Wednesday, July 29, 2009

Shaping a Fairer Future is an update from the Women and Work Commission about progress in securing gender equality in the UK. The crude gender pay gap has risen slightly since 2007, to 23 per cent - while this is an unsatisfactory measure in that it makes no allowance for differences in experience or other characteristics, the direction of change remains a source of concern.

The report points to gender stereotyping at early ages and failures to secure a satisfactory work-life balance as two major areas where change is needed. It notes some areas of progress since the Commission's earlier report three years ago, but at the same time laments the fact that recommendations made at that time have not been followed up.

While much of the new report is to be commended, some of its recommendations appear underdeveloped. For example, recommendation 34 urges the Department for Children Schools and Families to consider 'what more can be done to increase the wages of childcare workers, many of whom receive low/minimum wage, while ensuring that childcare costs remain affordable'. This is very worthy, but wages are of course determined primarily by the forces of demand and supply - as indeed are childcare costs. If this recommendation is a veiled call for subsidies, perhaps, in the current economic climate, the Commission should apply a rather brutal reality check.

Friday, July 24, 2009

Gross Domestic Product (GDP) continues to fall keeping the economy in recession. The latest figures show that GDP fell by 0.8% in the second quarter of 2009 - suggesting that the optimistic monthly estimates for April and May that had been produced by NIESR (and discussed earlier on this blog) were biased up. This is the fifth quarter of the recession. While the decline in output in the second quarter is certainly more modest than in the first quarter of this year, it still looks as though it will be the end of this year before the recession ends. And it will be many (18-24, possibly more) months later before unemployment starts to ease.

On the not-so-dismal side, retail sales have bounced back over the last month or so, and the housing market continues to show some signs of recovery with increased sales (albeit at depressed prices).

We may be past the trough, but there is still some way to go before we can say that output is rising and the recovery is properly under way.

Wednesday, July 08, 2009

The Chancellor of the Exchequer has announced plans to reform the regulation of the banking system in the wake of the financial crisis. The plans involve:

(i) capital asset requirements for banks, in the form of minimum required ratios that will vary according to the riskiness of activity
(ii) an enhanced regulatory role for the Financial Services Authority (FSA), and special focus on the activities of key banks
(iii) curbing the tendency for banks to take excessive risks, by devising a code that will regulate banks' remuneration practices
(iv) improved systems of corporate governance

As far as they go, the plans are good. One might quibble about whether certain functions are better carried out by the FSA or the Bank of England - but that is a secondary quibble. A more major concern, however, is that these reforms fail to tackle the problem that was at the very heart of the crisis - that of hidden information. Capital assets ratios can be enforced if the regulator knows all about a bank's transactions; risk-taking can be curbed if the regulator knows all about the risks that are being taken. But if there is latent information, the fundamental problems remain.

The economic theory of principal and agent shows that it is possible to design incentive schemes that ensure that agents (in this case, banks) behave in a way that is compatible with the interests of the principal (in this case, the regulator) even when the agents have information that is not revealed to the principal. Smart reform of the banking system should focus more on the design of such incentives, and be less trusting about the extent to which banks will be prepared to reveal all.

In a nutshell, the proposals are a good start, but they betray a naivete that, in the wake of the events of the last two years, is a little surprising. The plans should go further.