BU's Emeritus Professor Nigel Jump writes the next in a series of economic blogs.
Era of change
Through the pandemic, the change in labour has been substantial with estimates that tens, maybe hundreds, of thousands of working age residents have left the active market, especially amongst the self-employed. Through 2020, about 800,000 people, mostly ‘one-person’ operators, left the self-employed category (which fell from 5 million to 4.2 million). This reversed the trend of previous decades which saw the self-employed category rose from 8% to 14% of UK workers. (Some of these gains reflected the emergence of the ‘gig’ economy. Some generated high earners, but others struggled: the “better-than-nothing” underemployed.) The pandemic, its furlough schemes and its tax changes, probably encouraged some people to reclassify as employees rather than self-employed. Also, there has been more health-related early retirement, some Brexit effects and the rise in ‘hybrid’ working – all changing rates of participation and job definitions. The “cost of living” crisis of accelerating inflation is now putting fresh strains on employment status, not least by boosting strike activity and, perhaps, reversing some of the recent withdrawal from the labour market. How the supply of labour reacts to widespread vacancies and vunerable living standards will be very important for future productivity, growth and prosperity.
The change in trade has been equally significant. In the first half of 2021, for example, UK exports to the EU fell 15.6% or £12.4bn according to a recent University of Aston study (quoted in the FT). Brexit trade and pandemic frictions reflected different checks for health and safety standards, technical specifications and other new regulations. Such new non-tariff measures ensured that the recovery was more modest for UK operators than others (partly explaining the “worst in the G7” 11% drop in real GDP growth in 2021). With the current account deficit at an unsustainable 8% of GDP, the structural losses of competitiveness are more than “teething problems” and will need to be turned around, replacing lost EU sales with exports to other growing markets. Eventually, the recent fall in the £ sterling versus the dollar and the euro may help but, in the near term, it merely records market concerns by adding to the inflation and supply problems. Against this background, there is value in building more local, spare and resilient capacity, but offsetting barriers to trade and preventing a more closed economy will still be important for future productivity, growth and prosperity.
The change in living standards has also been critical. The “cost of living” crisis looks set to be harsh on real household incomes and business (especially small firm) profitability. High inflation takes years to control, probably with a period of high interest rates and recession. All of us will be affected, either directly through the gap between prices and wages or indirectly through tighter fiscal and monetary systems. A difficult balance needs to be struck between the price of money and the pace of activity. Interest rates need to go up and the housing market needs to cool. A fundamental shift in global demand and supply relationships has occurred and it will take time for a new, positive equilibrium to emerge - hopefully, helped by a competitive currency. Meanwhile, anything that weakens supply chains, including strikes and profiteering, will prolong the downturn. Government, business and households/workers need to co-operate, enabling investment in infrastructure, innovation and skills, and boosting entrepreneurship and competitiveness. Only then, by raising resilient capacity, can we improve underlying trends in productivity, growth and prosperity.
Hopefully, political and economic leaders will heed voices of collaboration and co-operation in pursuit of a world of market-driven investment and environmentally sustainable wealth-creation. Thereby, local levelling up, through a better distribution of productive skills and innovation, may be achieved. A robust consensus on where we are going and how we can get there is desirable. In Dorset and its hinterland, this suggests a call for openness to positive new investment in people, place and production. It means working together to build new industries and markets, integrating research and activity along and across the economic chain (from education, through business to households) and, thereby, “exporting” new products and services.
We face severe short-term disruption. Beyond that, we must lay foundations for generating mutually beneficial ways of achieving higher productivity, sustainable growth and lasting prosperity.