It's The Economy, Stupid: Economics for Voters

by Vicky Pryce

It would seem that in any one year it is business start-ups that contribute the most to net job creation and, perhaps more important, recent research by Moscarini and Postel-Vinay (2012)34 shows that ‘large employers on net destroy proportionally more jobs relative to small employers when unemployment is above trend, late in and right after a typical recession; and create more when unemployment is below trend, late in a typical

Entrepreneurs are little understood but ‘cool’; by contrast, commentators are increasingly suspicious of the high levels of self-employment. We now shed a little light on this issue.

Jean-Baptiste Say, whose Treatise on Political Economy appeared in 1803, was one of the first academics to consider the group of economic agents who, as ‘entrepreneurs’, ‘shift economic resources out of an area of lower and into an area of higher productivity and greater yield’,

This describes a process of ‘arbitrage’, and in this sense the self-employed are helping the market to move towards equilibrium, but this does not describe ‘entrepreneurial insight’.

While the US upped its productivity growth in recent decades, in 1987 the eminent economist Robert Solow noted wryly that ‘you can see the computer age everywhere but in the productivity statistics’.

We can therefore see how important the entrepreneur is to the economy, but also how few of the self-employed are true entrepreneurs.

Some employees in large firms will be tasked with providing the strategic insights that influence the nature of the company and keep it running, but they are not there to unearth the ‘unknown unknowns’ of entrepreneurship.

The entrepreneur ‘upsets and disorganises’ and is a ‘bold and imaginative deviator from established business patterns and

If the UK’s long-term future no longer required 200,000 miners, the government had a responsibility at the start of the 1980s to put in place retraining and other policies to support families during this transition.46 There are arguments that suggest the changes of the 1980s had to happen but that such change could have been much more compassionately managed.

It has become easier and more attractive (from a taxation perspective) to set up as a self-employed person running an incorporated firm, and this has falsely inflated the numbers of self-employed without employees over recent decades.

There are many possible reasons for this, not least the possibility that, in the face of stagnating wages, employees take the option of starting out on their own. However, the main thrust is likely to be a push into self-employment, reflecting a lack of employee job opportunities elsewhere.

Evidence suggests that the route from self-employed without employees to self-employed with employees is a particularly important part of the entrepreneurial

We are consistently voted one of the most open countries in the world and in terms of product regulation we are one of the least bureaucratic countries in the OECD,53 which suggests that despite concerns, the conditions for starting and continuing a business are among the best in the world.

Unfortunately, they are unlikely to find one party proposing a full range of ‘sensible’ policies, as the suggestion is that we need to a) spend more on certain parts of education, b) reduce the burden on small firms and start-ups, and c) increase the safety net for those who need it (i.e. the unemployed).

Individuals will increasingly consider the returns to their degree (moving them to where employer demand and productivity are highest) before embarking on a costly three-year degree.

Market incentives are for institutions to expand student numbers and award these students (no matter how smart or dumb) very good degrees, and the existing external examiner system does very little to stop this. We are likely to see many more ‘graduates’ working in non-graduate jobs, but this does not mean we go back to the old system of support that acted as a subsidy to the middle

All the evidence points to the fact that the recent rise in tuition fees, paid following graduation via income-contingent loans, has had no detrimental impact on participation among less-advantaged groups.

The present threat to expenditure on further education (within the Department for Business, Innovation and Skills) needs to be reversed immediately.

However, by all international standards the UK secondary education system is still very poor.

To rebalance incentives, a scheme could be created alongside the one that presently supports students to go to university. This would enable people who have reached a given level of qualification to access public funds to start up a business.

Well, as always in economics, nothing is clear cut. And this is an area where there is little consensus. Indeed, some researchers think that ‘size does not matter’, as once other factors are controlled for, there is no longer a significant correlation between size and entrepreneurship and job creation.

government is trying to do just that through an emphasis on identifying and assisting the few thousand companies with high growth potential which the think tank Nesta has termed ‘gazelles’. Nesta suggests that they have identified key firms that move faster than the rest of the pack and if they receive proper assistance can move even

In the UK there is only about a one-in-a-thousand chance that a new firm will become a large firm.

We do need to foster entrepreneurship, start-ups and growth, so venture capital is vital. We must provide start-ups with finance and, as the previous chapter has argued, our highly profitable banks have tended to favour the creation of yet more financial instruments rather than more industry.

This is underlined in the Wolf Report,64 which emphasises the importance of more general skills within the vocational suite of qualifications, both for employability (which is underlined by the CBI head, John Cridland) and for potential progression to higher learning. All qualifications should aim to develop critical thinking, and ideally quantitative and communication skills too.

Half the people of Brazil share a piece of their ‘national economic cake’ that is the same size as the richest 1 per cent.

The UK is somewhere in between these extremes, but it is both more unequal in its distribution of income than other industrialised economies and less equal than it was at the end of the 1970s. The big increase in UK earnings inequality occurred during the 1980s, when radical changes to economic policy were initiated by Thatcher’s successive Conservative governments.

This approach of leaving individuals with a greater proportion of what they earn is often characterised as a ‘free market’ or ‘neo-liberal’ economic approach. It is said to be ‘individualistic’, as the government intervenes in people’s lives much less frequently and does not force individuals to give up a portion of their income to others.

Commentators will argue over the details, but at its most basic level we might expect that a rather harsh free market approach results in greater efficiency, because we leave people with more of the fruits of their labour.

In fact, by 2013 the average person earned a weekly wage that only allowed them to buy the same amount as they could in 2002 – the present recession has cost us about a decade of earnings growth.

Older readers may remember Reaganomics in 1980s America and a wider pick-up in ‘neo-liberal’ agendas across countries such as Australia and New Zealand, imposed to some extent on developing economies from 1989 as part of the Washington Consensus.

But if we look across most countries of the OECD, it is changes in government policy that seem to have had the most impact on union coverage.

The suggestion is that during the twentieth century, from the end of the Second World War onwards, high rates of taxation on wealth and top incomes stopped the richest 1 per cent accumulating a larger share of the cake, but then deregulation from the 1980s onwards across many countries, not just the UK, allowed the top 1 per cent to accumulate a growing proportion of the fruits from economic activity.

A number of economic studies have suggested that in order to get out of the present recession we need to reverse this trend.14 Their argument is that growth is more likely to be driven by an increase in the spending power of those with wages below the stratospheric, and that this over-accumulation of wealth by the top 1 per cent may actually have sparked the present recession. Ultimately, the very free market policies implemented to improve economic performance may well have led to the sort of economic shock that we are still trying to pull ourselves out of!

Nevertheless compared to 2007 the average worker, across the private and public sectors in the UK, has seen an 8 per cent decline in real weekly earnings. On the other hand the estimate is that the self-employed have seen a decline of 20 per cent in real incomes over the same period. That suggests a widening gulf in pay depending on the type of contract one has managed to agree with one’s employer.

By specialising in those things that we are better at, we all gain and the cake gets bigger – this has been a fundamental driver of our move from agrarian economies, where we all had to do a variety of tasks to survive, to modern economic systems where we all specialise in a single area. Just as this argument applies to individuals, it also applies to countries – one of Adam Smith’s insights in his remarkable book The Wealth of Nations, published as long ago as 1776.

If we, as a country, increasingly specialise in high-value-added services such as banking, marketing, media and business services, it makes sense for us to trade with China and India, who specialise in production of manufactured goods that don’t require such a high skill input. These countries’ (comparative) advantage derives from the fact that they have millions of workers who earn much lower wages and so can produce these goods much more cheaply.

Those working in services are experiencing something that has been driving the loss of heavy industry in the UK for many years – it is just that the advent of new technology (ICTs) has now made the process viable for many service sector jobs.

education, health and social care play a crucial role – in the UK they were contributing to reducing inequality by about a fifth from what they would otherwise have

Second, the widening gap between high earners and middle to low, if left unchecked, is a main determinant of increased inequality. On 9 December 2014, the same day the FT reported that pay of FTSE 100 CEOs jumped by 50 per cent over the previous year, mainly because of increases in bonuses and stock options,20 a new OECD working paper reported that in the UK the richest 10 per cent now earn 9.5 times more than the incomes of the bottom 10 per cent, compared to 7 times more in the 1980s.

This brings us to an issue in the UK that has sparked debate for many years, and which has echoes of the American dream. The argument is that, while the levels of inequality are important, it is just as important (and, some would argue, more so) that even if you are born to parents a long way down the earnings distribution, during your lifetime you have a high chance of climbing to the top if you are smart. This is not just an issue of equity, but one of efficiency too.

Unfortunately, while there are examples of education providing a ladder up for some, recent research22 suggests that education is simply reinforcing existing inequalities: the middle classes are still using the ladder to protect their position (whether their children are smart or dumb), and the children of poor families find it hard to take the necessary steps up that ladder.

More generally, we are likely to see renewed pressure to consider socio-economic group (or ‘class’) as a characteristic that should be protected against discrimination.

Figure 15 tells a story of significant improvement in the situation of women between 1975 and 2006 but still much less than parity. In 1975 men earned wages that were on average 29 per cent higher than the average for women; by 2006 this had fallen to only 12 per cent (and, more recently, to just under 10 per cent).

Using this approach, economists and statisticians find that the gender pay gap does become smaller, but is still (statistically) a significant difference. This suggests that women with the same characteristics as men are not remunerated in the same way.

One of the enduring economic frameworks for consideration of discrimination is the one developed by Gary Becker, where discriminating employers perceive the cost of hiring a worker of a different (minority) group as being higher than the actual

There should be no consideration of whether we have ‘gone too far’ in changing Britishness to accommodate a more diverse range of identities. Britishness is now fundamentally changed for the better: we are no longer a faded nation of empire but a young, vibrant multicultural country and as a result British culture is one of the dominant forces in the world. Do we really think that if our institutions were dominated by white, middle-aged, heterosexual (or covertly gay) men, hiding and ashamed of any disabilities, and notionally Christian, we would be riding high in world league tables of cultural influence?

A surprising amount of the NHS has been quietly shifted out of universally provided health into means-tested social care provision.

Without the presence of these market failures in health provision the easier option would be simply to redistribute income in order to provide for all health care needs through markets.

Extreme libertarians are still not convinced. They habitually argue that everything that could be bought and sold should be provided entirely by markets, including health. Not free but rather through free markets.