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. 

Monday 23 March 2020


About a month ago, well before Corvid-19 had entered the vocabulary, a young man started to walk up and down the road outside my front window. He has done so every day since, for hours on end. I see him first thing in the morning when I open the curtains, and he’s usually still there when I close them at night. Sometimes he lengthens the distance he walks before turning to retrace his steps, but he never seems to stop. He stares straight ahead, oblivious to other people and unresponsive to attempts at communication.

I have no idea who this young man is, or where or how he lives, eats and sleeps. He is of East Asian appearance and well kempt, invariable dressed in dark trousers and dark hoodie, the hood always down. He doesn’t appear to be at all emotionally distressed, merely ‘in the zone.’ I wonder if he is meditating, something that maybe we might all benefit from in these strange times. Yet, and I feel ashamed to say this, I find myself unnerved by his daily ritual.

Maybe this can be put down to superstition. I come from the kind of old school Irish Catholic family for whom tales of the supernatural were ingrained in cultural heritage. As a child I would cower at mention of the Banshee, whose wailing cry was said to portend a death and who would exact terrible punishment on anyone who made off with the comb she used on her long white hair. In my imagination, the walking man also represents something potentially sinister, as if he is about to raise his dark hood and produce a scythe.

My normally rational self of course dismisses such thoughts as nonsensical. But I’m unnerved because these are far from normal times. I don’t really fear the walking man, I fear the coronavirus and the eerie state of mind it has instilled in so many of us across the globe. I suspect I’d be happier if I never saw the walking man again, but it’s the damned virus I want to wave goodbye to.  

Sunday 22 March 2020

How previous UK job retention subsidies compare with the Chancellor’s Covid-19 crisis scheme

The UK government is in the process of delivering a multi-billion package of economic measures to help protect businesses, jobs and incomes while our country tackles the Covid-19 virus. The package includes a Job Retention Scheme under which 80% of the pay of employees of participating private sector employers who agree to retain rather than lay them off during the crisis will be covered by the Exchequer, subject to a cap £2,500 per employee per month. It’s hoped that employers will top-up the payment so that employees receive a full wage but this is not a requirement.

Given the high incidence of low paid employees in sectors most directly affected by the civil contingency measures being taken by government to contain the spread of the virus – predominantly those providing services face-to-face to consumers - the average Exchequer payment is likely to be around £1,500 per employee per month. The JRS is initially proposed to operate for three months, though subject to extension if necessary, the main stipulation being that employees whose pay is covered by the scheme do not work (in the technical language used by government they must be furloughed i.e. given temporary leave of absence).

The gross financial cost of the JRS will depend on how many employees are covered, which won’t be known until the precise delivery mechanism is finalized and employers come forward to participate. Assuming a high level of take-up in current circumstances one can expect the cost to run to at least several £billion. But as with all such measures the net cost will differ from the headline cost. This is mainly because of corresponding savings in welfare benefit payments that would be made to employees laid-off. By the same token, however, it is the possible that some employees supported by the scheme will have been retained without it (the deadweight effect).

The Temporary Employment Scheme (TES) operated from 1975 to 1979 in the wake of the stagflation ushered in by the Oil crisis. This was succeeded by the Temporary Short Time Working Compensation Scheme (TSTWCS) which ran until 1983. I looked at both these schemes in the 1980s as part of wider comprehensive reviews of publicly funded employment programmes and subsidy measures. Sadly, this was before the arrival of the easy to use word processing packages we enjoy today, let alone electronically transferable documents, so I don’t have my reviews available to put online. However, my notes from the time include enough information to enable me to make a few comparisons with the JRS.       
Unlike the JRS, neither TES nor TSTWCS required subsidized employees to be put on furlough. In stark contrast to what is likely with JRS, the earlier schemes were almost entirely taken up by manufacturing employers (manufacturing then not only still accounted for a really big share of total employment but was also the sector government industrial policy mostly focused on).

All job retention schemes also raise concerns about possible negative effects on labour productivity. When applied as temporary measures during economic crises, such schemes are explicitly designed to sacrifice productivity in favour of employment in the short-term. The primary aim is to both reduce the social cost of joblessness and aid subsequent economy recovery by ensuring that attachment between employers and employees is maintained so as to preserve employee skills and experience. Ultimately, however, subsidies need to be withdrawn lest employers become dependent upon them and/or labour productivity be constrained by employees failing to move from less productive to more productive activities. I doubt if too many economists are greatly worried about this in the current crisis but it will be a consideration when Covid-19 is finally behind us and JRS is withdrawn. The end of TES in 1979 is thought to have exacerbated the big shake-out of manufacturing jobs in the early 1980s, which resulted in improved productivity but also gave rise to considerable social adjustment problems.                

Tuesday 17 March 2020

Initial thoughts on Covid-19 and UK jobs

Earlier today the UK’s Office for National Statistics (ONS) published its latest monthly report on the state of the labour market. These fairly healthy figures mostly refer to the period up to January 2020, before coronavirus Covid-19 spread beyond China to achieve pandemic status. This is therefore one of those times when our positive rear mirror view of the labour market offers little comfort given what we anticipate will obviously be a very rocky road ahead.

Employment was growing strongly at the start of the year (up 184,000 in the three months to January, reaching a record equaling rate of 76.5%). This was not enough to prevent a rise of 63,000 in unemployment – with the jobless rate also up slightly to 3.9% - but only because of a big fall of 175,000 in the number of people leaving economic inactivity in order to seek jobs. There were more jobs in both the private (up 169,000) and public (up 15,000) sectors and although the rate of growth in average regular weekly earnings slowed to 3.1% this delivered 1.5% real terms pay growth. However, it now looks inevitable that the global and local economic impact of the coronavirus on aggregate demand will hit the labour market with at least as much immediate force as the Great Recession just over a decade ago.

It’s too early to assess how much of the impact will fall on jobs as opposed to cuts in hours of work or pay and it will be a few months before the outcome starts to register in ONS figures. Previous recent experience suggests that such a mega shock to the economy has the potential to reduce total employment by between 500,000 and 1 million. But we don’t really know how the global economic supply and demand side dynamics triggered by a natural phenomenon like Covid-19 will actually play out, nor how effective traditional tools of economic management will prove to be in coping with the effects even if wartime levels of financial firepower are devoted to the struggle.

Moreover, assuming government action succeeds in providing enough support to ensuring that fundamentally strong businesses survive to fight another day, there will still be a shortfall in demand for labour while the crisis lasts. It is thus difficult to be optimistic about job prospects in the short-run.

Low unemployment at the onset of the crisis offers some hope that employers will adjust to falling demand in ways that avoid mass layoffs for fear of not being able to recruit staff once the malaise has eased, albeit the weakening of employment protection legislation by the Coalition government between 2010 and 2015 risks a bigger shake-out of jobs than experienced in the recession of 2008/9. Similarly, initial indications suggest that jobs are particularly vulnerable in consumer facing private sector services affected by restrictions on travel or public gatherings. These sectors are not only major employers, the driving force of the so-called ‘jobs miracle’, but also make considerable use of flexible contract workers who are relatively easy to stand down when demand falls. Remember, what the flexible jobs market giveth, it can easily taketh away.

Either way, perhaps the best we can expect, assuming an optimal fiscal, monetary and welfare policy response, is a very sharp rise in unemployment (or some combination of higher unemployment and increased economic inactivity) throughout much of 2020 followed by an equally sharp fall in 2021, if by then the deadly potency of Covid-19 has finally started to subside.      

Sunday 1 March 2020

"Thanks for having me!" - No Thanks!

Admit it, we all have our pet hates. Mine are too many to mention. But I’m particularly bugged by a new one. Listen to almost any broadcast media interview – TV, radio, podcast – and you’re likely to hear the interviewee begin by excitedly proclaiming “Thanks for having me!”. This tendency has crept in steadily during the past decade, at first gradually, latterly becoming ubiquitous, seemingly spreading faster than the coronavirus.

I’m not sure how the infection started. I think we can rule out a sudden outbreak of politeness, since the opposite seems to be the case for other forms of public discourse in the social media era. My hunch is that professional media training is the initial source. Presumably some former hack, gainfully employed teaching fledging advocates how best to get their point across, found members of focus groups responded favourably to interviewees who sounded grateful to be on the airwaves. If so, I reckon there are probably as many people who, like me, immediately dismiss the views of those who express such fawning gratitude.

When my children were young, their friends would invariably say “thanks for having me” at the end of a party or the morning after a sleepover. This was rightly courteous and I expected my own kids to behave likewise. But adults conversing in the public sphere should grow up and demonstrate greater confidence in themselves.

People are invited onto TV or radio programmes because the producers of such programmes consider their contribution of some value in terms of expertise or news worthiness. They are not being offered a favour or treat, so why behave as if they are?

I fear this reflects a wider trend toward thinking of news and current affairs broadcasting as a branch of the entertainment industry. The wag who once quipped that politics is showbiz for ugly people might now also conclude that media appearances give a taste of c-list celebrity to academics, experts and commentators. Worst of all in this respect is the egotistical contributor who flags-up an appearance with pre or post interview tweets, maybe with a selfie alongside their interviewer thrown in for good measure.

I long for a return to seriousness, with interviewees aware that they have both a serious role to perform and are deserving of being heard because they bring something important to the interview. Assuming this task is fulfilled, it is the interviewer, and the listener, who should be giving thanks.