when the full effects are felt in the labour market later in the year. Howard Archer, the Chief Economist at HIS Global Insight had this to say about the latest data.
‘Despite the overall firmer tone of the latest labour market data, we retain the view that unemployment is headed up over the coming months. We suspect that likely below-trend growth will mean that the private sector will be unable to fully compensate for the increasing job losses in the public sector that will result from the fiscal squeeze that is now really kicking in. Indeed, we believe that private sector companies will become increasingly careful in their employment plans in the face of a struggling economy and elevated input costs.’
The wage price spiral hasn’t begun as many though, and this may encourage the Bank of England to keep interest rates down, especially as inflation has come down to 4% and concerns about growth still remain. So despite good news about unemployment overall falling, young workers, women and public sector workers have not benefited. Youth unemployment is up, more women are claiming JSA and more jobs in the public sector are expected to be cut this year. The following articles consider the implications.
UK Unemployment: What the experts say Guardian (13/4/11)
Good news on jobs BBC News blogs: Stephanomics, Stephanie Flanders (13/4/11)
Unemployment falls, but young are left on the shelf Independent, Sean O’Grady (14/4/11)
Unemployment falls but jobs market remains fragile Telegraph, Louisa Peacock (14/4/11)
UK unemployment data reveals downturn victims as jobless total drops Guardian, Heather Stewart (13/4/11)
FTSE boosted by dip in unemployment The Press Association (14/4/11)
Unemployment falls: reaction (including video) Telegraph (14/4/11)
Questions
- What is the ILO method of measuring unemployment?
- To what extent does the change in unemployment and inflation conform with the Phillips curve?
- What can explain the fall in the unemployment rate, despite the decline in the economy in the last quarter of 2010?
- Explain how the FTSE was affected by the lower unemployment rate.
- Why is unemployment expected to rise later this year?
- Why has there been a rise in the numbers claiming JSA, despite unemployment falling?
- What is meant by the wage-price spiral and why has it not occured?
In March 2009, the Bank of England’s base rate was slashed to 0.5% in a bid to boost aggregate demand and stimulate the UK economy. And there it has remained for almost 2 years and as yet, no change is in sight. In the February 2011 meeting of the Monetary Policy Committee (who are responsible for setting interest rates to keep inflation on target), the decision was to keep interest rates at 0.5% rather than raise them to tackle high and rising UK inflation. Those in favour of keeping interest rates at this record low argue that any increase could damage the UK’s ability to recover and may lead to the dreaded double-dip recession. This is of particular concern given the economy’s performance in the last quarter of 2010.
However, one group that will certainly not be happy is the savers. With instant-access savings accounts paying on average just 0.84% before tax and with inflation at 3.7%, savers aren’t just not gaining much interest, but are actually seeing the value of their money in real terms fall. Howard Archer of HIS Global Insight said:
“For now, we retain our view that the Bank of England will hold off from raising interest rates until the latter months of the year. Even if interest rates do rise in the near term, the likelihood is still that they will rise only gradually and remain very low compared to past norms.
Monetary policy will need to stay loose for an extended period to offset the impact of the major, sustained fiscal squeeze. Consequently, we retain the view that interest rates will only rise to 2pc by the end of 2012.”
Following some speculation that the Bank of England may succumb to the pressure of inflation and hike up interest rates (markets had priced in a 20% chance of a rate rise), sterling did take a hit, but after the decision to keep rates at 0.5%, sterling recovered against the dollar. There is a belief amongst some traders that rates will rise in May, but others believe rates may remain at 0.5% until much later in 2011, as the country aims to avoid plunging back into recession. Of 49 economists that responsed to a poll by Reuters, three quarters of them said that rates would rise by the end of 2011, with median forecasts predicting a rise around November. This is certainly a space to watch, as it has implications for everyone in the UK and for many in countries around the world.
BOE leaves bank rate unchanged at 0.5% at Feb meeting Automated Trader (10/2/11)
Economists predict interest rates will rise in November Telegraph, Szu Ping Chan (11/2/11)
UK May rate hike view holds firm after BOE Reuters, Kirsten Donovan (10/2/11)
Interest rates: What the economists say Guardian (10/2/11)
Fixed rate mortgages becoming more expensive BBC News (10/2/11)
Bank rate: savers’ celebrations on hold Telegraph, Richard Evans (10/2/11)
Inflation fears turn up heat ahead of bank rate decision City AM, Julian Harris (10/2/11)
Sterling takes BOE in its stride, higher rate talk aids Reuters, Anirban Nag (10/2/11)
Bank of England holds interest rates of 0.5% Telegraph, Emma Rowley (10/2/11)
Questions
- Why are interest rates such an important tool of monetary policy? Think about which variables of aggregate demand will be affected by the Bank of England’s decision.
- What is the relationship between interest rates and inflation?
- What explanation is there for the fall in the value of sterling following speculation that interest rates may rise? Why did sterling recover after the Bank of England’s decision?
- How has the recent speculation affected fixed rate mortgages?
- What does the Telegraph article about “savers’ celebrations on hold” mean about the ‘real value’ of money and savings?
- What are (a) the arguments for keeping interest rates at 0.5% and (b) the arguments for raising interest rates? Who wins and loses in each case?
- Are there any other government policies that could be used to combat inflation, without creating the possibility of a double-dip recession? Why haven’t they been used?
The recession caused a large rise in unemployment in many countries. In the USA the rise has been particularly steep, where unemployment now stands at 14.5 million, or 9.8% of the labour force. Unemployment has continued to rise despite renewed growth in the US economy, where the latest annual real GDP growth is 2.6% (measured in Q3 2010). The rise in unemployment has been blamed on ‘sticky wages’ – i.e. the reluctance of wage rates to fall.
But are wages genuinely sticky as far as the average worker is concerned? They may be in many specific jobs with specific employers, but many workers made redundant then find work in different jobs at lower rates of pay. For them, their wage has fallen, even if particular jobs are paying the same as before.
So what are the consequences of this? Does the willingness of workers to accept lower paid jobs mean that the labour market is flexible and that people will thus price themselves into work? If so, why is employment still rising? Or does a reduction in real wages for many people dampen spending and hence aggregate demand, thereby reducing the demand for labour? If so, why is GDP rising?
The following articles look at the apparent stickiness of wages and the implications for the labour market and the macroeconomy.
Articles
Downturn’s Ugly Trademark: Steep, Lasting Drop in Wages Wall Street Journal, Sudeep Reddy (11/1/11)
The Causes of Unemployment Seeking Alpha, Brad DeLong (13/1/11)
Sticky, sticky wages The Economist blogs: Free Exchange, R.A. (11/1/11)
The Causes of Unemployment New York Times blogs: Wonkish, Paul Krugman (16/1/11)
America’s union-bashing backlash Guardian, Paul Harris (5/1/11)
Data
Federal Reserve Economic Data: FRED Federal Reserve Bank of St. Louis (US macroeconomic datasets)
United States GDP Growth Rate Trading Economics
US unemployment statistics Bureau of Labor Statistics
Questions
- Why might nominal wages be sticky downwards in specific jobs in specific companies?
- Why might nominal average wages in the economy not be sticky downwards?
- Why is unemployment rising in the USA?
- Why might there be a problem of hysteresis in the USA that provides an explanation of the reluctance of unemployment to fall?
- Why might a fall in wages end up being contractionary?
- What lessons can be learned from the Great Depression about cures for unemployment?
- How might unemployment be brought down in the USA?
- Why may making wages somewhat more flexible, as opposed to perfectly flexible, not be a good thing?
GDP (or Gross Domestic Product) measures the value of output produced within a country over a 12-month period. It is this figure which we use to see how much the economy is growing (or shrinking). We can also look at how much different sectors contribute towards this figure. Over the past few decades, there has been a significant change in the output of different sectors, as a percentage of GDP, within the UK economy. In particular, the contribution of manufacturing has diminished, while services have grown rapidly.
However, there is one specific area that is making a growing contribution towards UK GDP and is expected to see acceleration in its growth rate by some 10% annually over the next few years: the internet. Although the internet is not an economic sector, the Boston Consulting Group (BCG) said that if it was, it would be the UK’s fifth largest sector and according to a report by Google, it is worth approximately £100 billion per year to the UK economy. Furthermore, it is an area in which the UK is one of the leading exporters. The emergence of the internet has transformed industries and individual businesses and the trend looks set to continue. The report by Google found that some 31 million adults bought goods and services online over the past year, spending some £50 billion.
What are the benefits for businesses of internet shopping and does it have an impact on the retail outlets on Britain’s highstreets? The answer is undoubtedly yes, but is it good or bad? What does the emergence of this new ‘sector’ mean for the UK economy?
Articles
UK net economy ‘worth billions’ BBC News (28/10/10)
UK’s internet industry worth £100 billion report Guardian, James Robinson (28/10/10)
’Nation of internet shopkeepers’ pumps £100 billion into economy Independent, Nick Clark (28/10/10)
UK internet is now worth £100bn to UK economy Telegraph, Rupert Neate (28/10/10)
Google at 10 BBC News, Success Story, Tim Weber (4/9/08)
Britain’s £100bn internet economy leads the world in online shopping Guardian, James Robinson (28/10/10)
Report
How the internet is transforming the UK economy The Boston Consulting Group October 2010
Government Statistics
United Kingdom: National Accounts, The Blue Book 2009 Office for National Statistics 2009 edition
Questions
- What is the UK’s GDP? How does it compare with other countries and how has it changed over the past 10 years?
- How does internet provision contribute towards growth? Think about the AD curve. Illustrate this on a diagram and explain the effect on the main macroeconomic objectives.
- Is there a problem with becoming too dependent on this emerging sector?
- How has the internet and online environment helped businesses? Think about the impact on costs and revenue and hence profits.
- What explanation is there for the change in the structure of the UK economy that we have seen over the past few decades.
- Will internet shopping ever replace the ‘normal’ method of shopping? Explain your answer.
Multinational companies bring many advantages to host nations. Whether it is creating jobs, income, investment or sharing technology, governments across the world try to encourage firms to set up in their country. However, once a multinational has been set up, it’s natural for the owners and managers to favour their own countries when decisions have to be made. If there is some new investment planned, where to put it will be a key decision and not just for the firm. New investment may mean new jobs and better working environments. If job cuts are necessary, the decision-maker’s country of origin may determine where they occur.
This so-called ‘Headquarters effect’ is apparent in the case of Siemens, which has guaranteed the safety of all German jobs, both now and in the future. Those employees in the UK are understandably concerned. If job cuts are needed and German workers will not be affected, it takes little intelligence to realise that their jobs may be at risk. The following discussion by Robert Peston considers this issue.
British jobs, for German workers BBC News blogs, Peston’s Picks, Robert Peston (7/10/10)
Questions
- What is the ‘Headquarters effect’?
- The article states: “The HQ effect implies that when a British plant is owned by an overseas company, it may be more vulnerable to being closed down if the going gets tough”. Why is this the case?
- What are the advantages and disadvantages of multinational investment to (a) the multinational company and (b) the host country?
- How is multinational investment affected by the business cycle?
- It Trent UK were to shut down or if a particular office was closed in one part of the country, what type of unemployment would be created?