Is wealth inequality just getting back to normal?

Yesterday’s Guardian led with the headline “Britain’s five richest families worth more than poorest 20%“. The story came from this Oxfam report which said:

The richest 5 families in Britain are wealthier than the bottom 20 percent of the population in the UK (with a wealth of £28.2 billion and £28.1 billion respectively).

The basis of the calculation:

Oxfam used the latest list of billionaires from Forbes released on March 4, 2014 to calculate the accumulated wealth of the richest families in Britain and data from Credit Suisse Global WealthDatabook to calculate the wealth of the bottom 10 and 20 percent of the population.

Oxfam don’t say what they mean by a family or how many people they have included in each one but even if they mean an extended family of 100 people, that would still be 500 people with the same wealth as the bottom 20 percent.

At first this sounds crazy but they are not talking about income here, they are talking about accumulated wealth. The poorest, of course, have very few assets and spend most of their income. The total accumulated wealth of the poorest 20 percent probably consists of the houses belonging to the minority and a few pension investments. Could it really be that the wealth of a handful of people exceeds that of the bottom 12 million or so? 

Someone else with more time than me can pick away at Oxfam’s sources if they want. Chances are, though, that even if five families don’t already own more wealth than the bottom 20 percent, they soon will.

Last week, the English version of Capital in the Twenty-First Century came out. It was written by Thomas Piketty, professor at the Paris School of Economics and the man behind the World Top Incomes Database that I have referred to in a number of posts. In his new book, he argues that the concentration of wealth is a process that was interrupted by high growth and the wars of the twentieth century. Now all that is over, the accumulation of wealth by the few has resumed. As a result, inequality is rising again.

Given that it only appeared last week I haven’t read it but even the reviews are fascinating.

This one on Amazon gives a succinct summary:

The major conclusion can be summarized very briefly: Piketty has found that, over the long run, the return on capital is higher than the growth rate of the overall economy. In other words, accumulated and inherited wealth becomes a larger fraction of the economic pie over time. This happens more or less automatically, and there is no reason to believe this trend will change or reverse course.

Piketty argues that the reduction in inequality in developed countries after World War II was a “one-off” that was driven entirely by political choices and policies. It did not happen automatically. Those policies have now been largely reversed, especially in the United States. As a result the drive toward increased inequality is likely to be relentless.

As the Economist says:

It is, first and foremost, a very detailed look at 200 years’ worth of data on the distribution of income and wealth across the rich world (with some figures for large emerging markets also included). This mountain of data allows Mr Piketty to tell a simple and compelling story. Wealth as a share of income held steady at very high levels in the 18th and 19th centuries, contributing to stark inequalities in wealth and income. Rising worker wages in the late 19th and early 20th centuries stabilised growth in wealth concentrations but did nothing to reduce inequalities, which were only eliminated by the great shocks of the period from 1914 to 1950. Economists tricked themselves into thinking that the resulting compression in the income and wealth distribution was a natural feature of the maturation of capitalist economies. But as the shocks receded wealth began to accumulate again and growth in income inequality resumed. From the perspective of 2014, concentration of wealth and income begins to look like the natural state of capitalism rather than an exception.

So we were duped by the upheavals of the twentieth century, and the resulting government policies, into thinking that the trend towards greater equality was normal and would continue.

In Mr Piketty’s narrative, rapid growth—from large productivity gains or a growing population—is a force for economic convergence. Prior wealth casts less of an economic and political shadow over the new income generated each year. And population growth is a critical component of economic growth, accounting for about half of average global GDP growth between 1700 and 2012. America’s breakneck population and GDP growth in the 19th century eroded the power of old fortunes while throwing up a steady supply of new ones.

In other words, high economic growth reduces Old Money’s share of wealth and allows the plebs to even things up a bit, at least, for a while.

Tumbling rates of population growth are pushing wealth concentrations back toward Victorian levels, in Mr Piketty’s estimation.

It’s that demographic dividend again. We’ve already spent it.

The New York Times ran a Q&A piece with Thomas Piketty last week. In the author’s own words:

In the very long run, the most powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital r to exceed the rate of output growth g. That is, when rexceeds g, as it did in the 19th century and seems quite likely to do again in the 21st, initial wealth inequalities tend to amplify and to converge towards extreme levels. The top few percents of the wealth hierarchy tend to appropriate a very large share of national wealth, at the expense of the middle and lower classes. This is what happened in the past, and this could well happen again in the future.

The reduction in inequality was mostly due to the capital shocks of the 1914-1945 period (destruction, inflation, crises) and to the new fiscal and social institutions that were set up in the aftermath of the World Wars and of the Great Depression. There was no natural tendency toward a decline in inequality prior to World War I. During the 20th century, rates of return were severely reduced by capital shocks and taxation, and growth rates were exceptionally high in the reconstruction period. This largely explains why inequality remained low in the 1950-1980 period.

This graphic and commentary comes from the New York Times review of the book. 

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Income inequality and returns to capital are increasing worldwide. The figures for France are interesting, given that it’s often depicted in the British and American media as some kind of socialist throwback. They explain why the French left is so keen on wealth taxes.

Inequality is rising in most OECD countries. A series of studies by the OECD (see previous post for links) found that, while inequality between countries is falling, inequality within countries is rising. Around the world, there is that same tendency for wealth to accumulate  and concentrate in the hands of fewer people.

As the wealth and income of the richest 1 percent has pulled away from that of everyone else, even those adjacent to them in the income hierarchy have started to notice. If Thomas Piketty is right, and there is strong evidence to suggest that he might be, this is going to get worse. Or, if you are one of the lucky few, better.

It’s another shattering of post-war assumptions though. After the war, and certainly after the 1960s, most of us thought that society would become more equal. The rises in inequality during the Thatcher/Reagan era were, at first, regarded as a blip, especially by those on the left. A temporary setback after which things would ‘get back to normal’ once the postwar egalitarian consensus was restored. Now, though, it’s starting to look as though it’s the postwar period, with its rapid growth, rising share of wealth going to labour and falling inequality that was the aberration. ‘Back to normal’ is a world where, once again, a large share of national wealth goes to a very small group of people.

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Bob Crow

As others have noted, now he’s dead, even the people who once portrayed Bob Crow as a militant fanatic seem to have nothing but praise for him. Out of the way and no longer a danger, it’s safe to eulogise the man for his strength of character.

According to the Telegraph, some Transport for London bosses are already nostalgic for the Crow era, fearing that they are about to get someone much worse in his place.

“There is a view that one of the more radical people could now end up in charge,” one transport sources said.

“The real puppet masters in the union are much further to the Left than Bob Crow.”

Another source said: “Bob Crow was essentially a moderate in RMT terms.”

Bob Crow a moderate, eh? I bet it’s the first time he’s ever been called that.

Much of the abuse hurled at Bob Crow during his time as RMT General Secretary was based on the idea that he alone was responsible for making the tube workers go on strike. It’s a quaint old argument that was common during the 1960s and 70s. The poor workers, the story goes, are easily duped or bullied by ruthless apparatchiks pursuing their own evil agendas. Take out the militant leaders and the workers will see sense and settle down.

The trouble is, it now seems that one militant union leader might soon be replaced by another.

One reason for this might be that, far from being duped into militancy, a lot of the workers actually wanted a pugnacious union leader. Bob Crow was elected twice. If his members hadn’t wanted him in the job, he wouldn’t have been there. As he said himself, it was the Thatcher government’s trade union reforms that facilitated his rise to power. The authors of the 1980s trade union reforms assumed that imposing secret ballots on unions would make them less militant but, in the case of leaders like Bob Crow, it strengthened their hands.

As I’ve said before, thanks to the Conservative reforms of the 1980s, the argument that union leaders force their members to go on strike is very difficult to sustain. Without members willing to back strikes in ballots and vote for militant leaders there could be no militancy.

Salford University’s Ralph Darlington is a leading authority on industrial relations at London Underground. He puts half the blame for poor industrial relations on the Tube’s management.

On the basis that ‘it takes two to tango’ and that strike activity is a two-sided affair, the paper suggests that, apart from firmly rooted and influential left-wing activist traditions, managerial intransigence has also been a major contributory factor to encouraging strike activity.

In a 2009 paper, Professor Darlington noted an increase in the number of strike ballots since Bob Crow’s election but also a 27 percent increase in the number of RMT members.

[I]n the period since Bob Crow became RMT general secretary in early 2002 there were more ballots, more ballots leading to strike action, more individual numbers of strikes, and more strike days overall than in the preceding seven years 1995-2001; there were also a larger number of local strikes than previously.

Some of this, he says, was due to the more determined organisation by left-wing activists but he points out that the militant leadership was elected in the run up to the disastrous PPP deals. This caused resentment among the workforce and also had a detrimental effect on the management of industrial relations.

The separation of operational and infrastructure functions arising from the process of PPP created a mushrooming of management interfaces and the blurring of lines of management accountability and responsibility with disruptive consequences for the conduct of industrial relations.

On top of that, the management continued to push for changes in terms and conditions:

LUL management have increasingly attempted to implement radical changes in working practices, cut staffing levels, close ticket offices and reduce the opening times of others, casualise the workforce, and drive up efficiency (for example with more stringent attendance and sickness procedures) with the long-term imperative of cutting labour costs by 30 per cent an overarching theme.

The conditions were therefore right for militant leaders to channel this discontent into industrial action. Darlington’s overall conclusion is that the leaders made the union more militant but the workers grievances’ gave them plenty to work with.

[T]he industrial relations context (along with that of the political economy) has been an important factor creating the underlying material conditions that have given rise to strike activity on the London Underground. It has contributed to the process whereby workers have acquired a sense of grievance/injustice and come to define their interests collectively in opposition to employers/government. Such a context has also provided the opportunity and ability for workers to engage in effective strike mobilisation. Nonetheless the role of agency – namely the leadership role of union reps and activists – has also been a crucial resource necessary for such collective action.

So without leaders like Bob Crow, the RMT wouldn’t have been as militant but without the grievances, these leaders might not have been elected in the first place.

Darlington also points out that London Underground workers are in the sort of bargaining position that is rare these days. Their jobs are difficult to outsource and, for the most part,  impossible to relocate or offshore. There are no competitor organisations and the smooth running of the Tube is important to the sort of people who can make a lot of fuss when things go wrong.

The nature of the industry, and its tightly integrated service network which is not easily substitutable by other means, has provided an important source of workplace bargaining leverage in which strike s have a much greater and immediate impact than in many other industrial sectors. Employers are confronted by a number of interrelated pressure points: (a) industrial pressure: strikes either force managerial concessions or risk high stakes in terms of operational paralysis; (b) customer pressure: the effect of strikes on passengers are immediate and extremely inconvenient and (c) me dia pressure: stopping London ’s tube is dramatic and unwelcome news across the country, even the world; (d) business and financial pressure: strikes provoke the wrath of large companies and the City of London ; and (e) political pressure: strike disruption is an electoral liability that elicits both political party and government intervention.

This point has been lost in some of the more enthusiastic eulogies to Bob Crow. It’s not enough to have workers with grievances and leaders who are up for a good scrap. If  workers can be easily replaced or a competitor organisation can steal the work of a strike-crippled company, tactics like those used by the RMT leadership can lead to disaster. As Ralph Darlington concludes:

[The] study highlights the relatively very favourable industrial context within which RMT strike activity has occurred in recent years (despite the overall challenges posed by PPP) which have not necessarily been present elsewhere in Britain. The success of the RMT’s approach cannot necessarily be assumed to be automatically replicable by other unions that operate in less favourable contexts.

In other words, don’t try this if your bosses have got you over a barrel.

Of course, Bob Crow understood this which is one of the reasons he was such an effective union leader. His job was to represent his members and get the best deal for them that he could. That he didn’t (or appeared not to) care much what anyone thought about him no doubt helped him hold his nerve when others might have failed. He had the courage to confront his opponents but he was no reckless firebrand. He understood the balance of power in his industry and how far he could push his case. That is the secret of a good negotiator.

Bob Crow knew his job and did it well. Ultimately, pay is a function of power. The reason Tube drivers earn £52,000 a year is because Bob Crow and the RMT leadership recognised the extent of that power and exploited it. Until London Underground introduces robot trains, which is a more complicated task than it sounds, its workers will continue to have a strong bargaining position.

But while media comment was focused on the union’s leader, something else was going on inside the RMT. Here’s Ralph Darlington again.

One of the legacies of a highly politicised industrial environment, and of previous internal battles over strategic direction within the union, is that there is a significant layer of left-wing political activists inside the RMT who have also played a contributory role to the level of strike activity.

One important fruit of the left’s rising influence and the combative mood of the union’s members in the wake of PPP was the huge majority in support of Crow’s election on a platform of creating a ‘fighting trade union’. Similarly the Regional Council now has a combination of what one union activist has termed a ‘political left’ (members of far-left parties) and a ‘syndicalist left’ (non-party industrial militants), both of whom adopt a consistently adversarial approach to management with a more or less politically informed agenda.

More broadly a wide network of prominent left-wing figures (from Crow and other national officers to lay union reps and activists) have been increasingly influential in shaping the union’s rejection of social partnership in favour of the use of strike ballots and mobilisation of members as the means to win concessions. This has made it easier for an internal union culture of militant oppositionalism directed towards employers and New Labour, combined with robust collectivism and assertive style of leadership, to pervade the union with ramifications for the level of strike activity on the Underground.

Which explains why some people might be getting worried about who is going the replace Bob Crow and what they might do once elected. Better the devil you know….

Whatever else people might say about Bob Crow, he knew what his job was and he was very effective in doing it. He understood his members and their grievances and he was aware of his own power base and how much leverage that gave him. It is unlikely that his death will see an end to union militancy on London Underground though. Bob Crow has gone but many of the conditions that led to his leadership and to the RMT’s confrontational style are still there.

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What happens when the pensions run out?

My late father-in-law used to joke about the pensioners jugging up in the pubs and clubs of South Wales. He reckoned the old folk drank more than the youngsters. It certainly seemed that way last time I was in his local Wetherspoons just before noon on a Tuesday lunchtime and found the place full of sixty- and seventy-somethings tucking into pub lunches.

A CEBR report for Saga, published last month, found that the over 50s account for a greater share of household spending than they did a decade ago.

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And, as my father-in-law would have predicted, their share of spending on eating out and boozing has risen the most.

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The over 50s are only one third of the population but they do more than their fair share of drinking, travelling and eating out.

Screen Shot 2014-03-10 at 15.14.01Research in 2012 by the Intergenerational Foundation found similar patterns. Leisure spending by pensioners has risen considerably over the last ten to fifteen years.

Change in spending on theatre and cinema tickets 2001-2010

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Change in spending on foreign travel 1999-2011

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Change in spending on eating out 2000-2010

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Of course, some of this increase is due to the fact that there are more older people now than there were a decade ago. Numbers alone can’t account for all of it through. The over-50s went from 33.3 to 34.7 percent of the population between 2001 and 2011. The proportion of the over-65s increased from 15.9 to 16.4 percent. (See the 2011 Census.) Much of the rise in spending among older age groups is due to accumulated wealth and generous pensions.

I touched on this when The Economist called time on Britain’s old industrial towns last year. I have no firm data for this but I reckon pensioner spending is one of the reasons why some of these towns have avoided economic collapse. Many of the old industrial areas have a high proportion of retired people. Their money is keeping these places afloat.

Percentage of retired people by local authority

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Source: ONS Census Data

In a sense, the industries that once sustained these towns are still present, in the form of their pension funds. As my father-in-law explained, in his part of South Wales. many of his contemporaries had pensions from the government, the old public bodies, such as the National Coal Board and British Rail, or the big industrials, like Ford, BOC and British Steel. The young people pulling pints, running around with plates of food and packing shopping bags were kept in work by the generous spending of the active retirees.

Pension funds based on the individual and corporate prosperity of the boom years have been sustaining former workers long after the industries that created that wealth disappeared.

But what will happen when these pensioners die or become too infirm to spend and are replaced by the next wave of retirees?

Many of the aforementioned companies have closed their final salary pension schemes; British Steel in 2009, BOC in 2011 and Ford in 2012. Despite closing its final salary pension over a decade ago, BT is facing a rising pensions deficit. Even the solid John Lewis  is having to cut back on entitlements as its pension deficit rises.

According to the Department for Work and Pensions, the number of people in defined benefit schemes has more than halved over the past two decades. Over the next decade, fewer people will retire with the generous pensions that previous generations enjoyed.

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DWP projections suggest that the amount paid out be defined benefit pension schemes will start to fall sometime around now and will decline steadily over the next few decades.

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It is extremely unlikely that the defined contribution schemes will pay out anywhere near as much as the old defined benefit schemes. A recent study by Bath University found that the shift to defined contribution schemes will leave many people  with insufficient funds for retirement. In January, a Policy Exchange paper warned of a pensions time bomb as the number of over 65s rises while the funding for their retirement falls. There will be a lot more old people but a lot less pension money to go round.

Falling pensioner spending is going to be a problem for the whole economy, especially one so reliant on consumer spending, but it will hit some areas particularly hard. Most of us now accept that we will have to work beyond what we now consider to be normal retirement age. But that assumes that there are jobs available. If pensioner spending is preventing economic collapse in the old industrial towns, what happens when that spending stops? Instead of ordering food and booze in Wetherspoons, the over 65s will be competing with the young people for the bar jobs.

Generous pensions are the afterglow of our old industries. Once they are gone, some places may struggle to keep the lights on.

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Work in 2030: Even more precarious than it is now

I’m slightly surprised by the lack of discussion, in the media or online, about the Future of Work report from the UK Commission for Employment and Skills. There was a flurry of interest in the idea of the 4 Generation workforce (see Tuesday’s post) but not much about any of the report’s other findings.

Anyone interested in the labour market and the future of work ought to read this report. It is well researched and thought-provoking. Of course, its projections are educated guesses designed to get people thinking but you could say that about any government or think-tank report.

The disturbing thing about all the scenarios described by UKCES is that they are pretty grim for most employees. Apart from the highly skilled and the already rich, the outlook for everyone else is an increase in precariousness, uncertainty and low pay.

Here is a summary of the four scenarios for Jobs and Skills in 2030:

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The report expands on what each of these means for employees:

1 Forced Flexibility

Employees find themselves in an hourglass-shaped labour market. For highly skilled individuals, a progressive work environment allows for greater autonomy and a better balancing of work and family life. While the “squeezed middle” of the workforce sees jobs disappearing, low-skilled workers compete ferociously for positions (across all sectors). Security of employment is highly important for individuals – especially the low-skilled. Intergenerational differences need careful management in the work place, since many young people are trapped in low-level entry positions, as older people stay in employment longer.

2 The Great Divide

Employees experience new job opportunities due to the growth of companies providing high-tech goods. New jobs are also created in the higher value business and professional service industries that are linked to these new technologies. Positions for highly skilled workers come with a high degree of autonomy. Among the medium and low-skilled there is intense competition for poorly paid temporary positions, with limited career prospects, and a continued drop in demand for medium and low-skilled workers in manufacturing. Generation Y shapes organisational values and practices. Flexibility, transparency and employee engagement are widely adopted by business, but their application is effectively limited to the highly-skilled.

3 Skills Activism

Employees face long periods of unemployment, in particular those professionals made redundant by IT automation. Work is mainly project-based, with a high turnover of jobs, which can make the development of new skills more challenging. 

4 Innovation Adaptation

Employees face relative insecurity of employment, many being forced to develop ongoing portfolios of project-based assignments with a variety of employers. Company-specific qualifications are often demanded as an entry ticket to jobs.

So if any of these scenarios comes to pass, or even a mixture of them, life for the medium to low skilled is likely to get worse. Job security, personal development, autonomy, engagement and all those other good things become limited to the highly skilled elite at the core of the organisation.

The report goes on to suggest that the use of zero-hours contracts could extend to half the workforce by 2030. The scenario described:

With individuals facing such high competition in the job market, employers are able to structure employment conditions to meet their specific needs. It is evident in a rise in the practice of zero-hour contracts, and similar flexible arrangements, coupled with the decline of investment (by employers) in up-skilling individuals.

A possible outcome is a highly polarised labour market, with low- to medium-skilled workers in constant competition for more hours – either in zero-hour contracts (low and unskilled) or as freelancers – offering employers low wage bills and utmost flexibility. Full-hour contracts would be limited to a small minority of core staff in executive positions, similar to, e.g., Sport Direct today (only 10 per cent of all staff were on regular contracts as of 2013; Neville, 2013).

Companies’ investment in skills might be tightly concentrated on job-specific requirements. In addition, uncertainty about one’s personal income situation reduces the incentive to pay for one’s own training, hurting overall skill levels.

Far fetched? Maybe so but last week, the CIPD warned that the UK is becoming a low wage, low skill, low cost economy.

The low cost, low road economy means Britain has the highest proportion of low skilled jobs in the OECD after Spain. 22% of UK jobs require no more than primary education, compared with less than 5% in countries like Germany and Sweden. Low skilled jobs obviously mean low pay and carry wider social implications. In-work poverty has increased by 20% in the last decade, creating a huge benefits bill.

The OECD figures quoted come from its report on skills from last year:

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Last month’s Resolution Foundation report on living standards spotted a shift in the labour market during the recession. There was an increase in the number of high and low skill jobs but a decrease in those at the middle level.

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And some of this shift might be long-term:

To better understand whether recent shifts in the UK labour market are here to stay, we can look at changes in the types of jobs the UK economy is creating. Resolution Foundation research had already shown that the UK labour market was polarising before the crisis struck. In common with other mature economies, middle-skilled occupations have been falling as a share of employment while low and high-skilled jobs were expanding. We now know the crisis accelerated these trends. From 2008 to 2012 Britain’s low- and high-skilled jobs expanded their share of employment while middle-skilled jobs declined faster than they had previously.

Despite economic growth over the next few years, the Resolution Foundation reckons that, five years from now, the real-terms median working-age income will still be below what it was at the start of the recession.

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Projections from the OBR tell a similar story.

OBR Wage ForecastNone of this looks good for those on low to average incomes. They may spend much of this decade simply struggling to recover what they lost during the recession. The number of mid-level jobs, which might have been a route for some to improve their financial circumstances, has shrunk. Relative to other advanced economies, Britain has a high number of low skill jobs.

Against this background, then, the grim forecasts outlined in the UKCES report don’t look quite so unlikely. Low pay and low skill can become self-perpetuating. If pay is low, employers don’t need to invest as much. It costs less to throw cheap workers at a problem than it does to invest in new technology or processes. If the workers are on temporary and zero hours contracts anyway, why bother to invest in their development? Low investment means that skills stay low and pay stays low.

We see this reflected in the UK’s productivity figures. Part of the reason behind Britain’s fall in productivity is simple maths. If employment increases but the economy doesn’t grow, then productivity must fall. Self-employment, which accounts for three quarters of the growth in employment since the recession, has increased in Britain at a much faster rate than anywhere else in the G7. Incomes, especially those from self-employment, have crashed. While pay rates have recovered in most countries, here, they are still well below their pre-recession level.

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Source: CIPD Megatrends

It should therefore come as no surprise that, according to the ONS, the UK’s productivity is lagging behind that of most of the major advanced economies.

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We are not doing well when compared to some of the smaller ones either.

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With the exception of the US, productivity took a hit in all the major economies after the financial crash. Most, however, have recovered more quickly than the UK.

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Source: Centre for Policy Studies

Again, we can’t just blame the recession for this. Poor productivity has been a feature of Britain’s economy for some time.

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Source: LSE Politcs Blog

The recession has made an existing situation worse. The UK was closing the gap in the decade before the recession only to see it open up again with the financial crisis. The relative gains we made over the past couple of decades have been completely wiped out.

As the LSE’s Bob Hancké notes, the UK is now among the hard-working low productivity countries, not the smart-working high-productivity ones.

Screen Shot 2014-02-27 at 09.34.42Last month, CIPD CEO Peter Cheese warned against taking the low road of low productivity, low skill and low pay:

Skills supply and demand lie at the heart of the problems facing the UK. We have a higher proportion of very low-skilled jobs than many other developed economies. This has to change.  

The issue is not simply about increasing the supply of skills – a preoccupation of current and past governments. The solution to the challenges we face lies just as much with improving skills utilisation and demand for higher-level skills through increasing the number of higher skilled roles available. To do this, we need to encourage more employer investment in innovation and growth and the capabilities and skills needed to deliver high- performance workplaces which can better utilise the skills available and to generate opportunities, raise productivity and add value, which are vital to our long-term international competitiveness.

So investment, innovation, more highly skilled people and, crucially, more higher-skill jobs. He continues:

Unless we address the demand side of the skills equation, we will fail to improve our poor productivity or to achieve the sustainable increases in real wages that have become such a dominant feature of the current media and political narrative.

 The UK is at a crossroads – one which requires us to think about the fundamental nature and direction of our economy. Are we taking the high road – of higher skills and value-added employment – or the low road – trying to compete primarily on low cost?

At the moment, we seem to be stumbling with a post-recession hangover towards the low road.

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The 4G workplace

There’s plenty to pick over in the UK Commission for Employment and Skills (UKCES) report The Future of Work: Jobs and Skills in 2030. It contains some thought-provoking (and quite disturbing) scenarios about the world of work in 2030. I will probably write more on this in the coming weeks.

Among other things, the report suggests that, as people work longer, we might have a ’4G workforce’ with four generations at work in one workplace. If people work into their 70s and 80s it could be possible to have people working alongside their great grandparents.

The report also raises the prospect of ‘reverse migration’, as people from western countries leave for better lives in the growing African and Asian economies.

I’m a bit sceptical about the second point, given that per capita GDP in western countries is still likely to be higher than that of most other parts of the world even by the middle of this century. It may be, though, that rates of immigration will slow down after 2030.

The western countries went through their demographic sweet spot, where dependency ratios were at their lowest, in the postwar period, which is why they experienced high economic growth in the second half of the twentieth century. Countries like India and the Philipines will be going through their demographic sweet spot sometime over the next few years.

But, just as they have done everything else in a shorter timeframe than we did, the emerging economies will age at a faster rate too. By 2030 their demographic dividends will be running out and by 2050, most countries will have a higher proportion of their populations over 60 than Britain has now.

Percentage of population over 60 – 2012 and 2050

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Source: United Nations

As per capita income levels around the world start to catch up with those of western economies and more opportunities become available for young people in their home countries a decline in immigration towards the middle of this decade looks plausible. A significant level reverse migration looks unlikely but some people may be enticed away, especially if, as UKCES says, they have family ties in developing countries.

Even without the reverse migration scenario, though, the UK’s supply of eager young migrants is likely to dry up at some point, hence the need to have four generations in the workplace.

Without immigration or an ever-rising birth rate, the only way to maintain the dependency ratio in ageing societies is to redefine what we mean by old age. And, given that the whole world is ageing, the 4G workforce will be coming to all of them sooner or later.

As John Mauldin said earlier this year:

I occasionally get into an intense conversation in which someone decries the costs of the older generation refusing to shuffle off this mortal coil. Typically, this discussion ensues after I have commented that we are all going to live much longer lives than we once expected due to the biotechnological revolution. Their protests sometimes make me smile and suggest that if they are really worried about the situation, they can volunteer to die early. So far I haven’t had any takers.

So if no-one is volunteering to die early, we’ll just have to find ways of dealing with longer lives. Working with great grandparents and great grandchildren might well be one of them.

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America: Not a small business country

Adam Lent reckons Britain and Europe need a bit of American-style creative destruction:

[T]here are a small number of SMEs that are highly productive. If you want to ‘win the global race’, this is the place to look.  What is needed there is not the current policy vogue for lots of advice and state-sponsored finance, it is making sure these firms have the power to be creative free of any blocks.

One of the reasons the US is more productive than Europe is because of a dynamism which means sluggish uncreative whales are quickly replaced by hungry innovative piranhas who themselves get replaced once they run out of ideas.

In short, it is about an economy where those who exercise their creativity to the max get justly rewarded. Achieving this means stripping away the regulations, tax arrangements, public sector procurement and monetary policies which keep unproductive bigger businesses alive at the inevitable expense of new smaller players.

So one answer to our productivity problem is to encourage more new innovative firms to drive out the sluggish old ones.

Maybe so, but if America is producing hungry innovative piranhas, it isn’t producing very many.

Despite the popular myth of the American entrepreneur, America is not a small business country. As the Center for Economic and Policy Research noted in 2009:

By every measure of small-business employment, the United States has among the world’s smallest small-business sectors (as a proportion of total national employment).

Not much has changed since then. When compared to other advanced economies, the US doesn’t look that much more entrepreneurial than anywhere else.

America has a relatively low number of self-employed people and their numbers have fallen in recent years.

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Source: OECD Factbook  and Entrepreneurship at a Glance

Compared to other developed countries, the US has relatively few people employed by small companies.

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America’s business start-up rate is lower than that of many OECD countries and has also fallen in recent years.

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Even the number of high growth (more than 20 percent per year) and Gazelle companies  (under 5 years old with more than 20 percent growth per year) doesn’t compare particularly well with other OECD countries.

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Source for all the above charts: OECD Entrepreneurship at a Glance

Could it be that American firms are just better than those in other countries? Even though, relative to the size of the economy, there are fewer of them, are small firms in the US simply more innovative than those anywhere else?

Not according to the Global Entrepreneurship Monitor:

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The percentage of American startups with innovative products is fair-to-middling.

Are US startups making products the rest of the world wants to buy? Again, not really. The internationally trading startups are more likely to come from Europe.

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Whatever is behind the high productivity of the US economy, it doesn’t seem to be due to the quality or quantity of its small firms. There is almost no measure on which America’s small business sector stands out from those of other advanced countries.

In the end, as Jordan Weissman said in the Atlantic, it may simply be down to America’s sheer size and its funds available for investment.

Some of the most cutting-edge young companies in the world call Silicon Valley, New York, Boston, and Austin, Texas home, partly because we have the financial backers to support them. According to the OECD, the U.S. ranks second overall in venture capital invested as a percentage of GDP, which wedges us between Israel at No. 1 and Sweden at No. 3. In sheer dollars, we dwarf everyone.

Even the hungry innovative piranhas need feeding before they can get to the size where they can start eating the sluggish uncreative whales. The creative destruction in the US may simply be a function of having a huge continental single-market economy which generates a lot of investment capital. Perhaps America’s innovative piranhas grow because there are enough people around to feed them when they are too small to feed themselves.

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Will the shift to self employment change our politics?

An interesting thought from Ben Dellot at the RSA. If current trends continue, sometime before the end of this decade, the number of people working for themselves will be greater than the number working in the public sector. What, he asks, might the political implications of this be?

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The first thing to say about this is that I would be extremely surprised if either of these trends continue

The OBR forecasts that, according to the government’s projected public spending cuts, 1.1 million public sector jobs will disappear by 2018. The trouble is, no-one actually believes that the Coalition (assuming it is still in power) will be able to deliver these cuts. The IFS doesn’t and, reading between the lines, neither does the OBR. Cutting at this rate, while continuing the ring-fence on health and education, would leave only around 3 percent of GDP for everything else. As a recent joint IFS and JRF report put it, 1.1 million cuts to the public sector workforce would mean a 40 percent fall in everything that isn’t health or education. Even George Osborne has tacitly admitted that public service cuts on this scale are unlikely, which is why he is talking about cutting welfare instead.

So much for the public sector workforce, what about the number of self-employed people?

According to the latest figures, the number of self-employed people has has reached another record high. It seems to be setting a new record every few months now. I’d be surprised if it can continue along this path for much longer though. The number of self-employed people might have increased but between them, they earn less than they did five years ago. There are half a million more people fishing in a much smaller pond. Consequently, their earnings have crashed.

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Source: Resolution Foundation

According to the Resolution Foundation, the median self-employed salary is now £12,000 a year. In other words, half the self-employed earn £12,000 a year or less. That’s barely above the minimum wage. A report from the IFS last year estimated that 40 percent of the self-employed were at or below the minimum wage.

All of which suggests that the rise in self-employment is unsustainable. As long as the self-employed are competing with each other for a limited supply of work, which is what seems to have been happening over the past few years, there isn’t much capacity for an increase in numbers. As the economy picks up, more work will become available but so will the number of permanent jobs. At least some of the self-employed are likely to return to permanent employment.

One should always beware of making predictions, of course, but I would be surprised if the two lines on Ben’s graph cross over quite so soon, if at all.

Having said that, he is right that there has been a shift from public sector to self-employment and that at least some of this shift will outlast the recession. Over the next ten years, we will have more self-employed workers and fewer public sector workers than we have known in recent decades.

Will this labour market shift see a corresponding shift in political attitudes?

The most obvious conclusion is that we would see a more individualistic and less collectively minded electorate; anti-tax, anti-public spending and anti-welfare. As Ben says,

The last British Social Attitudes survey in 2012 showed that the self-employed were the least likely to support an increase in taxation and spending than any other labour market group – and by some margin.

Being self-employed certainly makes you more aware of tax. When you actually have to hand over the money, rather than just see it as a line on the payslip, even the most left-wing tend to have a ‘Bloody hell! How much?’ moment.

For all that, though, the sharp increase in the number of self-employed has changed the nature of the self-employed workforce. The number of skilled tradespeople, the classic white van man image of the self-employed, has actually fallen since the start of the recession. The ranks of the self-employed have been swelled by administrators, managers and those in personal services. At least some in those first two categories are people who have left the public sector and are contracting back to it. Their livelihood depends to an extent on continued public spending.

I have no data for this (and couldn’t find any) but, given the level of their earnings, it would be astonishing if a significant number of self-employed people were not on housing benefit or tax credits. Assuming that the self-employed vote will be in favour of welfare cuts may, therefore, also be wide of the mark.

What, perhaps, is more likely is political pressure for self-employment to be recognised as normal. Punitive rates for mortgages and some forms of insurance are particular sources of grievance. So too is the clampdown on the use of contractors, particularly in the public sector. (Which stems from a government over-reaction to a tabloid non-story a couple of years ago.)

More self-employed people and fewer public sector workers may change our political landscape to an extent but the rapid changes in the nature of self-employment may have blurred the lines between self-employed and public sector workers and between the self-employed and benefit claimants. Both these factors will affect the political views of the self-employed. Time was when the Conservatives could rely on the votes of the self-employed. That may not be so any more.

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