Pay freezes and macro performance
The forum post I am setting my AS macro students this week focuses on the possible economic impact of wage cuts and pay freezes. I am hoping it will help to develop their evaluative skills and get them to apply some AD/SRAS concepts. As the UK economy continues to experience a recession, pay is under pressure. The average wage in Britain, including bonuses, fell by 0.4 per cent in the three months to March 2009 – knocking about £95 off annual salaries to £24,000. People working in the private sector are at highest risk of a wage freeze or actual wage cut and public sector workers are also at risk of pay freezes in the months ahead.
Suggested reading
Half of UK firms plan a pay freeze (Telegraph)
Pay freeze in deal to save car plants (Independent)
Osborne plans one-year public sector wage freeze (Independent)
Outlook for jobs will remain grim for several years (The Times)
Wage cuts might condemn the economy to more misery (Telegraph)
FTSE bosses get big salary rise (BBC news)
Examine some ways in which a move towards wage cuts or pay freezes might affect the macroeconomic performance of the UK economy
The forum posting is designed to encourage students to read around the subject, develop a concise written style and build evaluation skills. The Moodle system is set up so that students can only see the postings of others once they have submitted their only entry. I will post a couple of replies later on in the week.
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The Fiscal Crisis - Borrow Long - If You Can!
This is a related post to my recent blog on the scale of government borrowing and debt. The Debt Management Office is responsible for finding buyers for the new debt issued by the UK government and they have their hands full this year with the challenge of selling over £220bn worth of new securities. Edmund Conway has a fascinating blog piece here about the term structure of this debt and what is means for the cost of making the interest payments. This week the UK government issued new bonds that will not be due for repayment until 2060 when most of us will be long gone! A fifty year bond is perhaps the longest bond (gilt) to have been issued for many years. And it turns out that the average date to maturity for UK public sector debt is significantly higher than for most advanced economies.
“The UK’s debt market is peculiar. In the US, average length of the existing Treasury bonds was, at recent count, 4.7 years and falling. Because this is such a short maturity, it means the debt has to be rolled over far more often, and at every point the government runs the risk of setting in stone any changes in interest rates. In France, the average maturity is 7.1 years, in Italy 6.9 years, in Germany 6.35 and in Japan 5.7 years. In Britain, the weighted average maturity of government bonds is a whopping 14.2 years. Admittedly, as the IMF points out this is slightly lower in the wake of the crisis, but it is still significantly longer than any other major economy.”
Market failure in city gender inequality
Study of the labour market includes market failures and gender inequality. It seems to me that, ever since the start of the financial crisis that led to the recession, there has been a series of reports suggesting that if there were more women in positions of power in the city institutions that lost control of their lending, this would never have happened. This is now confirmed by a committee of MP’s (which includes only one woman) which is currently studying the role of women in the City and has been told by a (male) professor from the London School of Economics that a more cautious approach, rather than an “alpha male” one, would be beneficial. Professor Charles Goodhart explained that the more cautious and long-term outlook of women could prove to be a more positive trait than the more aggressive risk-taking stance of men. However, another LSE professor told the committee of MPs that there is a need for a change of culture in the City before this can happen. It seems that women are well-represented on the boards of the FTSE top 250 companies, but very under-represented on the boards of the FTSE 100. In Norway there is a quota system; 40% of board members must be female. Clare Dobie, of the City Women’s Network told the committee that recruiters could do much to help the problem which her organisation sees as an issue of too little demand rather than a shortage of supply of women who are good enough for the job. A report last month from the Equality and Human Rights Commission found that women working in the city are paid on average 39% less than men doing the same job. Women start on a lower salary and never make up the difference. They also earn bonuses which are up to five times smaller than those earned by their male colleagues - on average, women get bonuses of £2,875 compared with £14,554 for men.
However the gender pay gap should be addressed there does remain a practical difficulty though: John Cridland, deputy director general of business group the CBI, said “As in many other areas of business, women applying for the top jobs need more flexibility with hours and childcare responsibilities” . How long will it remain the case that it is the women who need this flexibility, and not the men?
Wall Street Partnerships and Principal Agent Problem
John Gapper has a super blog over at the FT in which he discusses the benefits that might flow from reforming bankers’ pay and restoring the partnership approach to renumeration
“Mr Thain correctly pointed out during the session that the old partnership structure of Wall Street firms, under which partners’ capital was at risk until they retired, produced better incentives in terms of risk management than bonuses based on short-term performance...This is not a bad idea but it might be extended. Why not truly replicate the partnership structure by applying those conditions to everyone who reached “partner” level - senior managing director or the equivalent at a large investment bank?”
This ties in with the idea of changing the behaviour of senior management so that they give great weight to the risks of particular investment and lending strategies and tries to avoid the myopic decision making that has proved so costly before the financial crisis.
The partnership model has applied particularly successfully in the UK with the continued success of the John Lewis Partnership. In March 2009 despite the effects of the retail recession, John Lewis announced that The company it would pay out total bonuses of £125.5m. That is the equivalent to about 13% of salary, or seven weeks’ pay.
Escaping from the Poverty Trap
There is a timely article on the existence of the poverty trap here in the Financial Times. The article draws on some of the recent research by the Centre for Social Justice which has looked at the disincentives facing people who want to earn extra income either by leaving the unemployment register or by taking a second job or working some extra hours. There are hundreds of thousands of people whose ’effective marginal tax rate‘ is well in excess of sixty per cent.
As this article in the Times makes clear “Marginal tax rates actually refer to the extra tax you pay in proportion to every extra pound you earn as your income rises.:
And for others, the net gains from earning higher gross incomes are even smaller.
The poverty trap comes about because for every £10 of higher incomes many lower-income families
1: A loss of income from tax and national insurance
2: The withdrawal of means-tested social security (welfare) benefits
Add in the financial costs of child care, traveling to and from work and the deterrent to finding a job or accepting some extra hours can be tough to overcome.
Disincentives matter hugely in the labour market and benefit reforms are likely to figure prominently in the manifesto of the Conservative Party at the next general election. It seems at the moment that they are taking a lead in developing a more radical approach to labour market reform. The Centre for Social Justice appears to be influential in reshaping their strategies to get people off benefits and into work.
King confirms green shoots
CPI inflation has fallen to 1.6%, and RPI inflation started to recover to -1.3%, in the measure of the annual rate to August. Is this good news?
For CPI, it means that the rate is moving further away from the target of 2%, which would be a concern if it was to continue on that trend, but the RPI measure indicates a slightly lower level of deflation, which should be a welcome sign. However, in both cases, it depends upon the reason as well as the expectation of what happens next. In a speech to the Treasury Select Committee, Mervyn King suggested that inflation is likely to be volatile over the next year, and focusing on GDP, he said that there were signs of a recovery to positive growth in the third quarter of the year.
But he remains very cautious; although the European Commission forecast the UK to grow 0.2% between July and September, this is less than in France or Germany, and Mervyn King suggested three factors, or headwinds, against which UK growth would have to struggle in order to become positive.
read more...»Strictly Labour Market theory?
One of the most cumbersome terms in Economics is the Marginal Revenue Product of Labour (MRPL), which we encounter during our A2 Micro lessons. The phrase itself is one of those clumsy things that many students find hard to get clear in their minds quickly.
read more...»Apprentice Jockeys and Low Wages
The tragic death of two apprentice jockeys in an incident in North Yorkshire last weekend has prompted much press coverage of the ambitions and daily lives of the young people who aspire to make it into the intensely competitive world of professional horse racing. It struck me, reading this article in the Times, that the apprentice jockey is an excellent example to use of how a highly elastic supply of young people who want to reach their dreams has an effect on pay and conditions in their own particular labour market.
There are large hurdles (or barriers to entry) for people wanting to be a fully-fledged professional jockey. Last year less than 6% of apprentices made it into the professional ranks. For the humble apprentice desperately looking for rides and that all-important chance, the basic salary is likely to be little more than £10,000 a year for a job that involved huge hours many of which are at unsocial times plus the hard graft of traveling around the country from one course to another.
The Times article talks about “an endless supply of young talent” seeking one of the very few (and highly coveted) apprenticeship schemes. In other words, the supply of labour into the market is highly elastic at a relatively low wage rate. Little wonder that Trainers can employ apprentice jockeys at a low wage rate - and also take a slice of their riding fees.
According to the Times article:
*Until their success dictates otherwise, apprentices earn the basic stable lad’s wage. This starts at about £158.87 for a 45-hour week, rising to £214.94 between the ages of 16 to 21
*Generally, a trainer will take half the riding fees generated by his apprentice while paying half of his expenses. The riding fee on the Flat is £103.45
The passion of young jockeys also invites a discussion with students of the non-pecuniary aspects of work - the paradox being that many of the hardest jobs, both in physical effort and risk - are those that are deeply attractive to plenty of young people and thus carry virtually nothing in the way of compensating financial incentives.
Businesses call for youth jobs subsidy
High and rising youth unemployment is one of the most important economic and social policy issues of the day. The CBI has called for extra funding from the government for a youth jobs subsidy - a £2500 per head payment for businesses that offer apprenticeships. The aim is to widen access to apprenticeships and equip school and college leavers with extra skills to improve their human capital and occupational mobility. If the lobbying proves effective, this is a good example to use of an active-labour market policy whose objectives are firmly on the supply-side of the economy.
According to CBI Chairman Richard Lambert, ““Young people leaving education this summer face the toughest job market in a generation. We know from previous recessions that a lack of employment after leaving education can damage young peoples’ long-term prospects at a critical point as they move from education to the world of work.” Their 5-point programme for reducing youth unemployment is available here.
Given that the government was quick to introduce a £2000 car scrappage incentive (paid paid for by the motor industry) - it might make for interesting discussion in the classroom to weigh up the relative benefits and costs of using a similar pot of cash for a direct subsidy for consumers contrasted with an employment and training subsidy for employers. Who should pay for training? Why is the free-rider problem relevant here?
This Guardian article argues that “Apprenticeships are an out of date idea. The only reason that they are back on the agenda is because of the TV show.”
Unemployment in the UK labour market
We have put up a streamed presentation on the latest UK unemployment statistics - available to view here
Briefly:
*UK unemployment is now at its highest rate for 13 years
*Youth workers appear highly vulnerable in this downturn, 40% of all UK. workers losing a job during this recession are between the ages of 16 and 25
*Employment has fallen and there are fewer vacancies - hence more people chasing each available job
*Many businesses have cut wages and hours
*Gap between LFS measure (2.4million) and claimant count measure (1.6 million) is widening - the government is concerned enough about this to be started an inquiry. Many people out of work may be relying on income from other family members and their own savings or redundancy payments rather than signing on as jobless
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