Friday, 1 May 2020

Economics of Covid-19 – Let’s all avoid the ‘A word’


Boris Johnson is back from his personal battle against Covid-19 and yesterday chaired the daily Downing Street coronavirus press briefing for the first time since late March. One journalist asked if the cost of the pandemic to the public purse meant that the crisis will be followed by another lengthy period of fiscal austerity. The Prime Minister refused to utter the ‘A word’ preferring instead to look forward to the sunny uplands of an economic rebound. Many will see his response as a mix of political necessity and typical Johnsonian optimism. Either way, I think we should all avoid fretting about public borrowing and debt at present and focus instead on how to boost economic growth.

I was born in the 1950s at a time when the UK and many other major economies were burdened with massive post-war debt. Yet the first 20 years of my life were a time of growing prosperity, the ‘never had it so good’ generation. There was post-war debt but also a post -war boom, with very rapid rates of growth in national income driven by economic and social reconstruction. Public debt mattered but could be financed and so didn’t, to use contemporary parlance, ‘impose an intolerable burden’ on the post-war generation.

Unfortunately, for the past 40 years public discourse has been so dominated by small government thinking that balanced budgets are seen as a good thing in all circumstances on the assumption that state activity almost always crowds out private investment and enterprise. This is nonsense. It’s useful to be fiscally prudent in good times, reducing deficits and paying down debt, while the private sector does many things better than public bodies. But fiscal prudence doesn’t make sense if it actually results in reduced income generation, while excessive prudence (i.e. unwarranted austerity of the kind we saw for much of the past decade with the political aim of cutting public spending to the bone) is worse still.

I suspect that when the current crisis is finally behind us the UK government’s economic policy response will gain far greater plaudits than its health response. We should now ensure that economic policy continues on a sensible course as we gradually emerge into the post-crisis new normal. The focus must be on reconstruction and economic growth rather than short-term obsession with public borrowing and debt. Indeed, we will almost certainly need more fiscal stimulus, especially to boost investment, rather than less. The PM is right to avoid the ‘A word’ – we all should.   
     

Tuesday, 21 April 2020

UK jobs market was cooling before coronavirus crisis – 8% jobless rate now the best we can hope for


Earlier today the UK Office for National Statistics (ONS) published its latest monthly Jobs Report, mostly including data from the quarterly Labour Force Survey for the three months to February 2020. According to the ONS the labour market was ‘very robust’ at that time. But to me things looks to have cooled before the Covid-19 lockdown measures placed the economy in a coma to help save lives.

Although the number of people in work increased by a very healthy 172,000 in the three months to February (taking the employment rate to a record high of 76.6%), with fast growing labour supply this was not enough to prevent a rise of 58,000 in the number unemployed, lifting the unemployment rate back to 4%. Cooling was also evident in a fall in total hours worked, fewer job vacancies and softening in the rate of growth of average weekly earnings, which dipped to 2.9% excluding bonuses (or 1.3% in real terms). Moreover, the ONS reports more up to date figures based on PAYE data which show that the number of employees fell very slightly (by 0.06%) between February and March – what will prove to be the beginning of the largest shake-out of UK jobs for at least 40 years.

Given what we know about the massive shock to the economy in the past month, it’s disconcerting to see that the jobs market was already starting to look a bit off colour when Covid-19 arrived on our shores. Whether this has implications for how well the market recovers after the lockdown is unclear but in any case we won’t be seeing the unemployment rate anywhere close to 4% for several years, with a peak of at least 8% the best we can hope for even with the government’s welcome business support and job retention measures in place. Some scenarios, such as that published last week by the Office for Budget Responsibility, look to a jobless peak of 10%, albeit with a relatively swift recovery. For the time being I remain on the ‘optimistic’ end of the opinion spectrum. But uncertainty about the future course of Covid-19, let alone the economy, makes me feel uneasy, and I look ahead as much with hope as expectation.  


Saturday, 4 April 2020

Economics of Covid-19 – humanitarian vs. utilitarian


Economists pay a lot of attention to policy choices and trade-offs. Genuine free lunches are a rarity. The coronavirus pandemic has spurred a lot of comment on trade-offs, from economists and non-economists alike. Are governments, by effectively putting large parts of their economies into deep freeze to combat Covid-19, paying too high a price in terms of lost business, work and incomes to save what might prove to be a relatively small number of lives?

This seems like a horrible question to pose at this time of crisis but it is not completely unreasonable. As I say, trade-offs are part of the very stuff of economics. Indeed, implicit trade-offs are always being made within health systems. Available resources are finite and concepts like ‘quality of life years’ play a role in determining how to allocate care to different groups of people. It’s also likely that during the current crisis some medical practitioners will be faced with the distressing choice of which Covid-19 patients to help if hospitals run short of life saving equipment.

However, acceptance of this kind of micro choice doesn’t mean we should apply a similar calculus at the macro-level. The utilitarian principle of ‘the greatest good of the greatest number’ is of limited practical value when, as at present, we simply don’t have sufficient information to assess the trade-offs involved at the point when policy decisions have to be made. 

Even when the crisis is over, any post hoc assessment of the trade-off will be questionable because we’ll never know the counterfactual. UK epidemiologists think that without the lockdown and other measures the government has taken the death toll from coronavirus could potentially hit 500,000 in the UK alone. If, as we pray, the outcome is far better than this it will be highly misleading to simply weigh the economic cost against the actual number of deaths.

I fully understand why, with so many people suffering financial hardship as we battle Covid-19, some ask ‘is it worth it?’ I can’t answer that question but when pondering it my conclusion is that policy makers should favour the humanitarian response over the utilitarian.      

Friday, 3 April 2020

Economics of Covid-19 – why total hours of work could prove the key labour market statistic in this crisis


Each day brings yet sadder news. The UK death toll from Covid-19 is now just shy of 3,000 and will probably pass that mark when we receive the next update this afternoon. Particularly sobering is the constantly updated tally of deaths in the United States and globally published by Johns Hopkins University, the global total already above 50,000

The human scale of this relentless tide of grim health statistics is evidenced by the fact that staggering record-breaking figures on the number of people making claims for unemployment related welfare benefits haven’t monopolised the headlines in either the US or UK in quite the way they would at any other time.

As mentioned in an earlier blog, it will be a while before we start to see the effects of the Coronavirus crisis appear in the UKs published official labour market statistics. In this respect the US Bureau of Labor Statistics is ahead of the game. But the UK’s Office for National Statistics (ONS) has helpfully begun to issue snapshot data on the business impact of Covid-19.

The first weekly release published yesterday showed that of more than 3,600 business responding to a survey between 9 March and 22 March 27.4% reported they would be cutting staff numbers ‘in the short-run’. A similar proportion 28.5% had reduced staff hours, while approaching half (46.2%) were requiring staff to work at home in line with government advice on social distancing for non-essential workers. Some of these businesses were making a combination of such adjustments and one would expect some will also be making pay cuts or introducing pay freezes, though this is not covered in the survey.  

While these data are useful, they don’t come close to giving us the kind of numbers that will at some point be provided by the large-scale rolling Labour Force Survey (LFS). Assuming the ONS’ normal data collection process isn’t itself disrupted by social distancing – interviews are conducted face-to-face as well as by telephone – analysts will be digging into crisis relevant data from late spring onward. However, even when these data become available, the labour market impact of this particular crisis could prove trickier to read than usual.

One reason is that the impact is very abrupt. An emergency brake has been applied to large swathes of economic activity. We’re not experiencing a slowdown and slide into recession but a sudden sharp halt. There is not the kind of lag in the labour market impact one would normally expect but instead a punch in the gut that immediately takes the wind out of the sails. The bad news is that, among other negative effects, this causes a mega surge in job or income losses so big that it tests the ability of policy makers to respond. The less bad news is that the initial surge doesn’t necessarily mean a relentless wave of pressure on the system. More likely is a sudden bout of acute pain which doesn’t get noticeably worse the longer the crisis continues but will nonetheless be very tough to live with.     

Another oddity of the current crisis is widespread use of furlough procedures. An as yet unknown but almost certainly high number of employees will be retained in jobs but placed on furlough under the government’s emergency Job Retention Scheme (involving an 80% wage subsidy subject to a monthly cap of £2,500). It also looks as though some employers will retain staff in similar ways without participating in the government scheme.

Furloughing hasn’t tended to be a noticeable feature of UK employment practice during recessions: job cuts, shorter hours, pay cuts or some combination of these adjustments are generally more common place. But the significance of the furlough for our reading of labour market statistics is clearly demonstrated by a look at how the Job Retention Scheme will operate.

To be eligible, furloughed employees won’t be able to do any paid work for their employer or paid work elsewhere (they can if they wish do unpaid voluntary work). Despite them being ‘idle’ the LFS will count these employees as in employment. A person is deemed to be employed if he/she has done at least an hour of paid work in the week when surveyed or is temporarily away from work for a legitimate reason such as paid holiday, sickness absence or, in current circumstances, on furlough. Consequently, the headline employment figure obtained from the LFS will give a somewhat flattering picture of the effect of the crisis, as might the level of unemployment and economic inactivity insofar as these furloughed employees would otherwise lose their jobs.

The hit on the labour market will therefore be much better reflected by the slump in hours worked by furloughed employees, which will be in addition to cuts in hours worked by non-furloughed employees who keep their jobs and by self-employed people unable to find any or only a limited amount of work. But this is not the only reason why hours of work will prove to be an even more important statistic than usual in this particular crisis.

In a normal recession, hours lost through sickness absence tend to dip; throwing a sickie is not a good idea when jobs are on the line. But in this Covid-19 induced crisis, rates of sickness absence will rise significantly, the virus in this way having its most direct negative impact on the labour market. Offsetting this, however, are two other unusual features of the current crisis. Essential services, across both public and private sectors, are working even harder than usual and increasing hours as well as recruiting extra staff. And anecdotally, it appears that the shift to widespread working from home during the lockdown might be seeing people putting in extra hours because they’re spending less time commuting.

What kind of overall hours effect should we thus be looking at? In the last three major UK recessions (the early 1980s, early 1990s, and 2008/9) total hours worked fell by 5.3%, 5.2% and 4.1% respectively. The corresponding falls in total employment were 2.4%, 3.4% and 1.9%. Judging from what we can see so far about the current crisis and the initial employment policy response it looks as though the fall in hours will be at least on a par with the relatively large falls suffered in the 1980s and 1990s even if we manage to avoid job losses on quite the same scale. Either way, hours of work (and, more important still, what change in these mean for weekly earnings) could prove to be the key labour market statistic to look at when measuring the impact of Covid-19.   

Tuesday, 31 March 2020

Economics of Covid-19 – April 1st Living Wage hike could prove to be fools gold


The statutory National Living Wage increases by 6.2% tomorrow, rising to £8.72 an hour for employees aged 25 and over, benefiting around 2 million people. The lower National Minimum Wage rates for younger people go up 6.5% for 21 to 24 year olds and by 4.6% for the under 21s. That’s right, tomorrow, in the midst of a national economic crisis. A brave move, demonstrating how even Conservative governments have been fully converted to the merit of minimum wage regulation, or foolhardy at a time when many businesses are struggling to survive and millions of people are worried about their jobs?  

As in any crisis there will be winners as well as losers over the coming weeks and months. People working in essential services, public and private, may well see their workloads increase and receive higher reward for additional hours if not bigger pay awards. But at least as many private sector or charitable sector organisations will be badly affected by the Covid-19 lockdown. These will be making immediate pay cuts (including those who participate in the Government’s Job Retention Scheme but don't top up the 80% wage subsidy on offer), introducing pay freezes and/or cutting hours. Unemployment will also be rising as some businesses cut jobs which will depress wage pressure in the economy overall.

Millions of employees will feel the pinch which will slow average weekly earnings growth considerably. Without the Living Wage/Minimum Wage increases we would probably be looking at growth in regular average weekly earnings slowing from around 3% to around 1.5% in a matter of a few months and then slowing further the longer the crisis lasts. If so, real wage growth will fall close to if not below zero (depending on what happens to price inflation). This is bad news because we’ve only recently seen the average real weekly wage rise above the pre-Great Recession level.  

In view of this tomorrow’s Living Wage hike might be seen as a good move, offsetting the depressing economic effect of Covid-19 by putting more money in the pockets of the working poor. However, the Living Wage/Minimum wage increase is likely to prove only a partial palliative. A lot of recipients of the hike will be employed in exactly the kinds of sectors hardest hit by the crisis and employers may well respond by making even bigger cuts in hours or jobs than would otherwise be the case.

The overall effect on nominal average weekly earnings growth is difficult to judge since we don't yet know how businesses will respond. Optimists can point to well researched evidence of the benign effect of the minimum wage over the past 20 years, though whether this is guide to what might happen now is questionable.  

What one can say is that in current circumstances the faster the rate of growth of nominal average weekly earnings the smaller the squeeze on real wage growth and the greater the risk of a bigger than necessary rise in unemployment.

While a rise in the Living Wage/Minimum wage is highly desirable in normal times these are very far from normal times and a 6+% wage rise looks like Alice in Wonderland economics. Lewis Carroll himself might marvel at the Government hiking the pay of employees it was at the same time subsidising to keep in work.

There is of course nothing to stop ministers from exhorting employers who are able to afford it to voluntarily match the planned increase, perhaps targeting the supermarkets who might make a goodwill gesture to hardworking staff at this time. But it would be advisable to either limit the statutory increase or, and preferably, postpone it, with maybe October 1st rather than April Fools Day a better choice.             


Sunday, 29 March 2020

Economics of the Covid-19 crisis – How well might the UK's labour market policy model cope?


We learn this morning that the UK Prime Minister is writing to every household with a grim message on coronavirus – ‘Things will get worse before they get better’. He’s referring of course to the terrible effect of Covid-19 on people’s health. But the same can be said of the effect on people’s livelihoods. So how much worse might things get and how long might it be before they get better?
  
A times of economic crisis such as that triggered by the pandemic, attention is understandably focused on the severity or nature of the shock and specific policy interventions introduced to counter it. As important, however, is the broader underlying orientation of policy – the labour market policy model (LMPM) – which will ultimately determine how the current crisis affects people’s jobs and incomes.

There is no off-the-shelf definition of an LMPM. I think of it as the mix of polices that in different ways affect the behaviour of employees, people in work, and people without work who might reasonably be expected to find work. Ideally, during a time of economic crisis, the LMPM will act to encourage employers to cut wages or hours or work rather than jobs, encourage people in work to restrain wage demands, and ensure people without work remain willing and able to fill any job vacancies that are or become available.

In terms of specific policies this covers things like employment protection measures (i.e. the ease of ability of employers to hire and fire staff), individual employment rights, wage bargaining procedures, wage subsidies/tax credits, and active welfare measures that place job search conditions on jobless benefit claimants.

The way in which these types of policies interact, operating as an LMPM, not only determines how much unemployment an economy experiences in normal times but also makes a critical difference to the way in which we experience recessions. Labour markets with good LMPMs are often referred to as ‘flexible labour markets’, though one needs to be careful about the latter term since conceptually it can mean different things and has ideological connotations.

Guidelines on best practice began to spread internationally following the OECD Jobs Study in 1992.  A good LMPM will operate to minimise the peak in unemployment during a recession and thereafter facilitate a rapid sustained fall in unemployment to at least the pre-recession rate. To achieve this, the LMPM must continually adapt to structural change in the labour market and if necessary be easily amenable to short-run policy adjustments. No recession is ever exactly the same as another and it’s important that one doesn’t persist with a rigid LMPM only capable of ‘fighting the last war.’

The UK’s LMPM has developed considerably in the last 40 years, during which the economy has suffered three major recessions, in the early 1980s, the early 1990s and the late 2000s.

Between January 1980 and March 1981 GDP contracted by 4.6% before starting to recover. At that time, employers’ ability to hire and fire was fairly weak but union power was still very strong, limiting wage restraint. In addition, the welfare system was almost totally inactive.

Large numbers of benefit claimants gave up looking for work, effectively detaching themselves from the labour market. This resulted in a massive pool of long-term jobless and cut the usable supply of people, thereby putting upward pressure on wages and causing mass unemployment to persist for years after the recession had ended. 

The unemployment rate increased from 5.5% before the recession to a peak of 11.9% in the summer of 1984 and stuck at around that rate before staring to fall in the second half of the decade, to a low of 7% at the onset of the 1990s recession. The fall is normally attributed solely to the expansionary ‘Lawson boom’ but the developing LMPM played an important part, notably the introduction in 1986 of Restart job search interviews for claimants of unemployment benefit which led the way in activating the welfare system.

At the start of the 1990s after a decade of reform the LMPM was considerably different. Both employment protection and union power had been weakened but active welfare reform was still a work in progress.

The contraction in GDP of 2.5% between July 1990 and September 1991 was less than that suffered in the early 1980s recession. However, the enhanced ability of employers to fire staff outweighed slightly greater wage restraint. The result was what some economists at the time called ‘oversacking’ because the shake out of jobs was much bigger than the depth of the recession actually warranted. 

On the plus side, however, once GDP began to recover employers’ enhanced ability to hire and fire, plus the emergence of a somewhat more active welfare regime, resulted in a much swifter and sustained fall in unemployment than experienced in the 1980s. Although unemployment peaked at a very high rate of 10.6% in the spring of 1993, the peak came only 3 years after the previous trough. The unemployment rate then fell almost continually and was still on a downward path in 2008 at the onset of the Great Recession when the rate stood at 5.2%  

As its name suggests, the Great Recession was far worse than its two immediate predecessors, GDP contracting by 6.4% between April 2008 and September 2009. Within the LMPM, employment protection was slightly stronger than in 1990, union power remained limited and the welfare system had become much more active. 

This combination resulted in a smaller shake out of jobs than in either the 1980s or 1990s recessions, with wage cuts and shorter hours predominant, and a correspondingly smaller rise in the unemployment rate, from 5.2% at the start of 2008 to 8% at the start of 2010. The main shortfall in the model at the time proved to be lack of adequate provision for dealing with young jobseekers. By dampening the shake-out of jobs the LMPM also served to depress recruitment activity, hitting young entrants to the labour market even harder than usual.     

The Noughties version of the LMPM would almost certainly have enabled an earlier peak in total unemployment following the Great Recession and a rapid subsequent fall had a nascent jobs recovery in early 2010 not been curtailed by strict fiscal consolidation measures that began to be imposed on the economy later that year. Having dipped between the spring and autumn of 2010, the unemployment rate started to rise again reaching a peak of 8.4% at the end of 2011. There was then a de facto easing of fiscal policy with the acceptance that the initial deficit reduction timetable would need to be extended, allowing for higher public borrowing than originally planned which helped support aggregate demand.

From that point onward the LMPM began to facilitate the kind of swift and sustained fall in unemployment that one would otherwise have expected to see from early 2010 onward. This, incidentally, places talk of a remarkable post 2012 ‘jobs miracle’ in its proper perspective. An understanding of the Noughties version of the LMPM made the supposed ‘miracle’ entirely predictable a decade ago, and some of us are on record as saying so at the time.  

What might we expect in the wake of the Covid-19 crisis? How recession proof is LMPM 2020?


In its essential features the LMPM appears as robust as it did when the Great Recession struck. But two issues in particular are worthy of attention.

The LMPM is slightly weaker on employment protection than in 2008, with employers able to fire regular employees with less than two years’ service without legal comeback (at present that’s around 7 million people). Moreover, the model has been largely permissive on the rise of the so-called ‘gig economy’ of casualised contract workers (employing around 6 million people, including the self-employed) which now represents a significant enclave of super (or maybe one might say uber) hire and flexibility within the labour market.

There is therefore a clear risk that the current LMPM leaves us more prone to a bigger shake-out of jobs than during the Great Recession. In view of this the government’s Covid-19 emergency adjuncts to the LMPM such as the Job Retention Scheme and Self-Employment Income Support Scheme might have been necessary notwithstanding the sheer scale and nature of the coronavirus crisis.

Another potential worry is the operation of the Universal Credit (UC) welfare system. While UC is in principle no more than the latest iteration of an activity focused benefit system, concern has been raised that in practice it is performing less well than its predecessor systems at helping claimants into work. Well before any of us had heard of Covid-19, some labour market policy experts were warning that UC was slowing flows from unemployment and economic inactivity to employment, leading to a considerable rise in the stock of UC claimants. With early DWP figures pointing to a surge in the inflow of UC claims since the Covid-19 lockdowns came into effect, possibly leading to system overload, urgent improvement to the activation aspects of the benefit would seem necessary.

At the time of writing, the projected UK peak in coronavirus cases is still several weeks away and the duration of the widespread social lockdown is unknown. There is also the distinct possibility of further intermittent lockdowns to combat subsequent waves of the virus in the absence of herd immunity or a suitable vaccine. With large swathes of the economy already effectively placed in a coma, the contraction in GDP is almost certain to be larger than during the Great Recession, and while it’s hoped the Covid-19 induced recession will be shorter this cannot be taken for granted.

At present I anticipate that measures such as the Job Retention Scheme and the Self-Employment Income Support Scheme should be enough to buttress us from some of the employment protection weaknesses built-in to the LMPM since 2010. This would suggest a doubling of the unemployment rate from 3.9% prior to Covid-19 to a peak of around 8% (similar to the Great Recession peak), bad enough yet not disastrous. Additional interventions might also prove necessary to address particular problems if they arise, such as differential impacts on different groups in the labour market, so as to avoid a repeat of the Great Recession when too great a burden was allowed to fall on young jobless people.   

The fiscal cost of achieving this outcome will be jaw dropping but preferable to the combined economic and social cost of allowing the unemployment rate to soar into double digit territory.

How long unemployment remains at the peak rate before starting to fall will then depend in part on the length of the Covid-19 recession and in part on the operation of the LMPM.

While the current hire and fire features of the LMPM makes us more prone to a big shake-out of jobs during a recession they should also enhance prospects of an early rebound in hiring during the recovery. This bodes well for a swift post-recession jobs bounce back.

However, question marks over the operational effectiveness of UC raise the possibility that the jobs recovery might be slowed by bottlenecks in the system for moving jobless people off welfare and into work. This possibility ought to be considered and addressed with considerable urgency.

In any event, to support the LMPM economic policy makers will need to learn from the mistake of 2010 and adopt a slow and steady rather than fast and furious approach to the major fiscal consolidation that inevitably awaits us once Covid-19 has finally been defeated.    

      


Tuesday, 24 March 2020

Economics of Covid-19 – how should we help the self-employed?

Since the Chancellor announced the Job Retention Scheme (JRS) to protect regular employees during the current crisis there have been widespread calls for him to offer support to other groups of workers, notably the UK’s more than 5 million self-employed people. An announcement is expected soon, the Chancellor this morning said that preparations were moving ahead 'at pace'.

I understand the concern – I’ve been self-employed for most of the past decade. But I also think we need to be careful in our response. While some self-employed people are de facto employees effectively pushed toward this status by gig economy bosses, for most it is a lifestyle choice conveying a mix of advantages but also carrying considerable risk.

Self-employed incomes are generally relatively low and often uncertain. Many of us are grateful to make the annual equivalent of the statutory minimum wage (to which we are not entitled). Financial risk is an everyday reality. Yet if opinion surveys are to be believed self-employed people are on average happier than employees, enjoying flexibility of hours and not having to put up with overbearing employers. 

Given these accepted pros and cons, it seems inappropriate to expect too much financial support from government – i.e. the general taxpayer, mostly employees – during times of crisis. The state should not underwrite the risks associated with self-employment and with the public finances under severe strain ought to provide only what to some will seem like fairly limited support.

My proposal is fairly straightforward, to avoid the complexity associated with relating support to data on individual self-employed incomes. Any person who has been registered self-employed for the past two years and earned enough in the tax year 2018-19 to have to complete a self-assessment tax return would be entitled to a flat rate tax credit payment. This would be set at £1,500 per month, equivalent to the likely average level of wage support for employees under the JRS, for as long as the Covid-19 crisis persists. All other self-employed people would apply for any unemployment related benefits which they are assessed as being entitled to.

This would represent a particularly substantial hit to the incomes of high earning self-employed people, and might seem unfair to low earners or normally high earners who received an unusually low income in 2018-19. Many of the low earners will be amongst the 40% of self-employed people who work part time, including a lot of older people, a group in the vanguard of the sharp rise in self-employment in recent years. A mitigating factor for these people is that freelancing is often a top-up to available savings and any equity they have acquired from rising house prices which would dampen the hardship they experience.

I guess this suggestion won’t appeal to a lot of self-employed people and I’ll be interested to see what the Chancellor decides to do. Either way, a considerable amount of financial pain seems inevitable.