Addison Lee is a well-established brand in the London taxi market. It appears that they too have been making use of the ‘gig economy’ in order to reduce labour costs and maximise profits. Businesses, such as Addison Lee, Uber, and Deliveroo, do not employ their workers, but, rather offer a service that connects a customer, someone who wants a taxi or take out, with someone willing to provide the service. This helps to keep costs down as Addison Lee do not have to pay the additional benefits that an employee would cost, such as holiday pay, pension contributions, etc. The worker does have increased flexibility, and the potential to earn more, but has less security and does run the risk of earning less than the national living wage of £7.50 an hour (25+, April 2017). The growth in the ‘gig economy’ is seen as one of the reasons why wage growth has been so slow when UK unemployment is so low (4.3%, July 2017). Economists would expect wages to rise as the labour market ‘tightens’ and firms struggle to fill vacancies. It appears the growth of the ‘gig economy’ has resulted in more flexible labour markets, which, in turn, has reduced the natural rate of unemployment, the rate at which we would expect to see workers ‘bid up’ their wage demands. Clearly the ‘gig economy’ is good at creating jobs, but courts, unions, and those politically left of centre appear to be concerned by the potential exploitation of workers whose incomes can be rather volatile and lack much in the way of job security and employment rights.
Friday’s papers contained news which might make life easier for the Chancellor when he prepares for his budget on 22nd November. Government borrowing in August fell faster than expected, meaning that the Chancellor will have approximately £10bn more to spend on helping reduce student debt, boosting public sector salaries, spending on the NHS, improving our infrastructure, etc. At £5.7bn, the Government’s August deficit has fallen to its lowest level for a decade. The reason for the fall is twofold. VAT receipts have soared because of high consumer spending while current government spending, particularly local authority spending, has fallen.
However all is not rosy. Firstly, when interest rates rise, which is likely to happen sooner rather than later, government debt interest payments will increase, as will interest paid on index-linked borrowing because of higher inflation rates (borrowing where the rate of interest is linked to the rate of inflation). Furthermore, there are certain commitments which have already been made, particularly with regard to public sector pay, which will necessitate higher government spending. If these factors are not to increase government borrowing then either taxes will increase, other areas of government spending fall or the UK economy must grow sufficiently strongly to generate enough extra tax revenue.
Secondly Moody’s, one of the major ratings agencies, last week downgraded the UK’s credit rating from Aa1 (the top rating, sometimes referred to as triple A) to Aa2 on the grounds that leaving the European Union was creating economic uncertainty at a time when the UK’s debt reduction plans were in danger because of the decision to raise spending in certain areas. This follows a downgrading in 2016 by the other major agencies, Fitch and S&P. The downgrade might affect how much it will cost the government to borrow money, particularly on foreign financial markets. The Labour Party has called the downgrade a “hammer blow” to the economic credibility of the Conservatives.
Thirdly the stronger than expected level of consumer spending which boosted VAT receipts is unlikely to be sustainable as real incomes fall because of the low levels of wage increases combined with the higher levels of inflation. The forecast for the growth in retail sales compared to a year ago was 1.1% whereas the actual number was 2.4%, with last month showing particularly strong growth. There are many possible reasons for this. Possibly the weak pound caused more people stayed at home instead of going overseas for a holiday, possibly the falling unemployment had an effect and possibly the figures will reverse next month since they are extremely volatile.
Finally it is worth noting that the OECD (the Organisation for Economic Co-operation and Development, an organisation comprising the world’s major economies) forecasts that we will fall from being the second fastest growing G7 economy to the second slowest as the other main economies improve and we do not.
If the UK economy is to flourish, an increase in the rate of growth, an improvement in productivity and a satisfactory agreement with the EU are all crucial.
Recent data published last week on inflation and unemployment in the UK is causing excitement among economists – something rare among the practitioners of what Victorians called the “dismal science” after the gloomy predictions of Thomas Malthus.
Employment reached a record high of 75.3% and unemployment fell to 4.3%, a 42 year low, and almost half its 2011 peak of 8.5%. However, inflation rose, reaching 2.9% in August, up from 2.6% the previous month. Since wages rose only 2.1% in the quarter ending in July, real wages fell because the rate of inflation exceeded the rate of wage increases. This is unexpected since falling unemployment normally coincides with rising real wages as workers use the tightening labour market to obtain pay increases. Compared to the other 34 members of the OECD, only Greece, Mexico and Portugal have experienced weaker recoveries in wages than the UK.
There are two theoretical questions resulting from these figures. The first is whether we have yet reached the “natural rate” of unemployment (the rate at which inflation is stable) or whether there is scope in the economy for unemployment to fall even further without causing a significant rise in inflation. The Bank of England previously estimated the natural rate to be 5% and now estimates 4.5%. Yet wages are still not increasing as fast as before the financial crisis. Is 4% rate a better estimate?
The second, linked question is what has happened to the Phillips Curve. This was an important idea for economists and politicians since an article written by William Phillips, a Keynesian, in 1958. He suggested there was an inverse relationship between the rates of wage inflation and unemployment via the level of demand. Subsequent economists substituted price inflation for wage inflation and the idea of politicians facing a trade-off between inflation and unemployment was born. This lasted until the stagflation (stagnation and inflation) of the early 1970s when many developed economies simultaneously started to experience rising inflation and rising unemployment, something not possible with the original Phillips curve. As a result, economists such as Milton Friedman, argued that although the trade-off indicated by the Phillips Curve was valid in the short run, there was no long run trade off. He suggested that there are a number of short run Phillips Curves and a vertical long run Phillips Curve, which exists at the natural rate of unemployment – the rate of unemployment at which inflation is stable. Although one would experience lower unemployment and higher inflation in the short run if the government were to stimulate the economy, in the long run, as inflation eroded the effects of the stimulus and workers and businesses adapted to the higher rate of inflation, the economy would move back to the natural rate of unemployment but with a higher rate of inflation.
What we have today is a curve which seems flat. Unemployment has been falling but, although inflation has risen, it is still low (and largely explained away by the fall in the value of sterling following the referendum) and real wages are falling. Has the labour market changed significantly to finally kill off the Phillips Curve or is it that fear of the consequences of Brexit and economic uncertainty are allowing employers to recruit more staff without significantly raising wages?
Much of what goes on in economics has a short time span. Will economic growth accelerate or slow this year? What will happen to inflation next month? What will be the impact of Brexit? However one of the most significant challenges we and other countries are facing is much longer term and has to do with increasing life expectancy.
Pre 1800, according to The Economist, no country had an average life expectancy of over 40 while today, every country does. In the UK today, life expectancy is 79.5 for men and 83.1 for women. Infectious diseases are now much less significant; people with cancer now survive for much longer than in the past and survival rates from heart attacks have improved.
Why the concern? Surely we can look forward to a long, healthy retirement, with a high standard of living provided by our state and private pensions, living in properties which we own (and with the mortgage paid off long ago), spending time playing golf, becoming a “silver surfer” and embarking on regular SAGA holidays (the travel company catering for the older traveller).
Unfortunately the picture for the majority of the population will not be so rosy. A study by Public Health England, published earlier this year, suggested that the average woman has poor health from the age of 64 and the average man from 63½ and, although life expectancy has increased, much of it will be spent in ill health, with back pain, diabetes, obesity and dementia becoming common among older people. As people live longer in poor health, the demands on the NHS increase. A BBC report (http://www.bbc.co.uk/news/health-38887694) suggested that spending per patient for a 65 year old was double that for a 30 year old while, for an 85 year old, the cost was five and a half times as much. The Office for Budget Responsibility has suggested that spending on the NHS and care will rise from 6.1% of GDP in 2021 to 12.6% by 2066. In addition, there has much comment in the press recently about the rising cost of providing care homes for the elderly. And, finally, the spread of ill health is not uniform across the country. In the richest areas of the UK people enjoy nearly 20 years more good health than in the poorer areas. A survey by Canada Life, an insurer, found that three million more people think that they will need to work beyond 65 than did in 2016 and 10% of those surveyed expected to be working until they are 85 because of the increased costs of care home provision. Another issue to take into account is the way that low interest rates have reduced returns for pension funds and savers (many of whom save for retirement).
It is not just the elderly who will suffer. As people live longer, the amount of money needed to provide pensions increases and this money comes from the taxes paid by the relatively fewer working-age tax payers who find themselves supporting an ever-increasing number of retired workers as well as paying for the increased cost of NHS treatment for the elderly. Three years ago, the Institute of Economic Affairs suggested that Britain faces significant tax rises and government spending cuts in order to meet the needs of an aging population in terms of pension payments and health care.
The situation is not restricted to the UK. In Japan, the country with the most rapidly aging society and where 33% of the population are already over 65, a report found that over half of live-in carers are themselves pensioners and the Prime Minister, Shinzo Abe, suggested that Japan’s declining birthrate and aging population was the major obstacle to economic growth. To reduce the problem, the pension age is gradually being increased to 65 and Mr Abe has set a goal of increasing the number of women, and hence taxpayers, in the labour force.
The Government has just announced that the state pension age for men and women will rise to 68 in 2037, seven years earlier than previously planned. However a retirement age of 68 compared with one of 65 in 1948, when the NHS was founded, does not fully take into account the much greater increase in life expectancy since 1948.
So what are the solutions? Do we all work even longer and is this viable in some occupations? Does part-time work become more common for older workers? Do we encourage migration so that there is a relatively larger working population? Do taxes increase to cover the rising costs of pensions and care for the elderly? Does the government encourage (or force) people to save more towards their old age or cut the real value of the state pension? This is something for the younger reader to decide. I am off to book a Saga holiday!
Privatisation is an example of a market-based supply-side policy. Selling off public sector assets helps to raise funds to reduce the national debt and increases efficiency as firms respond to the profit motive. However, the record of privatisation has been rather patchy. The government has been accused of selling public assets at too low a price, reducing potential benefits to the taxpayers that funded their creation. In addition, the efficiency gains have been rather tepid. Instead, we have seen the growth of monopolistic and oligopolistic firms who deliver poor quality and charge high prices, enriching directors and shareholders in the process.
This article by the FT explores the dismal record of water companies and the regulator, OFWAT, in recent years. Households and firms often have no choice in who they buy from, directors know this, investors know this, and, as a result, consumers are exploited. Until the regulator takes a harder line or the industry is nationalised, a recent Labour party proposal, we can expect to see a lack of investment, high prices, ‘fat cat’ pay, and more “crappucinos”.
At the end of July there was positive news about the UK car industry. Production was 1.7 million vehicles, the highest since 1999, and newspapers reported favourably on the decision by BMW to assemble the new electric mini at its Cowley plant, near Oxford, rather than in Germany or the Netherlands, when it goes into production in 2019.
Greg Clark, the Business Secretary, called this a “landmark decision” showing confidence in the Government’s intention to make Britain a key player in the production of the next generation of motor vehicles.
However it is worth examining this decision in more detail to see what it suggests about the UK economy. A key concept in the discussion of the gains from international trade is “comparative advantage” which relates to those goods and services in which a country has the greatest relative advantage in production over other countries. (In economic terms we are looking at focussing on the production of goods and services where a country has a lower opportunity cost than its trading partners).
Ideally, the UK would like to be involved in the high value-added aspects of the production process since this is where the most income is likely to be earned and hence workers’ pay, profits and living standards will increase. In car production this is in the development and production of such things as batteries and motors rather than the assembly of component parts into the finished product. The most important parts of the new Mini, the electric motor and battery, containing new technology, will be manufactured and assembled in Germany and then shipped to Oxford to be put in to the vehicles. While the assembly of the vehicles will ensure that jobs will remain in Britain, the greatest value-added is likely to occur in Germany since that is where the highly-skilled parts of the production process will occur.
Fifteen years ago James Dyson moved the manufacture of his vacuum cleaners to Malaysia because of the significantly lower labour costs while emphasising that the high value areas, such as research and development will remain in Britain. Similarly, Apple designs its products in the USA but the manufacture is outsourced to plants in China, Korea, Mongolia and Taiwan.
Is the BMW decision a sign that this is the way the UK economy is going? Are we going to become a low-skilled assembly hub, trying to keep costs low in order to offset tariffs imposed on us by the EU? (With no deal with the EU, we could be facing tariffs of 10% on vehicles and 4.5% on parts). Alternatively do we look to the success of prestige British manufacturers such as Rolls Royce, Bentley and Jaguar which, although now foreign-owned, successfully manufacture high quality products in the UK?