Productivity and the election

Many of my recent posts have focused on productivity and the UK’s poor record when compared to other countries. As mentioned before, in general terms, UK workers produce in five days what workers in the USA, France, Germany and Italy produce in four. Although GDP growth has been good until recently (only 03% in the last quarter) and employment data in the UK is extremely positive with the employment rate standing at 74.6%, the highest since data was first collected in 1971, it has been accompanied by poor productivity growth with the increase in UK productivity since 2008 (the period immediately before the recession) being only 1.1%. This means that pay, and therefore living standards, will be lower in the UK than in more productive countries. The Bank of England’s latest Inflation Report suggests that incomes will rise 2% this year and inflation will rise to 2.8%, therefore implying a fall in real incomes.
There are many explanations for this. One explanation, which neatly sidesteps the problem, is that the main issue is not that the UK has low productivity, but is that we are simply poor at measuring it in the service sector, a key area in the UK economy. In manufacturing, it is relatively simple. One can count the number of goods produced; however, in services it is trickier particularly as the digital economy grows. 10 years ago, if I wanted directions, I would buy a map and eight years ago I bought a satnav and put it in the car (both are easy to measure). Today I  use my smartphone and these additional services are not easy to measure.
Nevertheless, most economists accept that there is a  productivity issue in the UK. Andy Haldane, chief economist at the Bank of England, suggests that poor management is a key factor, particularly in sectors where competition is low, allowing x-inefficiency to flourish. Lord Browne, former Chief Executive of BP, suggests three key factors. Firstly our service economy is not sufficiently professional compared with the USA; secondly there is a shortage of finance available in the UK for entrepreneurs wishing to start new businesses and, finally, he cites the anti-science culture in the UK where it is acceptable to profess an ignorance of mathematics and science. However almost all economists would agree that the UK’s low level of investment is a contributory factor and the uncertainty around Brexit and the election itself could cause businesses to delay their investment plans until the future is more certain. There is already anecdotal evidence of many financial institutions looking to open offices overseas.
There has been little focus specifically on the issue in the election. Labour plans to increase Corporation Tax to 26%. (It is currently 19% but due to fall to 17% over the next two years) which might impact on investment in the future but some of their spending plans might, in the long term, improve productivity. They also intend to renationalise the railways, water, the national grid and Royal Mail and borrow £250 billion to create a fund for infrastructure projects. The Conservative’s statement that “no (Brexit) deal is better than a bad deal” and a reluctance to remain in the Single Market has also caused anxiety among businesses, while a focus on grammar schools is not the best way to tackle Lord Brown’s concern over the UK educational system. However they do present themselves as a more pro-business, low tax government and hope that such sentiments will encourage investment. They are also committed to spend 2.4% of GDP on R & D by 2027 and to create a national productivity investment fund of £23 billion.
The IFS, an independent think tank focus on Labour’s additional infrastructure spending which would boost GDP in the near-term and would increase the productive capacity of the UK economy in the long term, although their increased labour market regulations such as a higher minimum wage would have the opposite effect as would four additional bank holidays and their higher rate of corporation tax. The Conservatives’ commitment to reduce net immigration would also weaken growth, although no specific timescale has been announced. Most disappointingly, the IFS suggest that there will be NO overall impact on productivity from either party. It is difficult to take into account the impact of Labour’s plans to take significant parts of the economy back into public ownership, not least because of the time which such measures would need to come into effect.

Roll on Thursday!

The mystery of the missing young US workers and the supply curve for labour

In the USA over the last 15 years, there has been a steady fall in the number of young people in the labour force in America. Before 2000 and 2015, the employment rate for male workers without a degree dropped from 82% to 72% and a fifth of this group had not worked for a year. This took place at a time when the unemployment rate nationally dropped to 5% and almost 3 million jobs were created in the economy.

As the time spent in work decreased, time spent on leisure activities increased, with the main leisure activity being on-line gaming. Economists have struggled to explain this fall in employment among this group. One view relates to the trade-off between work and leisure whereby the more one works, the less time one has to enjoy the benefits of one’s increased income. Therefore, by implication, this cohort is satisfied with a low income and more leisure because the additional leisure time allows them to engage in their favoured pastime. Linked to this is the idea of “leisure luxuries” which are the leisure activities one spends more time on as one has more leisure time. They correspond to the idea of luxury goods which are income elastic.  For example, as one’s income rises, one might spend proportionately more on restaurant meals since they are a luxury item. Similarly, according to this view, put forward by Hurst, Aguair, Bils and Charles last year, as one has more leisure time one does not spend more time washing dishes or eating breakfast, one spends significantly more on one’s preferred hobbies. For these people, the marginal utility of an extra hour of leisure which they can spend on their preferred activity exceeds that from the income provided by an extra hour working. The authors are clear that not everyone behaves like this since some will prefer to work longer in order to be able to afford better goods and services, e.g. the two-week holiday remains at two weeks but is spent in more exotic destinations, paid for by the higher income from work.

Given that the longer one is unemployed, the more difficult it is to get a job, the implication of this trend is that this group of missing workers, mainly but not entirely male, will find it difficult in the future to get a job and pay for the non-leisure activities people need such as housing, furniture, food and a car.

The dangers of saying goodbye to globalisation

On the other side of the Atlantic, President Trump is keen to “put America first” and move manufacturing back to the United States and he has already had dealings with US companies thinking of moving production overseas. He has also talked of moving away from free trade has about re-writing NAFTA (the trade agreement with Canada and Mexico).

However it is worth reflecting  about the Argentinian experience. Cristina Kirchner was elected President of Argentina in 2007 and announced that Argentina needed to manufacture far more of the goods it consumed, rather than importing. In order to achieve this, she imposed  import tariffs of between 30% – 40% and banned the import of certain goods, in the hope that foreign companies would move production to Argentina. In 2011 one such banned good was the cell phone. Apple refused to produce in Argentina but Blackberry agreed. (It is worth noting that at this time Blackberry was the most popular and fashionable mobile phone in the country with sales of over $100m). The Blackberrys previously imported into Argentina had components from Asia and were assembled in either Mexico or Uruguay.

The Argentinian Government specified the place where the factory was to be built and selected Tierra del Fuego, a remote small island with poor roads and few flights at the southern tip of Argentina. In fact the main streets of Tierra del Fuego look more like  the set of a spaghetti western, with sheep grazing in the fields and tumbleweed (almost) blowing down the street, than a major manufacturing area. The establishment of the factory and recruitment of workers, who had to be paid three times the normal wage to persuade them to move down, took two years and there was much celebration in 2013 when the first Blackberry rolled off the production line.

Unfortunately, as a warning to anti-free-traders, because it took so long to bring the factory into production that the phones produced were two year old models and, because of high labour costs, the phones sold for almost twice as much as later models on sale elsewhere in the world. A new industry – the smuggling of Blackberries into Argentina from the USA – quickly grew and demand for the Argentinian-made phones fell, leading to redundancies in Tierra del Fuego. Those in favour of free trade cite the principle of comparative advantage and suggest that Argentina should have put more resources into the sector sit is best at, such as wine and beef.

 

Year 12 Essay Competitions | Corpus Christi College

Source: Year 12 Essay Competitions | Corpus Christi College

The first of several essay competitions, Corpus Christi College has opened an essay competition for Year 12 A Level and IB economists. If you are considering economics beyond the Sixth Form, then an entering a competition is a must. It helps to develop your knowledge of the subject and signals to prospective universities that you take an active role in your own learning.

Read the instructions in the link above and inform Mr. Dean if you intend to enter.

Target 2.0 Competition – Applications Wanted

The Bank of England’s Target 2.0 schools competition has started and Brentwood School has a secured a place for this academic year. We are now looking for 5 individuals (4 + 1 reserve) to represent the school in the regional heats later this term.

Applicants need to write a commentary of no more than 500 words, analysing the Monetary Policy Committee’s decision in August to ‘loosen’ monetary policy. This BBC article is a good starting point, but should, by no means, be your only source of information. All sources should be identified at the end of your commentary and applications need to be submitted through Google Classroom (either AL or IB).

The competition is very highly regarded by leading universities and offers an excellent enrichment opportunity for those considering reading economics at undergraduate level. It does require individuals to commit to a weekly meeting and more in the weeks leading up to competition time.

Details regarding the Target 2.0 competition can be found here.