The Old Rectory Syndrome

The more data we crunch about the self-employed, the more complex the picture becomes.

Ben Dellot has compared the earnings and assets of the self-employed. He found that households totally reliant on self-employment earnings are far more likely to have below average incomes than those where at least one person in the household is an employee.

This is true across all age groups, though particularly so among the under 25s.

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This is consistent with what we know about self-employed incomes falling further and faster than those of employees.

But, despite their low levels of income, the self-employed are more likely to own their homes outright than those in other forms of employment.

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The data on property wealth is slightly older than that on income. Some of this might have changed after the recent rise in self-employment. Nevertheless, the differences are of the scale that suggest the pattern is probably still similar.

We already know that the distribution of income among the self-employed is much wider than it is for employees. A lot of the self-employed are poor and a much smaller number are exceedingly rich. This has been the case for years and is true in most developed countries. As the OECD noted, when you add the self-employed to the calculation, the Gini coefficient shoots up.

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That said, even though there are huge inequalities among the self-employed, the data suggest that there is an overlap between those with high property wealth and low income. If around 35 percent of self-employed only households own their houses outright and a similar percentage are earning below average incomes, it’s probable that some are doing both. There is a subset of the self-employed who are, as Ben says, cash-poor and asset-rich.

There is almost certainly an age dimension to this. Michael points out that, when you look at the number of people owning their homes outright, a higher proportion of those not in work at all do so than of those employed. The majority of these are retired people. It is highly likely, given the age distribution of the self-employed, that most of those who own their houses outright are also at the upper end of the age range.

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As Michael says, that wealth has not necessarily come from self-employment.

The fact that people who are presently self-employed have a lot of wealth doesn’t necessarily mean that their wealth derived from self-employment or that the self-employed are more likely to save or invest. For many of them, their property and financial assets will have been acquired during employment as an employee. This won’t just be older people who have moved to self-employment as an alternative to retirement, but will also include 40-something employees who are financially secure enough to afford to strike out on their own. On their first day of self-employment they might own their property outright and have a fair-sized financial cushion of savings and investments, but none of their wealth will have derived from self-employment.

People can’t build up significant wealth if they have low incomes. If they are asset-rich and cash-poor, they must have been cash-rich at some point in the past. If their earnings are low, it is unlikely that they became asset-rich by being self-employed. More probably, it was being asset-rich that enabled them to become self-employed.

I wonder if some of what we are seeing here is the Old Rectory Syndrome. The origin of this term is obscure but the first time I saw it used was in an article in the 1980s attempting to explain the difference in work ethic between the UK and the US. I forget who wrote it but I remember the argument well. Americans, said the author, want to be rich. The British, on the other hand, want to be comfortably off. The Old Rectory, he said, was the pinnacle of British middle-class ambition. The Americans would work until they were rich but the British would stop working once they had achieved the lifestyle epitomised by owning an old rectory in a village or country town.

I can’t speak for the Americans but there is a certain truth in this about the British. The Old Rectory is, of course, symbolic. That won’t be everybody’s dream. But once they have what they consider to be a comfortable lifestyle, even high-earning Brits tend to call it a day. Property is key to this, be it an old rectory, a converted barn or a Scandinavian eco self-build. Once the mortgage is paid off, it leaves people free to go and do their own thing. They don’t need to earn much because the house, which used to gobble up most of their income, is now bought and paid for.

That last bit is important. It’s that bought-and-paid-for-ness that allows former corporate professionals to go off and find themselves. For many people, housing costs, or the lack of them, will have been a key factor in making the decision to go self-employed. The important thing is that the house has been banked and they don’t need to worry about it any more. Therefore, people can be property-rich, income poor and a lot happier.

There is an interesting implication here for advocates of a Land Value Tax though. An objection often raised against LVT is the poor widow forced to move out of the house she has lived in for decades because her income cannot cover the tax. But what if the poor widows are joined by a larger, more politically savvy group of income-poor freelancers living in houses they assumed they had paid for? If they have downsized on the basis of having low housing costs, having to pay a tax on the land under the Old Rectory is not likely to go down well.

At the moment, we don’t know how big a subset of the self-employed are asset-rich and income-poor. (The RSA is planning to do more research on this over the next few months.)   It might only be a few hundred thousand. What we can be sure of, though, is that they will be a very noisy few hundred thousand. Another way in which Britain’s shifting labour market might change its politics over the next few years.

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Can UKIP scale up?

Douglas Carswell’s defection to UKIP provoked a furious reaction from the man who thought he was going to be the local candidate at the general election. What was supposed to have been a triumphant announcement was soured by the row, as UKIP supporters insulted each other on Twitter in a way that only they seem to know how.

This is just the sort of shit-storm that companies employ change managers and communications specialists to prevent. Sometimes, when things are changing rapidly, you have to do things that people don’t like. Occasionally, you have to dump on them from a great height. You try to get as many people as you can to support, or at least go along with, the change. For the rest, you do things to minimise the damage. That’s why you use stakeholder analyses and premortems. Work out what might go wrong, who will be most pissed off and what the impact might be.

Roger Lord could stand for another equally winnable seat in Essex, says Nigel Farage. Maybe so, but wouldn’t it have been better to have that conversation with him before the announcement, rather than let him hear it on the news?

Does this bumbling and crass behaviour reflect UKIP’s lack of maturity as an organisation?  In a discussion last week, Brian made this comment:

It’s an interesting point. Scaling up an organisation is not an easy thing to do. Over the last few years, I have worked with a number of companies that were experiencing growing pains. It’s a fascinating process. At a point, usually somewhere around the 100 employee mark, companies have to introduce a certain amount of process and structure or they become unmanageable. There’s another point around the 500 mark, where they need to do even more boring stuff.

Everybody just mucking in and doing things, with the founders making most of the decisions on the hoof, doesn’t work when the company gets to a certain size. The organisation needs to develop a cadre of managers who can grow the business. Often, the founders lack confidence in their own management abilities, let alone those of their direct reports. It’s a problem of both capacity and capability. Are your business leaders good enough and do you have enough of them?

The other problem facing growing companies is what I call Startup Mourning. Wasn’t it so much more fun when there were a few of us in a poky little office, disrupting the market and scaring all the old fuddy-duddy competition? Now we’ve got to go all establishment and it’s so bloody boring! As the HR director of one such firm said to me, “It’s a bit like teenagers being told to tidy their rooms. They know they need to do it but there’s a lot of ‘Awww Maaan! Do I really have to?’”

Stanford’s Bob Sutton and Huggy Rao have done a lot of work on how organisations scale up successfully. It seems that even Google experienced a bit of Startup Mourning in on the road from disruptive upstart to global corporation. As Sutton explains:

Google’s founder and CEO Larry Page is exhibit one. As we wrote in Scaling Up Excellence:

‘Page has been described as “obsessed with making Google work like a smaller company.” In 2001, when Google grew to about 400 people, Page decided that middle managers were creating complexity and friction – symptoms of John Greathouse’s “Big Dumb Company Disease.” So he got rid of all of them. More than 100 engineers reported to a single overwhelmed executive. Frustration and confusion was rampant. Without those middle managers, it was nearly impossible for people to do their work and for executives to grasp and influence what was happened in the company. Page learned the hard way that a hierarchy can be too flat and that middle managers are often a necessary complexity.’

When you get to a certain size, you can’t work like you did when you were a small company. If you do, things will start falling apart.

There are any number of ways to scale up an organisation. Each will be unique to the organisation. But, say Sutton and Rao, most adopt one of two philosophical approaches:

Is it more like Catholicism, where the aim is to replicate preordained design beliefs and practices? Or is it more like Buddhism, where an underlying mindset guides why people do certain things — but the specifics of what they do can vary wildly from person to person and place to place?

So you create a model and structure that works and replicate it, or you imbue people with an idea and let them adapt it to their particular environment and circumstances.

As I was thinking about all this, something else struck me. We don’t study political parties in the same way that we study companies and public sector bodies. There is very little written about them as organisations. A number of academic disciplines, entire university faculties and tomes of literature are devoted to understanding organisations and the reasons behind their success and failure. Yet explanations for the success of political parties usually focus on their policies and the social and economic reasons why they appeal to certain groups of voters. Comparaitively little is written about the organisational factors behind their success. I’m sure some people have studied this but the difficulty I had in locating any of it suggests that the discipline is fairly obscure. This was about the closest thing I could find.

Yet much of what applies to companies must also apply to political parties. Across Europe, there have been a number of insurgent parties of the populist right. All are appealing to similar demographics based on similar concerns yet their success and its sustainability varies considerably. It is true that proportional electoral systems help get them started but that doesn’t always mean they will survive. Under Pim Fortuyn, for example, the Dutch right burned brightly then faded just as quickly. It’s successor, under Geert Wilders, has never come close, despite all the hype. One of the most successful has been France’s Front National, all the more interesting because it has broken through in a first-past-the-post electoral system. That this has something to do with its capacity for organisation is suggested in a couple of papers though, again, the literature is sparse.

The successful insurgent parties that have appeared over the last few decades are, if anything, characterised by the slowness of their growth, rather than its speed. The Scottish National Party, Sinn Fein in the Irish Republic and the various Green parties across Europe are examples of steady, rather than hyperbolic, development. How far has their success been due to the long-term development of organisational capability?

The lack of a successful party of the right in the UK has been partly due to the electoral system but also because our far right parties have been rubbish. Like companies, insurgent political parties experience something similar to Startup Mourning. It’s great fun when you are upsetting the system but tedious when you have to start building a party for the slow grind of winning elections. Even more tedious when you have to start running things. The BNP’s disastrous performance when it finally managed to get its councillors elected shows its complete lack of competence as an organisation. It produced plenty of people who could rant about things but very few who could actually run things.

Britain is as fertile a territory for a populist right-wing party as anywhere else in Europe. Until now, though, no-one has developed the organisational capacity to mobilise the dissatisfied of Tunbridge Wells and the downtrodden of Merseyside into a coherent and sustainable political movement.

Could UKIP be that organisation? As with a company, growth depends on people with the right organisational capabilities. Does it have them? Does it have enough of them? If it doesn’t, can it develop them quickly enough?

As Robert Ford and Matthew Goodwin say, since its foundation, UKIP has shown an almost complete absence of organisational ability:

For much of their history, the party repeatedly undermined their own prospects through fierce infighting, strategic miscalculations, single-issue obsessiveness and a failure to build an effective campaign organisation. That they even survived the past twenty years is, in itself, truly remarkable.

This, they believe, is now changing. Whether it can change quickly enough and whether the party’s leaders can manage that change will determine how successful it is over the next few years. Last week’s fiasco suggests it still has some way to go.

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The spirit of the age

The announcement by former boxing promoter Frank Maloney that he is undergoing gender reassignment was met with less hostility and more support than I (and probably he) expected. Boxing is, after all, a very macho world and transgender is probably the last frontier of sexual liberalism, the subject still causing the odd row even among liberal types. Even so, things seem to be moving in favour of social acceptance and equal rights. It took courage for someone in Maloney’s line of work to go public about a sex change but he probably got less rough treatment from the media than he would have had ten years ago.

I was reminded of this when I read Giles Wilkes’s comments on John Campbell’s biography of Roy Jenkins. More than any other politician, Jenkins symbolises the 1960s liberal attitudes which, eventually, prevailed in Britain in the subsequent decades.

Says Giles:

[H]e achieved an astonishing amount in a short time in the Home Office In less than two years he helped end flogging in prisons, legalise homosexuality and abortion, end theatre censorship, and bring in a Race Relations bill. The latter is despite the fact that both the TUC and CBI opposed Jenkins’ measures to improve racial equality. The author explains the former simply with “there was still a lot of casual racism in the workplace”. I still don’t understand it.

I do but then, I’m nearly a decade older than Giles. In the 1960s and 70s, a lot of the trade union left wasn’t all that liberal. It fought for workers’ rights. It was ambivalent, or sometimes hostile, to claims for equality based on anything else. Casual racism didn’t only take the form of personal abuse; it was prevalent in the language people used. A sentence like, “I’ve been working like a black and now they’re trying to jew me out of my overtime pay” would have passed without comment in many 70s workplaces. People would have been bemused by the suggestion that someone might take offence.

The change in how people view sexism, sexuality and racism has been the biggest shift in attitudes I have seen in my lifetime. The decline in smoking and drink driving run them pretty close but they had the terror of cancer and driving bans to back them up.

Sure, the law has played its part. Nowadays, a manager couldn’t tell another to “get his typing done by the wog” and win the resulting tribunal case. He could get away with it in 1985 but he probably couldn’t now.

The law has criminalised the worst of racism and sexism but social disapproval has done its bit too. Much of what used to be common racist language has been banished to quiet pub corners and people’s front rooms. It’s not allowed out in public any more. Rather like persistent drink-driving, it’s something only diehards of a certain age do.

What makes attitudes change is a subject that has perplexed social scientists for years. A report by Institute for Social and Economic Research (ISER) in 2010 explained:

Changes in attitudes across time are considered to be the result of three general processes: generation (or cohort) replacement, life-cycle (or age), and period effects.

I’ve always thought the ‘one funeral at a time’ effect, where people holding the old views gradually die off, taking their attitudes and prejudices with them, was a little pessimistic. After all, I’ve changed my mind about stuff over the years so I’m sure other people must do too.

There’s some fascinating research from IpsosMORI on this. Looking back through the British Social Attitudes survey they have mapped the changing social attitudes of age cohorts over time. That people get more conservative as they get older is one of those things that ‘everyone knows’ – except that they don’t, at least, not where attitudes to things like gender and sexuality are concerned.

Among all generations, even those born before the Second World War, attitudes towards gender roles and sexuality have become more liberal.

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Attitudes to the death penalty, Roy Jenkins’s other signature policy, are also moving in the direction he would have liked.

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Of course, somewhere around fifty percent of the population still holds small c conservative views on these questions but, slowly, attitudes across the generations seem to be changing.

Some of the other charts, like support for the welfare state and monarchy, might provide less comfort for those on the liberal-left but almost all of them show similar patterns over time across the generations. So, for example, if support for the monarchy or NHS falls for a few years, it tends to do so among all generations. This suggests that politicians, commentators and the news may have more effect on people than they like to think.

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There is, then, an observable difference between generations but also evidence that the changes follow a similar pattern. The old are generally more conservative than the young but they get more liberal at the same rate. The most interesting thing about these charts is that the patterns track each other and show people changing their minds in similar patterns. So society is getting less homophobic not just because homophobes are dying off but because people who once thought being gay was wrong have changed their minds.

I’d be fascinated to see something similar for attitudes in the workplace. How have the attitudes of generational cohorts shifted over time? As I’ve said before, I’m sceptical about the attempt to categorise generational attitudes to work and I’ve yet to see any convincing evidence for it. We are constantly (to the point of tedium) being told that Generation Y want more freedom, more flexible working, less hierarchy and all that but I wonder if this is really a generational difference or just a symptom of wider changing attitudes. Just as Boomers and GenXers have become more liberal over the years, have they also decided that they too want a more autonomous and less deferential working environment?

A couple of years ago, I was at a conference where a Millennial told us oldies about all the things that Millennials want from work. I replied that I, as someone on the outer suburbs of GenX, I wanted those things too. I don’t think I’m unusual in that. I think many of us have changed what we want from the workplace. I know people who had a command and control approach 20 years ago who now have very different views about managing people. They are not trying to be down with GenY, daddio, they have just changed their minds about what works.

It’s not just funerals and retirements that change attitudes. The process by which whole societies change their minds about things is much more interesting than that. Generational attitudes waver and people move with the times. The word zeitgeist translates as spirit of the age. That spirit moves in mysterious ways.

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Why is the gender pay gap higher for management jobs?

The Chartered Management Institute and XpertHR published the results of a survey on the gender pay gap last week. It found that female managers earn less than their male counterparts, with the gap increasing with age. At 23 percent, the management gender pay gap is wider than the 19.7 percent in the workforce as a whole.

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The study found that the management gender pay gap really kicks in in the mid 30s.

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It also found that, by and large, the gap increased the further up the career ladder people go.

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This is consistent with the ONS data that I have been following for the past few years. The full-time pay gap at the median has almost disappeared for those in the twenties, with women earning slightly more than men in recent years. There has also been a significant fall in the gender pay gap for those in their thirties.

Gender pay difference for median hourly earnings, excluding overtime Percentage full-time pay difference (men/women) by age band
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Last time I looked at this I said that it would be interesting to dig out the figures for different earnings percentiles. Then I left the country for a few weeks and forgot about it.

Fortunately, David Richter didn’t. He took up where I left off and charted the numbers by age at each earnings decile. As you would expect, the pay gap is wider at the top of the pay distribution than it is lower down.

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The age distribution is where it gets really interesting though. The pay differential for those in their twenties is fairly narrow, even at the very top level. The pay gap for those over 40 is significant at all levels of the pay distribution but much higher at the top. The thirty-something pay gap gets much steeper in the upper quartile of the pay distribution. Around the median, as we already know, the gender pay gap is much smaller than it was a few years ago for those between 30 and 40. In the upper income deciles, though, the thirty-something pay gap shoots up. Those at the 90th percentile earn 16 percent less than their male counterparts. For all age groups over 30, the pay gap at the 90th percentile jumps. (The 18-21 pay gap also shoots up but we are talking about a much smaller group here; about a tenth the size of the other age cohorts.)

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Age and position in the earnings distribution, then, has a significant effect on the gender pay gap. Women over 40 and/or in the upper income bracket earn significantly less.

The CMI/XpertHR survey prompted the usual outrage and demands for compulsory equal pay audits, the implication being that the pay gap is the fault of discriminatory employers.

Stop blaming the children,” said Harriet Minter in the Guardian, implying that employers are discriminating against women with children.

There is little doubt that having children has a significant impact on women’s earnings. The gender pay gap appears just at the point in the age distribution when many women have children.

This data from Debra Leaker’s ONS study reinforces the point. She found that the gender pay gap increased with the number of children. Having more children has little effect on men’s pay but quite a lot on that of women. Furthermore, among single people of all ages, there was no gender pay gap at all.

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This is pre-recession data (I’d be interested to know if anyone has done a similar analysis since) but it probably still holds true. Children have more of an impact on women’s pay than men’s.

Some of this may be due to discrimination but other factors are at work here. The data show that the pay gap is steepest at the higher income levels. High paying jobs tend to be with bigger organisations, the ones with sharp-eyed HR and diversity departments and therefore most likely to spot any unfair practices. That doesn’t mean that deliberate discrimination against women with children is impossible but it does make it that bit less likely.

The motherhood pay gap has as much to do with women ruling themselves out of high paying jobs, simply by being the ones who take on most of the childcare responsibilities. As the Women & Work Commission said:

Women, particularly women with children, tend to have shorter commuting times than men which limits the range of jobs available to them. This potentially leads to the crowding of women into those jobs available locally, and in either case, depresses wages.

On average, women who have children have a quicker journey to work than women without children. The travel-to-work time of women with more than two children is half that of their male counterparts.

Women often want shorter commuting times than men if they have children to drop off and pick up. Also, for women working part time, it does not make financial sense to commute long distances.

It also noted:

The difference between the commuting time for men and women is largest in London.

Which is where most of the high paying jobs are.

An ONS study a couple of years ago found that pay levels tend to rise with commuting distance, especially in London.

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If women want to work closer to home, it will have an effect on their pay and this effect is likely to be greater in higher paying jobs. An accountant or lawyer based in a suburb or small town is unlikely to earn as much as one based in central London or the centre of one of the major cities. Even if a woman reaches a senior position in a local firm, she won’t earn as much as she would in the big city.

Some of the gender pay gap, then, is due to social factors. Even in enlightened Scandinavia, women still take responsibility for most of the childcare. These countries have done more than most to close the gender gap, yet their pay gaps are still around the EU average and only slightly lower than ours. Italy, on the other hand, all but eliminated its full-time gender pay gap by taking a lot of its women of childbearing age out of the workforce altogether. This, I hasten to add, was not government policy but the result of deep rooted cultural assumptions. In Italy, women leave the workforce when they have children. In Scandinavia, as here, they soldier on in part time or lower paid jobs. Even the Nordics’ famous female-friendly policies can’t redress that balance.

The CMI/XpertHR finding that the gender pay gap is so wide in managerial jobs shouldn’t come as a surprise. It is in these roles where the effect of childcare responsibilities on salaries is most acute. The further up the pay scale you go, the bigger the gap.

None of this is to say that employers should not do more to reduce the gender pay gap but I wonder how much difference employer action will make. Pay transparency rules might yield some interesting information for pay data geeks to pore over but I doubt that it will tell us much that we didn’t already know, or even whether it will reveal some major employers to be significantly worse than others.

It is unlikely that the gender pay gap will disappear until equal proportions of women and men take equal responsibility for childcare. Even in Scandinavia, it doesn’t look as though that is likely to happen soon.

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The self-employment earnings timebomb

Lots of people have been poring over this week’s report on self-employment from the ONS.  I particularly liked this chart from Nathaniel Lichfield, showing annual growth in GDP, employment and self-employment.

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It shows clearly how, even though employment growth fluctuated with the economy, the rise in self-employment carried on regardless.

Self-employment, says the ONS, is now at a record high, both in terms of number and proportion of the workforce, accounting for around 70 percent of the increase in employment since the recession.

Screen Shot 2014-08-21 at 14.47.50But the increase is not due to more people becoming self-employed but to fewer people quitting self-employment. According to the ONS stats, the number of people becoming self-employed did not change much on pre-recession levels but the number of people leaving fell, by a lot.

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It’s like filling a bath with the plug slightly open. If you then close the plug, the bath will fill more quickly, even if you don’t turn the taps to flow faster.

After the recession, a lot fewer people made for the exit, so, even though the numbers entering self-employment stayed roughly the same, the overall number of self-employed shot up.

This puts a different slant on the story of rising self-employment. Not a surge of new entrepreneurs, hipster lifestyle businesses and redundant public servants going freelance but lots of long-term self-employed keeping on going, who might otherwise have gone back into employment or retired. It’s not particularly good for the government’s narrative. Not so much a new generation of independently minded go-getters creating their own jobs as a bunch of old lags hanging on for dear life.

One or two people have taken issue with these figures. They are slightly at odds with what the Resolution Foundation said earlier this year. While acknowledging that outflows were falling, it also identified an increase in inflows. It put 28 percent of the increase in self-employment down to reduced outflow and the rest to an upsurge in the newly self-employed.

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Where there is no argument, though, is on the massive fall in self-employed earnings. The ONS estimates a 22 percent drop in pay since 2008.

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This is consistent with the Resolution Foundation’s findings and the HMRC figures I discussed earlier this year. As ONS says, the self-employed may under-state their income in surveys but they have been doing this for years. Therefore, while it might understate the overall earnings figure, it wouldn’t make much difference to the percentage by which that income has fallen. That self-employed incomes have collapsed is now surely beyond doubt. Although there are hundreds of thousands more people self-employed than in 2008, £8 billion has disappeared from self-employed earnings. That’s an astonishing amount.

Michael O’Connor posted a few weeks ago on the number of tax credit claims by the self-employed. He noted that, while a million families were taken out of tax credits in 2012, this reduced the percentage of employees on the benefit much more than the percentage of self-employed, which rose again in 2013. As he says:

The LFS suggests that the rise of around 100,000 in working age self-employed during 2013 was accompanied by a rise of around 40,000 in self-employed recipients of tax credits. Now this doesn’t mean that 40% of the newly self-employed claimed tax credits – the increase in tax credit recipients could have occurred amongst the existing self-employed. But all other things being equal it does point to new self-employed incomes not being enough to get by on, and/or self-employed income falling to a much greater degree than for employees.

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Whether or not the rise in self-employment is due to new entrants or the existing self-employed hanging on, the effect on the incomes of both has been catastrophic.

Earlier this week, construction union UCATT warned that self-employment pensions, or the lack of them, are a ticking time bomb. This concern was echoed by actuaries Barnett Waddingham:

A decade ago two in three self-employed people were saving in a pension; today the proportion is probably under half…. the majority of [self-employed women] currently appear to have no pension savings at all.

Again, this is consistent with the Resolution Foundation findings.

Self-employment can lull you into a false sense of security. You have enough to get by so you don’t worry but you forget to pay for all the stuff you used to get from your employer. So you stop paying pension contributions, fail to put money aside for sickness and forget to do enough training.

Every so often I run a session with my friend John Jackson, entitled So you want to be a freelance consultant? We go into a lot of this stuff. John, who has been doing this for years, calculated  that, allowing for holidays, business development and training time, and to cover your sickness and pension costs, you would need a day-rate of £400-£500 for the equivalent of a £50,000 employed salary. You need to make a lot just to cover what you used to earn in your old job.

The median cash earnings, then, even if they were the same for the self-employed as for employees would not deliver the same standard of living. The fact that median earnings are so much lower for the self-employed therefore reflects a much lower standard of living. This shortfall is most obvious when something goes wrong or when people retire. Which is probably why so many of the self-employed are choosing not to.

The reduced outflow hypothesis does seem to be the main reason for the rise in the number of over-65s in self-employment. The grey entrepreneur might make a good story but most of the increase is due to people who were already self-employed turning 65 since 2008. These are people who, probably for financial reasons, decided not to retire. There will be more of them as the next pensionless cohort moves through.

As Szu Ping Chan said in the Telegraph this week,”Self employed? You’ll be older, working longer and for less pay.

It doesn’t take much imagination to guess what impact an army of retired, impoverished former freelancers will have on the economy, at a time when pensions will be under pressure anyway. The rise in self-employment and the disastrous fall in earnings may be storing up a lot of trouble for the future. The consequences could be with us for decades.

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Britain’s management problem

UK Commission for Education and Skills (UKCES) recently published a wide-ranging report on the state of the UK labour market. It noted that, while the UK has been good at keeping people in work, it has not grown as fast as other countries and its productivity has fallen. Some other countries, though, seem to have managed to grow, keep people employed and maintain productivity

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While acknowledging that there are a number of reasons for this, UKCES has some sharp words for Britain’s managers.

International comparisons of UK management capability are typically unfavourable, and suggest that poor management hinders UK competitiveness. Recent evidence shows that while we have many good managers, UK management capability is on average weaker than in countries such as the US, Germany, Japan and Sweden, and is likely to be a substantial factor in the productivity gap with these countries.

This is based on the findings of the World Management Survey (see previous post) which placed Britain at the top of the middling group but falling short of those countries with top quality management.

Average score across 18 management practices by country

WMS Scores A quick glance at this reveals a few anomalies. Japan has the second highest management score but its productivity is worse than ours. That said, its economy has bounced back more quickly than ours. France’s productivity is better than ours but its management is, apparently, worse. Clearly there are other factors at work here. Good management is not the only thing that differentiates economies. That said, though, the more prosperous and better performing countries tend to be higher up the list.

Measuring management and its effectiveness is fiendishly difficult but the World Management Survey (WMS) is probably the most comprehensive attempt so far. It has tracked thousands of companies across the world over the last decade and found strong correlations between good company performance and 18 management practices. Its methodology is explained in this recent paper.

The UK’s position in the league table does not mean that all UK organisations are badly managed. In fact, the WMS studies found little difference between the top performing companies in most countries. What dragged a country’s score down was the long tail of poorly performing companies. As Rebecca Homkes explains in this LSE article::

Cross-country differences account for less than 10% of the diverging management scores: the biggest management differences occur across firms within the same country. The distribution of scores highlights the fact that much of what drags certain countries down is a persistent ‘tail’ of underperforming firms, those that score less than a two on our five point scale. While this tail is largely absent in the United States, it is evident in the UK and especially pronounced in developing countries such as Brazil and India.

Our research shows that large and persistent gaps in management quality remain across countries, mainly driven by the tail of underperforming firms. The UK clearly has a deficit in management quality, and this deficit is likely to be a key factor explaining the persistent productivity gap with other countries such as the United States and Germany.

So the poorly managed firms drag a country’s score down and Britain has more than its fair share of them.

Given the spectacular rise in senior executive pay in the UK, and the fact that our managers are among some of the most highly paid in the world, you might wonder why our economy is a laggard when it comes to growth and productivity.

executive_compensation.pdf

We already know that there is little relationship between management pay and firm performance. The UKCES and WMS evidence suggests that, in terms of value for salary, our managers don’t compare very well internationally either.

UKCES cites skills shortages and lack of management training as two factors accounting for the UK’s relative lack of management capability. This set me thinking. From what I have seen over the years, when a company is trying to beef up its management, it usually tries to recruit externally. Buy not build is the default response to skill shortages. I couldn’t  find any data on this but I’d be interested to see a country comparison on the amount typically spent on management development. Is the preference for recruitment over development worse in Britain, or is it simply the choice of harassed managers everywhere?

If most companies choose to recruit skilled managers from outside, though, rather than develop their own staff, they will end up chasing a limited pool of people and bid up the price. Having poor quality management on a national basis could therefore be consistent with a lot of executives being highly paid.

Duncan Weldon suggested last year that high pay could be a result of the focus on shareholder value, which has been stronger in the US and Uk than elsewhere. I discussed this in a previous post. Could it be, as Andrew Smithers says, that managers’ short-term focus has led to them taking more cash out of their companies, thereby starving them of investment? If so, American management seems not to have suffered as much as its British counterpart. US managers may be the most highly paid in the world but, going by the WMS and the country’s productivity figures, it is the most effective too. Britain, on the other hand, has relatively well-paid managers who seem to achieve relatively poor results.

Earlier this year, CIPD Chief Executive Peter Cheese warned that the UK is becoming a low skill economy, taking the low road of reduced cost rather than the high road of better skills and high value work. Our expensive managers, it seems, are happy to lead us down this road.

Much of the government’s response to low growth and productivity has been to make life more comfortable for less competent managers. By making it easier to sack people and get away with it, the government has made it less likely that managers will tackle the root causes of underperformance. If managers can simply blame an employee and recruit someone else, they have less incentive to find out what’s really going on. Having a pool of casual workers and cheap freelancers to throw at the problem makes the messy business of performance management even easier to avoid.

British managers need to be more ambitious, says UKCES:

Well-managed firms tend to have better performance on a wide range of measures: they are larger, more productive, grow faster, and have a higher survival rate. Skilled managers are more likely to innovate and launch new products and services and adopt higher, quality-based product market strategies. Raising management ambition is fundamental to helping the UK develop high value added innovative products and services, and achieve its global economic potential.

That means not relying on cheap casual labour, not banking on just being able to boot people out when they annoy you and taking on the long hard slog of raising performance and building skills for the future. Or, as Peter Cheese might say, taking the high road, not the low road.

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Italian tragedy

Anyone with an interest in government finances and public spending must, by now, have developed a morbid fascination with Italy.

The country slid into recession again this month, wiping out not only its post-recession growth but much of its growth since it joined the Euro.

Screen Shot 2014-08-17 at 13.48.54 Chart via Matt O’Brien at the Washington Post.

The pattern of Italy’s GDP growth has become detached from that of the rest of the G7. Since the crash, all the other major economies have grown, albeit at different rates. Italy, though, is on a severe downward slide.

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Chart via Ben Chu.

Some people blame the Euro for this but Italy was in trouble before it joined the single currency. Both Italy and the UK crashed out of the ERM in 1992. For the UK, this was the start of a decade of high growth but Italy’s economy stalled in the years after and grew much more slowly for the rest of the decade. Briefly, in 1991, Italy overtook Britain and France to become the world’s 4th largest economy. Since then, though, it has been a tale of slow decline.

The Italian government had borrowed heavily during the boom years and the slowdown saw its debt-to-GDP levels steadily rise.

g7-debt-historyChart via Paul Krugman

This excellent piece by Economics Help explains the story in detail. The upshot, though, was that by the start of the recession, Italy’s debt was way ahead of most of the other major economies.

Major Economies Debt

Source: IMF World Economic Outlook 2014

But here’s the twist. Italy reduced its deficits drastically in the 1990s. For many years now, it has run a primary surplus. This means that, before debt interest, its government revenue is higher than its public spending. Unlike many other countries, including Britain and the USA, it is not borrowing to fund public services and social security.

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Chart via Igor Di Giovanni

It is, however, having to borrow to fund the debt repayments on its historic borrowing which is why, despite its primary surplus, it is still running a deficit and its debt is still going up.

This OECD chart illustrates the problem.

3.2 General government primary balance and interest spending as a percentage of GDP (2011)

OECD deficit 2011

Source: OECD Government at a Glance

Even though it is running a primary surplus, Italy’s debt repayments are higher than those of most other countries. It is running a deficit simply to pay the interest on its debt.

It gets worse, though, because Italy’s borrowing costs are relatively high. This is not just because of its high level of debt. As I’ve said before, credit ratings and borrowing costs are based on a number of factors. As this Business Insider chart shows, there is little relationship between a country’s debt level and the amount of interest it has to pay.

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Japan, with a humongous debt-to-GDP ratio, can borrow more cheaply than most other countries because it borrows in its own currency, its economy is growing, most of its debt is held by locals and it has a very stable political and social system. Despite its high debt, it is seen as very unlikely to default.

None of these is true of Italy. Its economy has been slowing down over decades and it is notorious for political instability. It can’t use its own central bank to buy government bonds because it no longer has one. Consequently, its 10-year borrowing costs soared after the recession, hitting 7 percent at one point in 2011 and rising close to 5 percent after its election stalemate last year. By comparison, the US and UK 10-year costs are around 2.4 percent and Germany’s just over 1 percent. It took intervention by the European Central Bank to bring Italian borrowing costs back down.

The result of all this is that Italy is increasing its debt just to service its ever increasing debt. It doesn’t take much imagination to see where this will lead. As we know, despite what politicians say, governments very rarely reduce their debts, they just rely on inflation and economic growth to reduce the relative size of their debts. Take away the growth, then, and you’re in real trouble.

As Edward Hugh says:

The problem is that Italy has an appallingly low trend GDP growth rate – possibly negative at this point – and nothing which has happened since the financial crisis ended suggests it is going to to improve radically anytime soon, in fact there are good reasons to think that growth could even deteriorate further.

And don’t expect much help from the private sector. That’s collapsing too, says Roberto Orsi:

The situation of the Italian economy is simply dramatic. Recently, a study has appeared which reveals how the current crisis (2007-2013) is in many ways much worse than the 1929-1934 contraction. In the present crisis, investments have collapsed by 27.6% in the five year period, against 12.8% in the interwar depression. GDP has declined by 6.9% against 5.1%. Italy, with the second largest manufacturing sector in Europe after Germany, has lost about 24% of its industrial production, going back to the 1980s level. No data is currently showing any sign of recovery. From the beginning of this year, the country has lost over 31,000 companies. Every day 167 retail units are lost, signalling an authentic disintegration of the retail sector. The automotive sector, a crucially important one for the Italian economy, has been constantly contracting: from about 2.5 million cars sold in 2007, sales in 2012 reached only the 1.4 million mark (the 1979 level) and they are still contracting this year. Construction, the other pillar of the national economy, is in rout: the 14% slump in 2012 is only the last in a series of difficult years. Home sales have dropped by 29% in 2012 against the already miserable 2011, to the 1985 level of 444,000 units, about half the number of 2006. Of course, the consequences of this economic disaster in terms of loss of employment are dire: unemployment is now at almost 12% and growing fast.

Who’s going to provide the investment to grow Italy’s economy again? Its private sector is dominated by small firms who are traditionally reluctant to invest, its state running a primary surplus just to keep up with its debt and its educated people are leaving the country.

It’s difficult to see how Italy will get out of this mess. Some say it should leave the Euro but to do so would be a de facto default with horrendous consequences for the rest of Europe. In any case, the country’s other structural problems would still be there if it left the Eurozone. It could even speed up the brain-drain as rich Italians pick up their Euros and run.

More austerity is unlikely to help either. Italy’s public sector finances have been running a surplus for over a decade. As Edward Hugh says, it would need to run a 6.6 percent surplus for another decade just to get its debt down to 60 percent of GDP. With a shrinking economy, falling tax revenues and a fleeing intelligentsia, this looks improbable.

The speed of Italy’s decline is astonishing. Italians once celebrated displacing Britain and France as the world’s 4th largest economy. Now, a mere twenty or so years later, a knackered state, with hardening arteries and on ECB medication, is trying to outrun a rising tide of debt, and losing. It is a depressing and rather frightening story.

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