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. 

Unnerved

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.  

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).

Such is the potential scale and cost of the JRS it is being widely described as a mind-blowing extension of direct state intervention in the labour market – ‘the nationalization of work’ - the UK copying the job retention policies of countries like Denmark and Germany. Yet while both the JRS and the circumstances in which it is being introduced are truly remarkable, the UK has its own experience of running large scale state subsidized job retention schemes.

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).

Although these earlier schemes have largely faded from memory, they were a big deal at the time. TES, for example, supported around 2% of total private sector employees at its height, equivalent to around 600,000 employees today. But the flat rate subsidy of £680 per employee per month (in today’s prices) – paid for up to a year, with the possibility of a further six months at half rate - was less than half the average amount likely to be paid under JRS. In view of this, and the sheer scale and economic uncertainty caused by the Covid-19 crisis, one might reasonably expect to see something more like 4% to 5% of private sector employees, 1.2 to 1.5 million people, to be covered. This converts into a gross cost to the Exchequer of between £1.8 and £2.2 billion per month for as long as JRS is fully operational.

Evaluation based estimates suggest that approximately half the jobs retained by employers under TES and TSTWCS would have been retained without them. It’s difficult to judge if this offers any meaningful guide to the merit of JRS given that so many jobs are potentially at risk in the current crisis. All one can say is that there is a trade off between making the JRS administratively robust and the need to introduce it as quickly as possible. In current circumstances policy perfection seems less important than urgent action.

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.                

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.      

"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.     

Bye, Bye EU - some thoughts at the time of Brexit

I haven’t blogged for quite a while. Brexit Limbo sapped my enthusiasm, not to mention the seeming pointlessness of expressing a measured opinion in a time of polarised debate. But with the UK’s departure from the EU due to begin in earnest late on Friday this week I feel ready to start writing again, not just on economics but on anything that takes my fancy (you have been warned!).

As for Brexit itself, I’m neither happy or too sad. I voted Remain in the 2016 Referendum because the risks of leaving a powerful trading bloc after decades of integration look considerable when compared to any proposed benefits. Not surprisingly, therefore, I won’t be rejoicing with the pro-Brexit enthusiasts as they dance around Big Ben or whichever alternative percussive devices are available. Yet I won’t be crying into my favourite high strength Belgian beer, either. This is partly because, like it or not, Brexit respects the outcome of the Referendum. I always opposed a second vote, which smacked of telling people that their vote only counted if it delivered the ‘correct’ (i.e. pro-Remain) choice. In addition, however, I have always been a rather reluctant European, a pragmatist rather than a Europhile.

I was only 16 when the UK joined the European Economic Community and to be honest not that interested (my social hinterland being somewhat wider than that of today’s kid’s army of wannabe Greta Thunbergs). By the time I went to university the 1975 Referendum had given solid public support to membership of the ‘Common Market’, any debate amongst my undergraduate associates on the subject largely confined to whether within the European fold the UK would steer more toward the Social Market or Social Democracy.

Thatcherism then totally upset the apple cart by demolishing the UK’s post-war settlement, with those like me opposed to a de-regulated free-for-all turning enthusiastically to the EU to safeguard minimum standards, notably in the realm of individual employment rights at a time when collective rights were being watered down. But this often created as many tensions as it solved. UK business culture and the legal system never really gelled with continental norms, creating frictions that tested the guiding EU principle of subsidiarity to the limit. Moreover, anybody who has sat through EU deliberations on policy matters would surely attest the clash between the plain-speaking British empiricist culture and the esoteric philosophical language favoured by representatives of some of the other powerful member states.

As my experience of such matters developed, my inclination leaned firmly toward a Europe consisting of trading relations between independent nation states. But it was difficult to swim against the prevailing tide of my pro-Maastricht contemporaries who increasingly took an almost Panglossian view of all things European to argue that nirvana lay in full-blown economic and monetary union and closer, not looser, political integration.

My underlying reservations nonetheless grew stronger in the early 2000s. Having initially been persuaded of the merits of the Euro currency, it became apparent that the institutions and rules governing the eurozone were more likely to stifle than support economic growth and employment (a view reinforced by the subsequent turmoil experienced by several member states after the 2008 financial crisis). The UK had been wise to remain outside. Then in 2004 came EU enlargement. This in itself made sense. But I seriously doubted the wisdom of extending the principle of freedom of movement of labour to a bloc of countries with such a wide divergence of income levels. I remain convinced that the resulting mass migration of EU labour to the UK is the main reason why Vote Leave won the Referendum in 2016.

As a pragmatic Remain voter, I would prefer a reformed EU to Brexit. But we are where we are and the imperative now is to make the most of Britain’s post-Brexit future. Some fellow Remainers, especially the most ardent Europhiles, will doubtless be tempted to run a rhetorical Re-join campaign. I would rather they campaign instead for a Better Britain.

UK labour market gets even more puzzling

Judging by the latest official figures for the final quarter of 2017, published this morning by the Office for National Statistics, you clearly can’t have it all in the UK labour market at the moment. And the economic puzzles get even more perplexing. 

Pay growth, the source of most of the bad news in recent months, picked up from 2.3% to 2.5% at the end of 2017 when measured by growth in average weekly earnings excluding bonuses. The corresponding real pay squeeze in turn eased, from a cut of 0.5% to 0.3%. But while this might suggest either a tightening in market conditions or an improvement in labour productivity, the opposite has happened. 

The rate of job growth slowed in the final quarter of last year (the economy added only 88,000 net new jobs), unemployment increased by 46,000, the total number of hours worked fell by 0.3%, while growth in output per hour worked (i.e. labour productivity) dipped from 0.9% to 0.8%. 

In other words, a labour market that struggled to boost pay when getting tighter, just saw pay strengthen when conditions got a bit weaker. This pattern is difficult to explain, though may become clearer as more data become available. However, it clearly adds to the conundrums facing economists, not least those at the Bank of England when they next consider if and when to raise interest rates.