How the Coalition’s cuts are hitting the private sector


5:45 pm - August 1st 2010

by Richard Exell    


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The private business sector has mainly been positive about government cuts, even gleeful at first.

But, as we at the TUC have pointed out, the private sector will also be hit by the cuts – about 30 per cent of public sector spending goes to private companies.

Connaught, the social housing services provider, was one of the first to be hit, issuing a profit warning, followed by a drop in their share price. Recent reports have warned that the FTSE 250 company is in talks with its lenders and share prices fell by more than 80 per cent.

Other companies with large government contracts are now feeling the pinch as well:

  • IT provider Capita, regularly reported as “defiant”, saw its share price fall about ten per cent and a UBS report downgraded the company from “neutral” to “sell”.
  • Earlier this month, Cable and Wireless shares fell 20 per cent after the company said that UK government cuts would force down the profits they expected. (It is not common for a company that relies on government spending to blame the government publicly for its difficulties.)
  • Goldman Sachs and JP Morgan Cazenove have warned against Logica shares because the company relies heavily on government contracts.

It isn’t only firms with large government contracts that are going to be hit.

The F.T. reports that investment bankers Execution Noble in a report on Investing for Austerity recognise the obvious – that cuts will hit growth:

The UK government’s commitment to reducing the structural deficit raises the question of whether it is possible to cut debt via spending cuts and tax increases without significantly increasing unemployment and reducing consumption. Current economic forecasts suggest that it is. We take the view that a period of fiscal austerity will result in a lower level of economic growth than is currently being forecast.

They are therefore recommending that UK shares generally are worse bargains than they look:

Given our more pessimistic view on the UK economy we have reduced our expectations for the UK equity market in 2010. While we admit that on traditional metrics the UK equity market looks cheap, we believe earnings upgrades have peaked and expect incremental cuts from here.

We have already seen evidence of how fiscal austerity measures and budgetary cuts have impacted a number of UK companies and we expect this to become more of an issue as the year progresses. As a result we have reduced our year end FTSE 100 target from 5950 to 5400 and no longer expect smaller companies to outperform.

Perhaps some of the business figures who have been cheerleaders for cuts may start to recognise that, to coin a phrase, we’re all in this together.

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About the author
Richard is an regular contributor. He is the TUC’s Senior Policy Officer covering social security, tax credits and labour market issues.
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Reader comments


Makes sense. If you’re a paperclip company selling paperclips to the government, and the government starts cutting ‘waste’, you’re going to have to start cutting employees at some point.

A very short-termist view – big business is playing a long game.

There will be a lot of privatisation over the next Parliament and, given the Government’s antipathy to regulation, a lot of these will be uncompetitive oligopolies rather than competetive markets i.e. big profits secured by a taxpayer taking all the downside risk.

There will be a lot of unemployment, which will drive wages, terms and conditions downwards. The minimum wage will not survive. Benefits will be cut massively forcing people into work at sub-poverty wages – those who can’t find work will have to work for their benefits as well.

Tax on the rich will be decreased further on the theory that “wealth creators” must not be punished – taxes are for the little people.

As the owner of a big business, what isn’t there to like from this government creating a new deep recession?

Hands up all those who’ll shed a single tear if Crapita goes out of business tomorrow.

Anyone?

Thought not.

Sure, the employees’ll suffer short term, but Crapita’s death will allow many other bidders to move in, and hopefully they’ll lose all their preferrred bidder status contracts as soon as possible.

Most of the cuts and details thereof haven’t even been announced yet, but at least they will be announced, unlike the cuts Darling was planning which were nearly as big.

Crapita and others have been growing fat off Govt contracts for the best part of two decades, and, I’m told, occasionally they also doa good job without messing up. Occasionally.

given the Government’s antipathy to regulation, a lot of these will be uncompetitive oligopolies rather than competetive markets

No, that was what the last Tory govt did, and Labour did. There are actual liberals with strong economic credentials in there this time. I’ve no doubt it’ll happen in some cases, but the need for competition is well understood in the Cabinet, if not the majority of the Cabniet.

4. inyourhouse

The Bank of England is able to offset any negative effects on aggregate demand caused by fiscal consolidation. Given this, the idea that the private sector will be hit by the cuts is a classic case of the “seen and the unseen” fallacy. Businesses like Capita will face less demand, but if aggregate demand is unchanged then that means some other business is facing an equivalent increase in demand. It’s really as simple as that. The only hitch is if the Bank of England doesn’t offset the negative effects on aggregate demand, but there’s a simple solution to that: change its mandate. A nominal GDP (which is total nominal spending; ie. aggregate demand) target would be ideal.

5. inyourhouse

*some other businesses are facing an equivalent increase in demand

My comment made it seem as though I was saying one business would get the entire increase, which is obviously false.

Capita predicts public sector surge

Outsourcing giant Capita has said it stood to benefit from Government spending cuts as public sector clients are forced to offload work to the private sector.

The group believes that while it may be hit in the short-term by austerity measures, the drive to slash public sector costs will offer it “significant opportunities” to pick up outsourced contracts.

It is already seeing a strong pipeline of work coming through for local councils, central government, health and defence departments, according to Capita.

The firm’s comments came as the group reported underlying pre-tax profits up 15% to £163.1 million in the first half of 2010.

http://money.uk.msn.com/news/articles.aspx?cp-documentid=154190208

3 – Given that Nick Clegg is, in large part responsible for the LLU regulations which mean broadband in the UK isn’t all that terrible (it’s not, honest), I’m reasonably confident that he knows the value of a competitive market in the right kinds of industries. Let’s just hope they don’t try to shoehorn the markets where they don’t belong.

2 – anyone who attempts to kill the minimum wage shall be hunted down and Hurt by me. And that includes Mr Chope ( http://services.parliament.uk/bills/2008-09/employmentopportunities.html ). Having worked (illegally) for £3/hr, it’s not an ‘opportunity’ I think we should be allowing in this country. I wouldn’t mind upping the minimum wage to £7/hr or so, actually. That’d be nice.

8. inyourhouse

@7 – so raise the minimum wage to benefit yourself and screw those who will be pushed into unemployment because of it? That’s a rather selfish attitude. A more rational proposal is to abolish the minimum wage and extend the working tax credit to compensate. The WTC does not price workers with low productivity out of the market. It’s also more effective at targeting those truly in poverty because it takes into account household income, whereas a number of those earning the minimum wage are teenagers or spouses in middle class households. Of course, the WTC could do with some reform itself (in particular, making it a monthly or quarterly system rather than an annual one), but it is still superior to the minimum wage even in its current form.

In this Saturday’s The Economist, on the subject of what exactly is constraining bank lending to business:

“But recently even surveys from small-business associations suggest that poor access to finance is not the main reason why bank lending to businesses is falling. It is rather that business confidence is stalling and business costs are rising. The London Chamber of Commerce and Industry says just 24% of firms in its sample are actively seeking credit, and “only” 17% report difficulty in getting a loan.”

Never-ending story
http://www.economist.com/node/16693862?story_id=16693862

I’m more persuaded by the evidence of business uncertainty about the future than by strident claims that public spending cuts – which won’t start to bite until next spring – won’t have much impact on aggregate demand and GDP growth.

4. inyourhouse

‘ The Bank of England is able to offset any negative effects on aggregate demand caused by fiscal consolidation. Given this, the idea that the private sector will be hit by the cuts is a classic case of the “seen and the unseen” fallacy. Businesses like Capita will face less demand, but if aggregate demand is unchanged then that means some other business is facing an equivalent increase in demand. It’s really as simple as that. The only hitch is if the Bank of England doesn’t offset the negative effects on aggregate demand, but there’s a simple solution to that: change its mandate. A nominal GDP (which is total nominal spending; ie. aggregate demand) target would be ideal. ‘

Given that the BoE do not have a mandate other than to maintain 2% CPI at all times, who in the current ConDem is arguing that they should have a NGDP targeting mandate? No one. Therefore, eventually the hawks will prevail and they will not offset the fiscal consolidation. Moreover, how will this offsetting be transmitted to the economy? The narrative coming out of the coalition is anti-bank creating an atmosphere of regulatory uncertainty about future liquidity and capital requirements. In such circumstances the banks will continue to shrink their balance sheets because they do not know what the future environment will be like. All those current bank adverts all over the place trying to get savers deposits to boost their deposit ratios is already monetary tightening. Sterling has been appreciating for weeks which is evidence that monetary policy is too tight.

11. inyourhouse

@10 – “Given that the BoE do not have a mandate other than to maintain 2% CPI at all times, who in the current ConDem is arguing that they should have a NGDP targeting mandate? No one. Therefore, eventually the hawks will prevail and they will not offset the fiscal consolidation.”

Nobody in government is arguing for an NGDP targeting regime, unfortunately. However, if the left put the energy they currently put into criticizing cuts into promoting an NGDP targeting regime then it is very likely that it would be adopted. It’s hardly as controversial as fiscal policy, is it? It seems as though the left want to maintain government spending for ideological reasons, which is why they are reluctant to point out that monetary policy can offset any negative effects.

“Moreover, how will this offsetting be transmitted to the economy? The narrative coming out of the coalition is anti-bank creating an atmosphere of regulatory uncertainty about future liquidity and capital requirements. In such circumstances the banks will continue to shrink their balance sheets because they do not know what the future environment will be like.”

How an expansionary monetary policy effects the relative structure of demand depends on the precise mechanisms used by the BoE. For example, if they put a penalty on banks for holding excess reserves then the growth in demand would largely come through an expansion of credit to businesses. The mechanism used is unimportant, though. What’s important is that however they do it, the BoE does have the power to control aggregate demand.

By the way, I agree that the government is creating an atmosphere of regulatory uncertainty, and that would certainly make the BoE’s job more difficult. However, all that’s necessary is to set up a market in NGDP futures – the BoE can use that to judge how effective its actions are.

“It seems as though the left want to maintain government spending for ideological reasons”

C’mon. Try instead this by Chris Giles in the FT:

Osborne delivers kill or cure Budget
http://www.ft.com/cms/s/0/de6ba960-7dde-11df-b357-00144feabdc0,dwp_uuid=ec12e25a-624a-11de-b1c9-00144feabdc0.html

13. inyourhouse

@12 – “C’mon. Try instead this by Chris Giles in the FT:”

I read that article weeks ago. It doesn’t address my comment about monetary policy offsetting fiscal consolidation in any way, so I have no idea why you posted it.

@13: “I read that article weeks ago. It doesn’t address my comment about monetary policy offsetting fiscal consolidation in any way, so I have no idea why you posted it.”

Chris Giles – economics editor of the FT and hardly a stereotypical “leftie” – was warning of the downside risks inherent in Osborne’s emergency budget. Similar warnings were expressed by Martin Wolf in the FT.

As for monetary policy offsetting fiscal stringency, that can prove challenging when interest rates have already been cut to 0.5% and when businesses and consumers seem willing to continue to pile up cash balances or pay down debt rather than spend. This is why Keynes characterised monetary policy in depressions as like “pushing on a piece of string”.

As John Kay remarked in the FT:

“The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

“Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead.”
http://www.ft.com/cms/s/0/19491372-472c-11df-b253-00144feab49a.html

8
Why should I, as a taxpayer, fund employers who are not prepared to pay a living wage?

16. inyourhouse

@14 – “As for monetary policy offsetting fiscal stringency, that can prove challenging when interest rates have already been cut to 0.5% and when businesses and consumers seem willing to continue to pile up cash balances or pay down debt rather than spend. This is why Keynes characterised monetary policy in depressions as like “pushing on a piece of string”.”

Yes and we now know that Keynes was wrong: there is no limit to what the central bank can do to nominal variables, even in a liquidity trap. This is acknowledged by almost all mainstream economists. Paul Krugman (a liberal) has suggested that in the US the Federal Reserve could be expansionary by committing to a higher target rate of inflation, for example. It’s not my preferred solution (inflation targets can’t differentiate between shocks to aggregate demand and aggregate supply, unlike nominal spending targets), but it would certainly be expansionary. Consumers will only hold cash balances and pay down debts up to a certain point before they begin to spend. That point may be very high, but the BoE can increase the money supply as much as it wants until it reaches that point. Do you deny that?

“As John Kay remarked in the FT:”

The usual anti-mainstream nonsense. You don’t need a DSGE model to realize that monetary policy can be expansionary in a liquidity trap. Ben Bernanke reached the conclusion based on an empirical analysis of the Great Depression.

@15 – “Why should I, as a taxpayer, fund employers who are not prepared to pay a living wage?”

It’s not a case of employers not being “prepared to pay a living wage”. It’s a case of simple maths: if somebody contributes £n per hour to revenue, why should a business pay that person anything more than £n per hour? If the person was paid £n+1 per hour, then the business would be making a loss of £1 per hour on the person. That’s why the minimum wage causes unemployment – employers simply don’t hire people whose productivity is lower than the minimum wage because they would be losing money.

The WTC is better from a humanitarian perspective because it allows people who aren’t very productive to work as well as have a suitable wage. You’re complaining about having to fund the WTC as a taxpayer, but you have to fund the unemployment benefits of those pushed out of work due to the minimum wage as well as funding for all the negative externalities associated with unemployment. Why is the latter okay, while the former is not?

@16 – I regard most of your post as rubbish.

For instance:

“Paul Krugman (a liberal) has suggested that in the US the Federal Reserve could be expansionary by committing to a higher target rate of inflation”

How can a higher inflation target be achieved when the interest rate has already been cut to 0.5% and businesses and consumers show a continuing willingness to pile up cash balances or pay down debt rather than spend? The monetary authorities in Japan in the 1990s would have really loved to reverse the continuing deflationary spiral, year after year, with a bit of inflation but weren’t able to do so.

IMO Keynes was correct in saying monetary policy in depressions can be like “pushing on a piece of string”.

The evidence in last Saturday’s The Economist @9 is that much of the current failing of banks to lend to business is because of low business demand for loans as the result of business uncertainty about the future.

Try focusing on the evidence instead of your ideologically driven fixations.

Bob, not got involved in this so far, but he is looking at the evidence, you’re not. OVerall, he’s broadly right, I think.

How can the bank stoke inflation without cutting rates further? You think rates are the only tool they’ve got? What other measure has the bank been doing for the last year or so?

Printing money. Krugman argues that the central banks could continue to print money in order to stoke demand. That’s basic monetary policy.

Whether it’s a good idea or not is a different question, but it is an option. And it seems to be what King is planning.

19. inyourhouse

@17 – “How can a higher inflation target be achieved when the interest rate has already been cut to 0.5% and businesses and consumers show a continuing willingness to pile up cash balances or pay down debt rather than spend?”

Quantitative easing (ie. printing money). As I said before, consumers will only hold cash balances and pay down debts up to a certain point before they begin to spend. That point may be very high, but the BoE can increase the money supply as much as it wants until it reaches that point. Do you deny that?

“The monetary authorities in Japan in the 1990s would have really loved to reverse the continuing deflationary spiral, year after year, with a bit of inflation but weren’t able to do so.”

No. The Bank of Japan has a target of 0% CPI inflation. Whether that’s a good target or not is a separate matter, but they achieved what they wanted to. Indeed, because they were in a liquidity trap they used quantitative easing to reach the target, and they were successful: http://ideas.repec.org/p/nbr/nberwo/15565.html

“Try focusing on the evidence instead of your ideologically driven fixations.”

I am focusing on the evidence. You’re the one denying the overwhelming consensus among economists.

“What other measure has the bank been doing for the last year or so? Printing money. Krugman argues that the central banks could continue to print money in order to stoke demand. That’s basic monetary policy.”

I was and am well aware of that option – which is PRECISELY why I added the consideration of what when businesses and consumers show a continuing willingness to pile up cash balances or pay down debt rather than spend?

In other words, the extra cash put into ciculation gets hoarded because of rising uncertainty – and even more so if deflation (= falling prices) comes to be expected since purchasing decisions are then often postponed as prices will be predictably lower next year than this. In the 1990s, the monetary authorities in Japan really wanted to stop the the continuing deflationary cycle with moderate inflation but were unable to do so.

The evidence supports my interpretation. And btw John Kay was absolutely correct about conventional commentary not anticipating the recent financial crisis despite this warning in 2003:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

And this in 2002:

“CHARLES GOODHART, a former member of the Bank of England’s monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

“His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . ”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

On the evidence, bank lending to small and medium sized businesses is cumore the result currently of lack of demand on the part of business because of mounting uncertainties than because of an unwillingness on the part of banks to lend.

Too many have got into a state of denial over this and are intent on making a scapegaot of the banks to cover up George Osborne’s failing to take heed of advice from, amongst others, FT commentators about the downside risks inherent in his emergency budget.

“You’re the one denying the overwhelming consensus among economists.”

Rubbish – just read Chris Giles and Martin Wolf in the FT.

inyourhouse,

It is a fascinating debate and Scott Sumner argues a compelling case. I think Krugman’s argument is the likes of your argument and Scott Sumner’s does not acknowledge the pervasive conservatism of central bankers. At the moment the commercial banks are quite happy to sit with a steep yield curve coining it in at no risk. Sure, the BoE could do more and completely flatten the yield curve. However, we would immediately have the Daily Mail and Telegraph screaming about hyperinflation. The Taxpayers Alliance would be all over the BBC whining about the poor fixed income pensioners. Therefore, the culture that the Bank operate in constrain them. Moreover, I am not sure it would not just lead to a big build up in reserves. So put a negative interest rate on excess reserves. They would just park their excess reserves in the Treasury bills market.

Although I agree a NGDP targeting regime would be preferable to the current failure of 2% CPI targeting. You still need the banking sector functioning as a transmission mechanism.

16
The simple math is, that if the taxpayer didn’t subsidize certain labour, the producer would have to offer a higher wage in order to attract said labour. And ‘value’ doesn’t necessarily equate to cost, some cheaper labour will add a huge amount to the good produced while other more expensive labour will not.

It is a truth universally acknowledged that anyone who wants to abolish the minimum wage has clearly never had to live on or near the poverty line.

When the minimum wage first came in, there were predictions of doom and how it would make vast tranches of people unemployed. It didn’t, of course.

8 – I’m well above the NMW these days, fortunately. But that’s beside the point – I’m gifted with the ability to consider how things affect people who aren’t me.

Assuming there are ‘uneconomic’ jobs, we can pay for people doing them in three different ways. Either we can increase their pay through the NMW – resulting in the product of their labour (which someone, possibly you, has to buy) more expensive; we can supplement their earnings using tax credits – i.e., subsidize low goods/services prices via higher taxes; or we can shrug and accept the costs of having people working for a below-subsistence income (increased crime, higher welfare & health bills, etc). That means higher taxes, too.

So, a business wants to sell a good or service. Lower prices makes the business more competitive, but we have to pay for that competitiveness through taxes. And taking money from people to give to other people via the tax system is highly inefficient.

It’s really a no-brainer. Unless “I’m alright, jack” applies, of course.

26. inyourhouse

@20 – “In other words, the extra cash put into ciculation gets hoarded because of rising uncertainty”

For the third time I’m going to say this because you have yet to respond to it: consumers will only hold cash balances and pay down debts up to a certain point before they begin to spend. That point may be very high, but the BoE can increase the money supply as much as it wants until it reaches that point. Do you deny that? Here is a paper on monetary policy during a liquidity trap from an economist at the Swedish central bank that might help you understand: http://people.su.se/~leosven/papers/MonPolZIR090217e.pdf

“In the 1990s, the monetary authorities in Japan really wanted to stop the the continuing deflationary cycle with moderate inflation but were unable to do so.”

No, as I said before, the Bank of Japan has a target of 0% CPI inflation. Whether that’s a good target or not is a separate matter, but they achieved what they wanted to. Indeed, because they were in a liquidity trap they used quantitative easing to reach the target, and they were successful: http://ideas.repec.org/p/nbr/nberwo/15565.html

“The evidence supports my interpretation.”

No, it doesn’t. I’ve just linked to two academic papers on how monetary policy can be expansionary in a liquidity trap. You’ve just made unsubstantiated (and ridiculous) assertions.

“On the evidence, bank lending to small and medium sized businesses is cumore the result currently of lack of demand on the part of business because of mounting uncertainties than because of an unwillingness on the part of banks to lend.”

Irrelevant. The more the BoE increases the money supply, the easier conditions will become, and thus the greater the demand for loans will be. The evidence from Japan linked to above shows this to be the case.

“Rubbish – just read Chris Giles and Martin Wolf in the FT.”

I do apologize for looking at academic papers with empirical studies. Next time I’ll be sure to consult journalists.

@22 – “However, we would immediately have the Daily Mail and Telegraph screaming about hyperinflation.”

That’s why you have to change the BoE’s mandate to an NGDP target. That way inflation can never become hyperinflation.

“Moreover, I am not sure it would not just lead to a big build up in reserves. So put a negative interest rate on excess reserves. They would just park their excess reserves in the Treasury bills market.”

Looking at the evidence from Japan (see above), about 70% of quantitative easing had no effect on inflation, but 30% did. It seems clear that after some point, additional increases in the money supply have an effect – it’s just a matter of finding that point. As for just parking their excess reserves in the T-bill market, that would be great – it would mean all the excess reserves going out into circulation. Scott Sumner actually addressed that point in his latest blog post.

@23 – “The simple math is, that if the taxpayer didn’t subsidize certain labour, the producer would have to offer a higher wage in order to attract said labour.”

No. If a worker only has a marginal revenue product of labour of £3 per hour, then a business is not going to offer a wage of, say, £5 per hour because they would be losing £2 per hour. The business would have a higher revenue without that worker.

“And ‘value’ doesn’t necessarily equate to cost, some cheaper labour will add a huge amount to the good produced while other more expensive labour will not.”

I don’t know what this is in response to. I never even used the word “value”. I’m talking about the marginal revenue product of labour.

@24 – “It is a truth universally acknowledged that anyone who wants to abolish the minimum wage has clearly never had to live on or near the poverty line.”

I lived below the poverty line for most of my adult life. I also understand economics and so I realize that subsidizing workers with low productivity is better than pricing them out of the market.

@25 – “When the minimum wage first came in, there were predictions of doom and how it would make vast tranches of people unemployed. It didn’t, of course.”

That’s largely because the initial minimum wage was very low. Nevertheless, there is evidence of employment and hours worked reductions in low-skill sectors: http://ideas.repec.org/p/cep/cepdps/dp0544.html

Of course, it will take decades to see the full effects of the minimum wage. Neumark and Wascher’s book “Minimum Wages” analyses over 300 different studies from multiple countries with datasets of up to 50 years. They find that the vast majority of studies have found that an increase in the minimum wage increases unemployment: “[O]ur overall sense of the literature is that the preponderance of evidence supports the view that minimum wages reduce the employment of low-wage workers” (p. 104)

“Lower prices makes the business more competitive, but we have to pay for that competitiveness through taxes. And taking money from people to give to other people via the tax system is highly inefficient.”

You seem to be under the impression that if the minimum wage simply means higher prices for goods. That’s not the case.

I must admit to not knowing a great deal about economics, true. But my impression of the minimum wage isn’t that it just increases price of goods – I said goods and services :).

Obviously. there’s a wage point above which companies will be discouraged from employing people if they have to pay them a certain amount – in my area of expertise of low-paid jobs (catering), I guess that’d manifest as the company employing fewer people to do the same amount of work, attempting to get “value for money” out of the wages they’re paying.

I’m open to the idea that the NMW results in less jobs overall – but I don’t think that, in and of itself, it results in “vast tranches” of job losses. I should get that book you quoted and read it, though, so I can actually make an informed judgment on that specific point. A small negative effect is acceptable in my mind if the jobs that are left are paying reasonable rates.

It seems to me that companies are always looking to reduce their costs, and wages are a big cost. So they’ll reduce them as much as they can – and I guess offshoring is one consequence of that, given that not everywhere has a minimum wage (although it seems quite common in the EU as a whole).

(looks up marginal revenue productivity)

I’ve got an idea filtering through my head that I can’t really express very well – especially not in economics terminology, but I smell a circular reference. When you work out the MRP, you’re valuing the worker’s labour based, at least in part, on what you can afford to sell the product of that labour for. Which depends on your wage bill. So if you reduce the amount of money that you’re paying your worker, you can sell the product of his labour for less money, which means his labour is worth less.

Hrm. I think that’s the point I’m trying to make. I don’t know how good it is – I’m well beyond my comfort zone here.

ENOTENOUGHEDUCATION. REDO FROM START.

Nick, broadly, in the current economy, I support a minimum wage, although I acknowledge that, at the margins, it does stop some jobs and at times create work for others.

Specific examples, pubs used to pay people a pittance to collect glasses, they’d also get paid in kind. Normally, those people would be doing it for spare extra cash.

Now, pubs don’t do this, because the NMW makes the value of the work done non existent, instead, the actual paid bar staff have to collect glasses, increasing, partially, their workload. Make sense?

For those at the lowest end, they’ve lost a possible source of occasional extra spare cash, or at least free drinks, and other employees have an increased workload. Offices sometimes cut back on cleaners and tell staff they have to have to clean their own keyboards/screens/etc.

Now, as to ‘putting prices up’, it can’t. It might be used as an excuse, but it doesn’t.

In a competetive economy, which, broadly, we’re in, prices are determined by four factors, supply, demand, scarcity and the price a purchaser is willing to pay. The more competition, the lower the prices, the less competition, or the more ‘prestige’ the brand, the higher the prices.

That’s it. Companies will talk up their brand and the quality and how much they pay their workers in order to give a perception (perhaps a real one) of quality to justify higher prices. Other companies will put almost identical products in cheaper packaging to allow those of us that want the cheapest and will go elsewhere to buy ‘value’ products to buy cheap, while those that value perceived quality buy the more expensive product.

Trust me on this, when it comes to baking a cake, tesco basic self raising is fine. Tesco basic from concentrate orange juice is also fine, not as good as freshly squeezed, but indistinguishable from other from concentrates.

That’s what determines prices. If Tesco is cheaper, I go there. If Lidl were nearby, I’d go there more often (that’s scarcity).

When it comes to wages, you can sell a product at market price. If you can’t make a profit at that price, you go bust. Ergo if wages go over marginal value of work, those jobs are lost.

The question we have to decide on is is that a price worth paying; is an increase in unemployment and/or a decrease in opportunities a Good Thing. To an extent, given the current system, I say yes.

If we replaced the lot with a Citizen’s Basic Income and a high threshold tax system, the NMW would be an impediment and unnecessary. But that ain’t going to happen any time soon…

It’s quite funny to read the apologists for being anti-NMW (one of the few good things the Labour gov did).

Guess what folks, if we legalised slavery again we could solve all these economic problems! Let’s go!

Reductio ad absurdum perhaps but not without precadent. Back in the 1800s it was hailed as a great victory to stop children from working a 14 hour day… making the maximum “only” ten hours (IIRC). the same type of people who are commenting here were arguing back then from a purely economic point of view how it would be bad for business etc. It’s pretty much how to spot a Tory – if someone starts spouting jargon and meaningless stats without an ounce of compassion for folk who have to work these shit jobs to survive then you got yourself a true-bluer.

@28

So shit jobs that pay fuck-all won’t be created. And the problem here is? What’s the problem with giving workers a decent standard of living FFS? I realise you say you’re in favour of the NMW but your argument is daft.

31. Sevillista

Re Minimum Wage, it is obvious what will happen.

Unemployment is going to rise significantly as public sector
workers and private sector workers whose companies
depend on government procurement are made unemployed. “Work for benefit” schemes will further dampen demand for workers who don’t want to work for £56/week JSA.

The blame for this unemployment (as we are seeing some commenters doing above) will be put on the minimum wage preventing the labour market from clearing. Abolish the minimum wage, they will say, and
our economic problems will be over.

It’s all so obvious.

S. Pill, the problem is that there are less jobs within the economy for the very lowest skilled. The least employable as is are finding it a lot harder to find work, any work, at all.

So they have no choice but to stay on benefits as they’re, arguably, unnemployable. Arguably, they’re unemployable anyway, but that’s not the case for all of them.

Your position is that you’d rather someone be on the dole than earn less than NMW. My position is I’d rather look at all factors and decide if that is a price worth paying, and move to a position where the NMW isn’t needed.

I can assure you the argument isn’t ‘daft’, it’s not even an argument, it’s an analysis.

The NMW does, at the margins, create unemployment and reduce employment opportunities. That’s a fact backed up by masses of studies and can be justified by economic analysis from any position on the ideological position.

My question is therefore do we, as a society, think that’s acceptable. Your position appears to be yes, it is acceptable. Is that the case?

28 – totally, citizen’s allowance is extremely desirable and would indeed make the NMW obsolete. It’s not even /that/ much more expensive than our current system – and it’s a lot simpler.

To my mind (and I’m not sure how accurate this is), most NMW jobs aren’t opportunistic – like glass collecting. They’re full-time occupations on which people are trying to live, and – offshoring aside – it’s still not obvious to me that increasing the cost of employing people in these jobs will result in the jobs being lost, rather than prices increasing.

If cocoa doubles in price (hey, it might happen soon….), companies don’t necessarily stop making chocolate bars – they /can/ increase the price. Since every manufacturer of equivalent goods is affected, it doesn’t affect the competitive dynamic at all. If the public accepts the price increase, the companies don’t go bust. Same for fuel or bus fare price rises caused by soaring oil costs.

If I go to a cafe, I don’t really care if the cup of tea and the sit down costs me 95p or £1.50. I’m not even going to blink if they charge me 10p for the milk and sugar. There’s plenty of room for price rises to allow us to revalue the products of labour to make employment at the NMW economic in this sense, to my mind.

32 – I think that makes reasonable sense. And I’d say that, yes, I’d rather have the state pay for someone to be out of work than for them to be in work at a rate that isn’t enough for them to live on in any kind of dignity. I don’t mind paying the “costs” of that out of my wages as benefits to those people who are out of work.

Do you thinks lots and lots of other people will be on NMW jobs who would otherwise be on a lower rate of pay? Do you think the total amount of extra pay due to NMW is greater than the amount of pay in jobs lost through the NMW? (Obviously, these would be fiendishly hard sums to do. I wouldn’t care to guess at the answer).

Falling back on my own experience, doing 30 hours/week at £3/hour was intensely demeaning and not /actually/ enough to live on. When I lost that and ended up on income support instead, I was averaging slightly more money/week – but I had more peace of mind and was able to get my act together enough to restart at college, whence I got off of income support by taking another job above the minimum wage (£6/hour, 20 hours/week – about £110 all in, after tax). That job was great & fitted in with my college hours very nicely, thank you.

If I’d kept in that £3/hour job, I’d never have gone back to college, never have gotten to university, and I’d probably be working as a cook in a greasy spoons right now.

Nick, yes, good questions. Please bear in mind as I answer them that I learnt a little economics as part of my politics and history degree, and the rest is self taught afterwards, that so few of us in this country are taught even the basics of how the economy runs really damages political discourse, so I thought I’d do what I can to teach myself. Krugman’s columns are a good starting point, as is any book by Tim Harford, especially his first, nice basic primer in laymans terms.

Anyway, point by point

totally, citizen’s allowance is extremely desirable and would indeed make the NMW obsolete. It’s not even /that/ much more expensive than our current system – and it’s a lot simpler.

Yes, a lot, it used to be LD policy but was dumped in, IIRC, 1994 (I wasn’t a member then) because they couldn’t figure out how to cost it, it became an aspirational aim. IDS seems to be moving in the right direction with his proposals, but I doubt Gideon’ll pay for it.

To my mind (and I’m not sure how accurate this is), most NMW jobs aren’t opportunistic – like glass collecting. They’re full-time occupations on which people are trying to live,

They are now, sort of, yes. But many jobs simply don’t exist within the private sector anymore; cleaners and similar, or casual day staff. I used to have a part time job in a shop (nearly 20 years ago, I was 16) earning £2 per hour, no contract. Great for me, and useful for the shop to be able to call in extra staff when busy. But the marginal cost of employing an extra member of staff can be quite high; if you’ve got to pay them £5 per hour, plus taxes, you need to ensure that you’re going to make more than that in actual profit in increased sales. For a lot of smaller shops and pubs and similar, they can’t be sure of it, so you get more flustered and overworked till/bar staff, etc.

There were other FT jobs, some of them now earn the NMW and others simply don’t exist.

it’s still not obvious to me that increasing the cost of employing people in these jobs will result in the jobs being lost, rather than prices increasing.

Specific example. I, when a student, had a brilliant summer job. £20 per day flat rate, I had to take language students on excursions, chat to them and run entertainments. We had lots of staff (were overstaffed), but the work was easy and fun. We’d regularly do 10+ hour days, but didn’t care, because a lot of that time was sitting on the beach “supervising” kids having fun.

Then the NMW came in, staffing ratios had tob e completely redone. The company put charges up to customers a bit, but it was competing with schools all over the world, including Malta (also an English speaking country), so having to price to market, simply instead had to cutback on staff and reduce shift times, so staffing ratios went down to the legal minimum, and the job was a lot less fun.

Weirdly, those employed in it, despite now earning a lot more, put less effort in, it became “just a minimum wage job”, rather than a great fun summer job. I grew up in a seaside town, that sort of work was all you could get, some of my colleagues weren’t students, this was their only job each year. Scary stuff.

That company still exists, is still thriving, but the leisure package got completely rewritten. I’m rambling, sorry. Yes, it does reduce jobs in some sectors. It also increased aggregate demand in other sectors, so possibly other jobs were created, but that’s a different argument.

If cocoa doubles in price (hey, it might happen soon….), companies don’t necessarily stop making chocolate bars – they /can/ increase the price. Since every manufacturer of equivalent goods is affected, it doesn’t affect the competitive dynamic at all. If the public accepts the price increase, the companies don’t go bust. Same for fuel or bus fare price rises caused by soaring oil costs.

Yes, but total demand for the product reduces, as do margin per item sold, so some companies do go out of business. Look at, for example, pubs. Govt policy over the last 30 years has been to hike the price of alcohol, the amount drunk has thus gone down and about 40 pubs per week are going bust, it was 50+ per week before the recession hit (the recession helped pubs for a few reasons outside the remit here).

Sure, the businesses still exist, but the least profitable fail, and aggregate demand is decreased; I’ve significantly cut back my chocolate and coffee consumption, for example. It still buy it, but prices are higher, so I buy less.

If I go to a cafe, I don’t really care if the cup of tea and the sit down costs me 95p or £1.50. I’m not even going to blink if they charge me 10p for the milk and sugar. There’s plenty of room for price rises to allow us to revalue the products of labour to make employment at the NMW economic in this sense, to my mind.

Except if it does go up from 95p to £1.50, you might not come back, either looking for somewhere else, or, perhaps more likely, not going to a cafe and instead drinking your tea at home.

When eating/drinking/socialising out of the house became too expenseive for us, we eat at home. When I was working in marketing in London, I’d buy a decent coffee froma decent coffee shop several times per day. Now I work part time in a Yorkshire school, I can’t afford that, so instead drink instant at home (I could pay £1 per week to the school as a contribution and have coffee there, but that’s more expensive).

Ergo, by increasing prices, even if it’s an accros the board increase that affects everyone in the sector equally, you decrease aggregate demand, some potential customer drop out of the market. so some businesses fail; this does allow other within the sector to increase their margins and thus increase profits, as less competition means higher prices.

There is no doubt, at all, that an NMW decreases job opportunities. The question is by how much, and whether that is worth it. My current position is the decrease isn’t that big, and the overall benefit makes it acceptable, but denying that it happens at all is head-in-the-clouds willful ignorance. Something ‘the left’ has to move beyond

@32 MatGB

The least employable will always find it harder to get work, minimum wage or not. You say the NMW stops people from being glass-collectors and computer-screen wipers and that is “analysis” so can’t be “daft”. Well it may well be analysis but it seems to be a daft argument against the NMW – what it is an argument for is better training for the long-term unemployed/unemployable so they can get into jobs that aren’t meaningless and demeaning. As for my views on the matter, Nick @34 puts it pefectly: “I’d say that, yes, I’d rather have the state pay for someone to be out of work than for them to be in work at a rate that isn’t enough for them to live on in any kind of dignity.”
That’s the whole damn point. Dignity.

Pill, yes, it is, dignity. And I’m not putting forward an argument Against the NMW, I’m analysing the effect. It does stop some jobs from existing. Do we accept this as being a net good? Yes, I think we do. But a lot of people seem to deny it even happens. That’s daft.
Nick

Do you thinks lots and lots of other people will be on NMW jobs who would otherwise be on a lower rate of pay? Do you think the total amount of extra pay due to NMW is greater than the amount of pay in jobs lost through the NMW? (Obviously, these would be fiendishly hard sums to do. I wouldn’t care to guess at the answer).

Exactly. Well outside my paygrade, and I really don’t know. On balance, I think we benefit, currently, from having the NMW, but would like to see us move to a situation where it simply wasn’t needed by, as S Pill suggests, ensuring that everyone is educated to a level that their marginal production value is high enough they can get decent work.

Counterpoint. I quite my just-above-minimum-wage shop job aged 24 to go back to college, then go on to get a degree. Since then I’ve worked all over the place.

Soon after I moved to Yorkshire, my freelance marketing work dried up (damn recession, IT marketing is not a sector to have just moved into at the beginnning of a recession). I spent over a year effectively unemployed, but as Jennie worked full time, ineligible for many benefits.

My mental health suffered, a lot. Not all those who end up unemployed have mental health problems. Some of us do, and if you spend a year out of work and are prone to problems, boy it can be a doozy.

Fortunately, I kept involved in other stuff, including politics, and got my current job with the assistance of a good reference from my PPC.

So the flip side. The unemployable as is, because their marginal labour value is below NMW, have nu current chance. Many of them have been failed by the education system, place no value on education, etc.

And instead spend their days looking to alleviate the boredom. Is that, and the linked anti-social behaviour (*glares down the street at the house of the person he’s describing) a price worth paying?

Reducing employment opportunities for the least well educated increases unemployment and can increase crime and other ASBs.

I say that’s OK, to an extent, and should instead work on ways to alleviate the problems in other ways. But if we don’t acknowledge it at all, then nothing will be done about it (except introduce ASBOs & bemoan the “rise” in ASB over the last decade).

Good this economics lark, isn’t it? Gives you a completely different way of looking at problems, and sometimes lets you look for better solutions because of it. Of course, other times it means you make fucking stupid schoolboy errors, but, y’know, no one’s perfect…

The problem when discussing wages is people think in moral terms. However, the way wages are determined is through an amoral labour market. The market does not care if someone earns enough to live on that should be the concern of politicians. Paul Krugman was mentioned and there is no better international trade economist. I don’t think anyone would accuse him of being a right-wing apologist. Here are a couple of his articles explaining how wages are determined.

http://www.pkarchive.org/cranks/LivingWage.html

This one is en excellent article about Ricardo’s comparative advantage and how it determines wages in a national labour market.

http://web.mit.edu/krugman/www/ricardo.htm

Wages in the developing world.

http://www.slate.com/id/1918

@37

The problem with economics as a science is that it removes the humanity from people and reduces them to units or factors in an equation, effectively dehumanising workers (and the poorest of them if we’re talking minimum wage/crap job workers) which I see as a bad thing indeed. Sure the science has gotta stack up but as I mentioned before a slave society would solve a few problems economically. I think we’re on the same page with this one just looking at the issue from different angles.

@38

Exactly and that’s why we need the Gov to interfere, because despite what our libertarian friends tell us the market is far from perfect. Cheers for those links, will check them out.

@39: “Exactly and that’s why we need the Gov to interfere, because despite what our libertarian friends tell us the market is far from perfect.”

Try this interview in the FT of Prof Carmen Reinhart on recurring patterns in 800 years of financial crises:
http://video.ft.com/v/82349517001/May-3-800-years-of-financial-crises

She is co-author of a book with Kenneth Rogoff: This Time Is Different – 8oo years of financial crises (Princeton UP, 2009)
http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf
http://press.princeton.edu/titles/8973.html

Rogoff, now at Harvard, was previously chief economist at the IMF. He is a Grand Master at chess.

This recently published book on market failure has been well-reviewed in business media: John Cassidy: How Markets Fail – The Logic of Economic Calamities (Allen Lane, 2009)
http://www.businessweek.com/magazine/content/09_47/b4156079791251.htm

There’s a long mainstream history of the economic analysis of market failures – this was the state of the art 50 years ago:

Francis Bator: The Anatomy of Market Failure
http://instruct1.cit.cornell.edu/courses/econ335/out/bator_qje.pdf

39
I agree that we need a government to intervene in the labour market but it has to be the right intervention. WFTC intervenes in the wrong way, it enables producers to rely on taxpayers to subsidize wages, rather than to price unit costs realistically. Moreover, it discriminates against young single people, (no surprises why the 16-25 age group suffer the highest unemployment rates)

@42

Quite frankly I’m increasingly of the opinion that capitalism can’t be tinkered with to be properly equitable at all. Damned if I know the solution, it’s quite depressing. WFTC has done some good in lifting people out of poverty (and the poverty trap) but as you say it’s far from perfect.


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