have I understood this right?

On the basis of an estimate that the private sector will lose £27bn in revenue derived from government, you are estimating the number of job losses by taking that £27bn and dividing that through by the estimated average wage (with pension costs) to arrive at 889,000?

First, the cost of employing somebody is far more than their wage + pension, but there’s a more important error here.

To take a perhaps extreme example, consider a branch of Tesco. Tesco has an average revenue per employee of about £200,000 but, you will not be surprised to learn, they do not pay their average employee £200,000. To be very crude, this means a better rough estimate would be that if Tesco loses £200,000 in revenue, it would shed one worker, not “£200,000 divided by average salary”, maybe 5 workers.

So take an average Tesco, annual revenue £24m, and imagine this store experiences a £4m decline in sales, to £20m. The Richard Murphy Method of estimating the effect on employment will be £4m divided by average salary + pension costs (call it a generous £40,000 for ease of calculation) or 100 job losses. That’s not a good estimate. Assuming it’d still be profitable, branch of Tesco would not need to fire 100 workers if sales fell 16%.

That “assuming” is doing a lot of work – at the other extreme, if becomes unprofitable, it could fire everybody. So the relationship between “change in revenue” and “change in employment” depends on the revenue-per-worker, and on how much scope companies have for adjusting their size whilst staying profitable. Lord knows what the right number is, but the estimate here is about as useful as pulling a number out of one’s backside.

(I suspect Worstall is going to turn up shortly and point out another problem with this article, to do with the difference between cash cuts and the actual cuts)

On the broader point, I’d have thought it was obvious that shrinking the public sector from 48% of GDP to 45%, or whatever, is going to mean big job losses in the public sector. And that’s going to hurt and that’s part of the reason why those who oppose the cuts, do so. It will likely take a long while for those workers to find new jobs. I’m not sure why Mr Murphy thinks “no one is saying it” when at least half of the economic commentators I’m aware of are saying precisely this.

hmm, having written the above, I think I’m in need of that edit facility. I’ve omitted the fact that in the Tesco example, there would also be some job losses in some of its suppliers, so you’d need an estimate of the total number of workers involved in producing the £X quantity of final goods. So Richard’s estimate is a bit more sensible and my criticism less important (but still, he should be using total output per worker, not the ratio of output/wage bill, to account for non-wage costs).

We spend more on debt interest than we do on transport, housing, defence or public order? Oh dear. I’m guessing that interest will be going up quite a bit as well?

Meanwhile, the Tories are up to 42% in a post-budget poll. That’s landslide territory in the system we’ve got – if the polls are still showing the same come Conference season the pressure on Cammo to ditch the coalition and go to the country again will become intense.

People blame Labour for the cuts, and I don’t see why they won’t blame Labour for the job losses, too. They did in 1979 and again in 1983.

(to continue my back-tracking, Richard writes “and profits in the private sector may anyway absorb some of the cuts”, and of course other than imported goods, all costs boil down to labour costs (roughly 65%?) or profits (35%?) eventually, so he’s acknowledged the over-estimate. I like to say it’s salutary to admit one’s mistakes, so here’s me taking my own medicine. It’s particularly painful, because I maintain R Murphy is a twerp).

[5] It will interest Tesco, among others, to hear that they don’t incur any land costs.

Mike

and what happens to land costs? They either become profits (for the land owner) or wages (to the extent that the landlords / agents etc. employ any workers).

I’m not sure that you can collapse rent into profit in that way. They are both forms of surplus, true but a rental income is certain in a way that profit isn’t. Presumably there is a reason why governments typically subject them
to different tax régimes.

Rent also adds cost to economic activity, because it sets a floor to the profit rate: investment in the production of goods and services has to be more profitable than the rental rate, or it won’t take place (how much more depends on how risk averse investors are). Therefore, and allowing for our dear friend ceteris paribus, the less land costs, the more economic activity there will be.

Mike,

Yes, but the fact that everything either boils down to wage or capital income does not entail firms have no “land costs” any more than it entails firms have no “input costs” (i.e. Tesco has to pay for the food it sells). Land is one form of capital. If you want to differentiate between land and other forms of capital, fine. So when Richard wrote “and profits in the private sector may anyway absorb some of the cuts” one should include land rents as part of “profits”.

One clear mistake here – assuming that the number of people employed falling equals people being put out of work. A policy of not replacing staff who are leaving for example (in effect in much of government already in most cases) would offer less opportunities for employment, but would not increase the number of unemployed in itself. For unemployment to increase as a result of goverment reducing spending requires one of three conditions (badly described below):

1. Government cuts require redundency of existing workers. A possibility, but not yet confirmed.

2. Number of people in the job market remains stable, but the rise in other positions (private sector) is limited, and does not match the number of positions lost through goverment costs. Government is clearly hoping recovery and targetting of taxes on individuals not jobs will lead to growth to counter this, but we’ll have to see.

3. Number of people entering job market is greater than number leaving + number of posts lost to market through government cuts. Quite probable, but I don’t have the demographics to determine this.

Cutting posts does not automatically increase unemployment. This requires other conditions.

And before anyone points out about supply chains, loss of funding here also only leads to unemployment in certain conditions, which are basically those above plus the consideration of whether other customers can be found…

I don’t really see how the private sector could pick up the slack. For that to happen one of two things have to happen.

1) Exports go up, but unfortunately that’s everybody else’s plan too (and our main trading partners are also in fairly serious economic problems). Plus so far these plans seem to have strengthened sterling…

2) Private saving needs to fall to make up for the increase in public saving. I suppose that could happen, but given the weakness of bank balance sheets, consumer sentiment and business opportunities its hard to see why it would.

I don’t find the estimates of private job losses above terribly convincing. However if anyone was to construct a model of this, you’d have to take into account the level of economic activity dependant upon public sector wages. If the cuts happen all at once (seems unlikely, but george osbourne is a moron, so I’m ruling nothing out) then you’d also risk a housing crash. Which would be interesting.

“I suspect Worstall is going to turn up shortly and point out another problem with this article, to do with the difference between cash cuts and the actual cuts”

And here he is. And just like Luis wishes he were, I’m going to be a little tentative.

But what I think Richard has done is this:

“Here is the current budget. Here is the level of cuts being talked about. Thus we can calculate the cuts as a percentage of the current budget”.

But that isn’t true: the 25% is not as a percentage of the current budget. What is being said that making all the assumptions that the previous government did about inflation, about public sector wages, about future spending plans, we’re cutting 25% from that.

And there’s more!

As Tyler has pointed out:

http://burningourmoney.blogspot.com/2010/06/when-is-cut-not-cut.html

If public sector inflation is less than 9% (cumulative) over the next five years then there will be no cuts in real spending at all.

Now, what do we know about public sector inflation and its likely course? Yes, in hte purchase of goods and services the govt faces the same sorts of inflation rates as the rest of us. However, a large part of the inflation that government faces is in those very numbers that ritchie is talking about. Wage inflation. Which, given that we’ve just had a wage freeze on the public sector means we’ll not have all that much wage inflation in the near future then.

No, I too doubt that there will be less than 9% culuative inflation over the next five years, even for the public sector. However, that doesn’t excuse what I think Richard has done which is to assume that 25% cuts means 25% off current cash spending. It doesn’t, it means 25% off future planned and inflated spending: a very different kettle of fish indeed.

Whilst cutting 25% will be very difficult, the comments above regarding the difficulty of working out what is being cut suggest that what will be a lot easier in a couple of years is to take the expenditure at that time add 33% to it and then find a way of generating the figure that 25% has been cut from!

‘Scuse the cynicism!

The finance establishment know the budget cuts will lead to job loss in all the countries where it is being pushed. They are trying to force yeltsinization. If they crash the economy, the state will be forced to sell assets like greece, and they can pick them up on the cheap like the Russian oligarchs. Not they have gotten wealthier during this recession. This is deliberate.

Could, may, might. Are you saying you think Unemployment will probably go over 4 million or arent you ? My prediction is for a rise to less than 3 million in 2012 & then a rapid fall, lets wait & see.

Extrapolating job losses from the available information is pure guesswork. For example, two-thirds of the fall in managed expenditure is from capital investment. ( projected to fall 42% in real terms between 2009/10 and 2014/15 ) Cutting capital investment is short-termism but always popular with all fiscally contracting governments because it does not actually lead to current jobs being lost. It just means jobs that would have been created through the capital investment are not created because the investment does not occur. Moreover, the last government were heavy capital investment spenders so it was always likely to fall as it is one-off spending.

To come up with a 1.6m figure you need to have a seriously large fiscal multiplier. Since the author does not mention what the multiplier is one has to assume he does not know. The Office of Budget Responsibility forecasts that real GDP will be 0.3% lower 2014/15 than the pre-budget forecast. They plan to reduce cyclically-adjusted borrowing by 2% of GDP, which implies a fiscal multiplier of 0.15. That seems low to me but unlike the OBR, I don’t pretend to know the unknowable.

I think Worstall has nailed it.
The cuts are not cuts versus current cash spending.
Govt spending in the non-ringfenced depts will not be 25% lower in 5 years’ time.
It will be 25% lower than previously planned.
Murphy really is rather thick.

@Mike Killingworth

Meanwhile, the Tories are up to 42% in a post-budget poll. That’s landslide territory in the system we’ve got – if the polls are still showing the same come Conference season the pressure on Cammo to ditch the coalition and go to the country again will become intense.

I’d be cautious about such predictions if I were you.

The Tories up to 42pc? With Labour at 34pc too, mind you.

The there’s always a little boost for governments after budgets anyway.

And the Tories were in mid to late forties 18 months prior to the election.

If “Cammo” goes to the country, on these numbers he’d still come up short on seats. And there’s no guarantee Labour wouldn’t eat into that lead again under a new leader.

What a complete and utter load of total twaddle.

Clearly none of you have ever run a substantial business.

Years ago I was a senior manager in a multinational. My divisional budget was $80 million . Ordered to cut 20%, I managed it very well, without losing a single job.

Anyone who has ever come into contact with any branch of government or quango can see the levels of overspend and profligate waste.

I could easily cut £30 billion without losing a single job, I could save another £2-3 billion with a pay freeze and another £2-3 not replacing natural wastage. The staffing figures don’t include pensions which are significant.

£18 billion on an NHS IT system that doesn’t work £2 Billion on Management Consultants and on and on.

Am sorry- but that is the most convoluted logic I have ever seen. Have you looked at WHO and where the civil service employs? The high levels of part time working parents at the bottom two levels- the high percentage of single parents. Each one of those job losses actually costs the government- because not only do they have to pay welfare. Services crumble.

Have you figured the amount these people pay in tax? Or the demand? Or the private sector employees paid through the public sector?

Piss off.

I have worked my entire life- and this budget has just taken me out of the labour market, and out of the housing market- and I have sod all chance of getting back in.

The costs of these cuts is astronomical- and if you are going to put across an assessment of how much something will cost- I suggest you get a grip on economics- and the fact that these are not sums of money in a purse- they are people who still exist- and stil need to survive-the money to do that needs to come from somewhere.

The reason for teh debt, is the level of private sector debt transferred to the public balance sheet.

Oh, and as for ‘just’ 11billion. That £11billion is paid to the most vulnerable people in our society- and the idea that you should describe them having their lives ripped out from under them- as ‘just’….sickening.

Try this review in the FT of the likely (draconian) implications of cutting departmental spending by 25%
http://www.ft.com/cms/s/0/487ccbda-7f34-11df-84a3-00144feabdc0.html

The implications will become clear(er) with the outcome of the Comprehensive Spending Review due on 20 October
http://www.guardian.co.uk/uk/2010/jun/24/george-osborne-pension-welfare-disability-cuts

Btw @19: managing the economy of a country is very different from managing a company.

Try Paul Krugman on: A Country is Not a Company:
http://www.pkarchive.org/trade/company.html

BobB at 22 succinctly shows why Libertarians like the fool @19 should continue to be treated like the cartoon clowns they clearly are.

The reason the Right gets economies into such dire straits is because they believe vastly over simplified guff like the bilge spewed by “libertarian” at 19.

What most on the Left do not seem to understand is that we are relatively skint and that the big state as a notion has failed.
History is littered with examples showing that when free markets and capitalism are in the ascendance a state will prosper but when there is big Government and central planning a state will fail (in fact there are many present examples too).
Government spending cuts, even if they were twice as big as those proposed, would not lead to poverty for anyone. The ‘poverty’ alluded to by the Left is comparitive poverty and not real poverty, not the kind of poverty which leaves swollen bellied children scrambling around in the dirt for a grain or two to eat just to stave off death for an hour or two longer.
So I ask all on the Left to please sit back and ask youselves to what extent did your calls for more and more Gvernment control and spending contribute to the present cuts. Be honest with youselves and we can all get through this together.