Friday, October 28, 2016

The employment tribunal ruling that Uber drivers are employees rather than being self-employed sub-contractors has major implications for the development of the labour market. Much evidence suggests that there has been a large growth of employment in the-so-called 'gig economy', where a firm puts workers in direct contact with clients to undertake specific one-off tasks (or 'gigs'). The firm acting as co-ordinator between workers and clients arranges the gig - and is often assisted by technology in doing this - and takes a commission for doing so. Hence, in the case of Uber, a passenger uses her digital device to arrange a journey, and Uber's software is used to find a possible driver. Till now, the drivers have been considered to be self-employed.

Working in the gig economy offers advantages and disadvantages. Work arrangements can be very flexible. But as self-employed workers, many of the protections available to employees have been absent. So, for example, gig economy workers cannot access sick pay unless they make insurance arrangements themselves - and there are moral hazard reasons why this might be difficult. Likewise they are likely to have to make their own pension arrangements. If they are available for work at a time when no work is offered, they may in effect be paid below the minimum wage. For some workers, involvement in the gig economy supplements a more regular job. For others, the main source of income is the gig economy. And for this latter group, the lack of job security can be a problem.

It is, however, a problem not only for the individual worker, but for the economy more generally. If workers do not have a long term engagement with an employer, they are likely to lack the structures that have conventionally accompanied a job - in particular training, development and progression. While some parts of the gig economy involve highly skilled work - freelance journalism, or business consultancy, for example - others less so - and here driving is a classic example. In the absence of a career structure, workers will lack the opportunity to develop to their full potential, and, for the economy as a whole, this creates a productivity gap. If the future of work is increasingly characterised by a looser set of ties between employers and employees, institutions other than the employer will be needed to provide the mechanisms that ensure development, progression and productivity enhancement. Membership organisations may be one way in which this role can be fulfilled. Unions are one example, accreditation bodies are another.

The finding of the employment tribunal will raise Uber's costs and this in turn will diminish its competitive advantage. If Uber can survive this, then its employees will benefit from the new employment security that they will enjoy. Otherwise, Uber may not be able to operate in the UK.

In this digital age, however, solutions similar to Uber, possibly operated from other legal jurisdictions, would be sure to emerge to fill the gap. While the tribunal ruling shifts the responsibility for employment security onto the employer in this case - and while many other gig economy businesses will need to consider the ruling carefully - a more comprehensive solution may be to look to other institutions than the employer to provide workers with security, development, progression and productivity enhancement.

Friday, October 07, 2016

Following an encouraging showing in July, the latest industrial production figures, up to August of this year, indicate a fall in production over the month. Year-on-year, the data show an increase of some 0.8%. Nevertheless, analysing these data using my neural network forecaster continues to show that a dip in the data is likely over the coming months.

The outcome of Brexit negotiations is, of course, as yet unknown, and the reliability of any forecast of industrial production in this context is likely to be unusually limited.

Friday, June 24, 2016

The months of campaigning are over, and the majority of those voting in the Brexit referendum have determined that the UK should leave the EU. The campaigning period was seen by many to be frustrating, not least because neither side succeeded in engaging fully with the concerns of the other - it became less of a debate than a shouting match.

On the Remain side, the economic costs of Brexit were emphasised. It will now be necessary to ensure that these costs are kept to a minimum. The resignation of David Cameron as prime minister will serve to prolong the period of uncertainty following the referendum, and does not help in this respect. Still, the new government will need to decide what model of trade the UK should pursue in the future. There are three main options. First, we could join the European Economic Area (the 'Norway' option). This is attractive in that it would provide least turbulence. Businesses could quickly return to a relatively risk-free environment, and we could expect investment, and hence the economy, to recover fairly quickly from the shock. Secondly, we could negotiate a free trade agreement (similar to that which Canada is close to completing with the EU - the 'Canada' option). This would be more limited in scope than the Norway option, and probably would not greatly help our service industries. It would also take many years to negotiate. Thirdly, we could simply trade under WTO rules. This would mean that our exports to the EU would be subject to the common external tariff unless special arrangements can be made. It would therefore be the most damaging option.

While the Norway option has some appeal, it also suffers a major drawback. The campaign to leave brought to the fore some major concerns that the public has about immigration. The Norway option would require the UK to continue to allow the free movement of labour between EU member states and itself. Here, however, a possibility suggests itself. The deal negotiated by David Cameron earlier this year allowed, within the rules of the single market, a temporary brake to be applied to benefit payments to EU migrants entering the UK. Such a temporary brake could, in principle, be applied also directly to migration without breaching any new principle. This would allow migration from the EU to the UK to continue (over the brake period) only subject to a points mechanism. Hence control over borders could be enhanced. The duration of the brake period would need to be subject to negotiation, but a lengthy brake should serve to reduce concerns about immigration, while not breaching any principle of the single market. It is likely that, even in the politically sensitive environment that we have now entered, the UK could find allies in the EU in the context of this cause.

This is important, not least because the time that it would take to negotiate a Canada option means that the Norway option is a likely outcome, at minimum as a staging post. Yet it is an option that would, as things stand, leave many voters feeling that they have been cheated - unless a migration brake, or something similar, could be negotiated. In an ideal world our government would already be discussing options with Brussels - though the reality that we are in a period of leadership transition may make that difficult.

And yet, while immigration turned out to be a key issue, we should not lose sight of the fact that areas of the country with most EU migration are amongst those where the remain sentiment is strongest. Concerns about immigration are really just a reflection of a much deeper concern - about the distance that has grown between the political establishment and the people. We have woken today to a fractured Britain. Healing that break requires a reinvention of our political structures. Genuine devolution of powers might help. A reassessment, within the major political parties, of how they should connect with their natural constituencies, may help more - but whether they can rise to that challenge remains to be seen.

Wednesday, May 11, 2016

Industrial production rose slightly from February to March, but the higher baseline figure from a year ago means that output in this sector has nevertheless fallen over the past year, by some 0.3%. The March data confirm that, for the second successive quarter, production has declined. This means, in effect, that the industrial sector is in recession. My forecasting model (see graph below) suggests that the slowdown is likely to continue for some time.

Manufacturing comprises most of the output in the production industries, and has been in the doldrums for some considerable time. Output in this sector is now some 2.2% below the level achieved at its post-recession peak at the beginning of 2012 - and is indeed no higher than was achieved in April 1989. The recovery remains dangerously unbalanced.

Monday, April 25, 2016

The rapid increase in life expectancy has led to ageing being regarded as one of the major policy challenges facing governments. Policies to encourage savings include Individual Savings Accounts (ISAs), and the new Lifetime ISA and Help to Save initiatives. At the same time, auto-enrollment in pensions schemes is being rolled out so that, by 2019, pension contributions amounting to 8% of salary will be made on behalf of all employees (unless they opt out). This 8% is widely believed to be too low a figure.

As well as providing incentives to save more, policy has been aimed at lengthening working lives. The age at which workers qualify for the state pension is being raised gradually, and in 2011 the concept of a default retirement age was scrapped.

These two solutions - saving more and working longer - are often seen as the only two options available in paying for the increased burden of an ageing population. But there may be a third.

If productivity were to rise, the additional output produced by those in work could be used to pay for some of the extra cost burden - in terms of both care and pensions - implied by ageing. In the long run, this could be done through private savings and insurance. In the short and medium term, however, it would involve some redistribution from the generation of working age people to that of retirees. That would need to be done through the tax system. (That is a transitory and technical requirement, not an expression of a preference for solutions from the political left.)

Suggesting increased productivity as a solution may appear curious at a time when the economy is still suffering from a stagnation in productivity - the so-called productivity puzzle. But there is reason to believe that productivity growth might come back.

If ageing is one challenge that society has to learn to face, another is the rapid advance of technology. Some researchers predict that almost a half of all jobs are at risk of becoming defunct owing to the steady march of the robots. If true, adapting to that is certainly a challenge - though past experience suggests that jobs morph as technology advances. What is certain is that rapid technological advance should bring about massive changes in productivity - why else would the technology be adopted?

We certainly need to plan for longer lives through saving more and working longer. But, faced by the two challenges of ageing and rapid technological change, we might just find that one can become a solution to the other. And - to reiterate - fully to take advantage of this opportunity when it comes, we must be lithe in our thinking around what is acceptable in the arena of taxation and redistribution.

Monday, April 18, 2016

The Treasury has published an analysis of the economic costs associated with Brexit. A range of estimates is given, with different values attached to different assumptions about the nature of trading arrangements made with other countries after the United Kingdom leaves the European Union. The central estimate that has attracted most media interest is a prediction that the costs will amount to 6.2% of Gross Domestic Product. This is a substantial figure - huge in relation to other analyses such as those undertaken by Open Europe which estimated a los of 0.8% of GDP on the most plausible scenario. This warrants further interrogation.

The Treasury investigates three options for the post-Brexit world. One is for the UK to negotiate a Norway-style arrangment whereby free trade with the EU is maintained but, while no longer being a member state, the UK continues to make payments to the EU. The second is the the UK to negotiate a Canada-style Comprehensive Economic and Trade Agreement with the EU. This does not cover services - which represent some 80% of UK output - and would not allow the benefits of free movement of labour. The third option considered is a 'clean break' where no special arrangement is made between the UK and EU, but trade continues under World Trade Organisation rules. The estimated loss, as a percentage of GDP, for each of these options is 3.8%, 6.2% and 7.5%. It is the 3.8% estimate that most closely corresponds to Open Economy's 0.8% figure - and clearly the gap between the two is large.

The key question that emerges from consideration of these figures, then, is this: why are the figures, particularly those for the first option in which free trade with the EU in both goods and services is maintained, so much larger than other estimates in the literature? The Open Europe analysis is based on a Computable General Equilibrium (CGE) model. This type of modelling approach examines comparative statics - in essence it compares an equilibrium position 'before' and 'after' a change - and is calibrated using estimates of key parameters that the received literature suggests are plausible. This is good for providing a long run comparison, but it is likely to understate costs that are due to adjustment between the 'before' and 'after' positions. By way of contrast, the Treasury approach employs a statistical analysis based on a gravity model. In this framework, pairs of countries that are both members of a trading partnership such as the EU can be identified using dummy variables, and the importance of such joint membership vis-a-vis, say European Economic Area (EEA) membership, can be assessed. Since there are few observations for countries that are in EEA but not in the EU, there is likely to be some imprecision in the estimates of the costs associated with the 'Norway option'.

The uncertainties surrounding any predictions of this kind are substantial. But the main message to come out of the various exercises should not be minimised. The long run costs of Brexit, even under the kindest assumptions about what regime will follow, are large albeit not prohibitive. The costs of getting from here to there are larger. Those advocating that the UK should leave the EU need to be aware that the years following Brexit would be a bumpy ride, that even in the long term there are non-negligible costs, and that they therefore expect people to value really highly whatever gains they are seeking - just how highly, they need to spell out. At this stage, it is not clear that the Leave camp is offering much beyond bluster.

Friday, April 08, 2016

The latest data on industrial production show a drop of 0.5% over the year to February. This is further evidence of an economic slowdown. While overall growth is still positive, this is entirely due to expansion in the services sector - and we know that confidence in that sector too has fallen sharply in recent months.

I have, for several years, used the industrial production data in a neural network forecasting model. The latest forecasts of this model, updated to include the data released today, appear below. They continue to indicate that the next year will be challenging for the production sector, with continued falls in output.