In the last few years, the picture has become less clear. On the one hand, there were large increases in employment rates among 65 year olds between 2018 and 2021. This was due to the most recent rise in the UK’s state pension age (Cribb et al, 2022). But among the larger group of people in their 50s and 60s, employment rates have fallen by around 1.2 percentage points since the start of the pandemic, partially reversing a decades-long trend (Boileau and Cribb, 2022).

What effect did the most recent increase in the state pension age have on 65 year olds?

The UK government has been increasing the earliest age at which people can claim a state pension known as ‘the state pension age’. This is partly in response to pressures on the sustainability of the system brought on by rising life expectancy and an ageing population, as well as to ensure the fairness of the system across different generations as life expectancy increases.

Most recently, the state pension age for men and women rose from 65 to 66 between December 2018 and October 2020. Understanding the effects of this is important because the state pension age is already legislated to rise further, starting with an increase to age 67 between 2026 and 2028.

The change from 65 to 66 has had a clear effect on the employment of 65 year olds, as Figure 1 shows (Cribb et al, 2022). Before the end of 2018, the employment rates of 65, 66 and 67 year olds evolved similarly, rising gradually over time. But since the state pension age rose above 65 at the end of 2018, the employment rate of 65 year olds has grown sharply from 29% to 39%. At the same time, the employment rates of 66 and 67 year olds have continued on their previous trajectory.

Figure 1: Employment rates of people aged 65, 66 and 67 over time

Source: Authors’ calculations using the Labour Force Survey.
Note: The vertical line shows the last quarter in which all 65 year olds were over the state pension age (2018 Q3).

Overall, the rise in the state pension age from 65 to 66 led an extra 8% of 65 year olds (55,000 people) staying in paid work. The increases in employment for men and women have been of similar size.

But the employment effects of the reform were not the same for all groups. In the most deprived fifth of the country, women’s employment rate at age 65 rose by 13 percentage points and men’s by 10 percentage points. In contrast, in the most prosperous areas, women’s and men’s employment rates at age 65 rose by just 4 and 5 percentage points respectively. This suggests that many of those living in poorer areas are unable to retire without the income provided by the state pension.

While the higher state pension age did cause a significant increase in employment among 65 year olds, it is important to highlight that the vast majority (over 90%) of individuals in this age group did not change whether they were in paid work because of the change. Some individuals will have retired before 65, while others would have worked past 65 regardless of the rise in the state pension age.

But one group of particular concern is the 65 year olds who would like to work because of the increase in the state pension age but are unable to. There are 30,000 individuals in this group, affected either because they cannot find employment, or because they have health problems that are preventing them from working.

Since only a minority of 65 year olds offset the loss in state pension income with extra employment income, household incomes among this age group fell by an average of £108 per week due to the reform (Cribb and O’Brien, 2022).

A large increase in poverty came along with this: almost 100,000 more 65 year olds were in income poverty as a result. The counterpart to lower household incomes – and higher poverty rates – was a boost to the government’s finances of around £5 billion per year.

What has happened to the employment rates of people in their 50s and 60s since the onset of the pandemic?

Despite the increased state pension age encouraging 65 year olds to delay retirement, there has recently been greater concern about an exodus of older workers from the labour market. This stands in contrast to the longer-run trend of higher employment at older ages seen over the past few decades.

Since the pandemic, employment rates among people in their 50s and 60s have declined. This has been driven by increasing rates of economic inactivity, which refers to the state of neither being in paid work nor searching for work. Put another way, it is not a result of rising rates of unemployment for this group.

Those in their 50s and 60s stand out as a group in their experience of increased economic inactivity. There were 270,000 more economically inactive people in their 50s and 60s between October 2021 and March 2022, compared with the period from October 2019 to March 2020, immediately before the pandemic (Boileau and Cribb, 2022).

The proportional increase in inactivity among this group has been significantly larger than for most other age groups. The Institute for Employment Studies (IES) estimated in May 2022 that the fall in the number of over-50s in the workforce accounted for 58% of the gap between contemporary labour force participation and what we might have expected before 2020 (IES, 2022).

The rates at which those in their 50s and 60s are moving directly from employment into economic inactivity are higher than at any point since at least 2006, a period of time that includes the global financial crisis of 2007-09 (see Figure 2). These movements directly out of employment explain two-thirds of the net increase in economic inactivity during this period.

Figure 2: Number of people aged 50-69 moving from employment to inactivity (and vice versa) and from unemployment to inactivity (and vice versa) within three months, by half-year

Source: Boileau and Cribb, 2022.

Note: The vertical line indicates the final data point unaffected by the Covid-19 pandemic.

Within older age groups, who is moving from employment into economic inactivity?

On many dimensions, the rate of movement into inactivity among older workers has been relatively broad-based, with little variation between groups. For example, there was minimal difference between men and women, between professional and non-professional occupations, or between those with and without degrees.

Yet there are three specific groups that have left employment at greater rates than others. Self-employed workers were more likely to leave work and move into inactivity than employees, and they did so earlier. This trend peaked in 2020. Part-time workers also moved out of employment at a faster rate than full-time workers. And the increase in the rate of movement into inactivity was more marked for those in their 60s compared with those in their 50s, especially in 2021.

It is striking that these three groups stand out: they are all groups that are, in some sense, close to retirement. Part-time work at older ages plays an important role in transitions into retirement for some older workers (Crawford et al, 2021). Self-employed workers have lower earnings than employees (Cribb et al, 2019), and more control over their working lives. And those in their 60s are closer to – or at – their state pension age, so they can count on more imminent financial support from the state to move into retirement.

What has driven the fall in employment for 50-69 year olds?

Weak labour demand for particular occupations or skills during the pandemic does not seem to have driven the fall in employment for those in their 50s and 60s. There were no strong differences in rates of leaving work between those in occupations that have seen relatively high or low growth in vacancies over the last two years.

Redundancies and dismissals did play some role in increasing movements into inactivity in 2020 compared with before the pandemic. They drove over a third of the increase in older individuals leaving the labour force in 2020, compared to the years immediately before the pandemic. But redundancies were much less important in 2021, as the economy recovered.

Health reasons were also not a central driver of these trends. Only 5% of the growth in movements out of work into economic inactivity between 2017-19 and 2021 was a result of people saying that they left their last job for health reasons. Movements directly into long-term sickness or disability from employment remained similar to their pre-pandemic levels in 2020 and 2021. The increases in movements from employment to inactivity were also similar for those with and without a longstanding health condition.

Instead, early retirement has been key to these changes in employment. More than half of the growth in people leaving work and moving into inactivity during the pandemic was driven by people saying that they had retired from their previous job. Retirement was both the most frequently given reason and the reason that saw the largest increase between 2019 and 2021 (Office for National Statistics, ONS, 2022).

What might happen to employment rates of older workers in the future?

It is difficult to say how employment will evolve in the future, and much will depend on how long-lasting are the increased inactivity rates from the pandemic.

In general, retirement tends to be a persistent condition, with only 5-10% of people who retire in the UK returning to paid work (Kanabar, 2013). Around six in ten older adults who became inactive during the pandemic, who were surveyed by the ONS, reported that they would not consider returning to work in the future (ONS, 2022). But high inflation and rising energy bills could potentially mean that more return to work out of financial need, especially if retirement has been taken significantly earlier than planned.

Looking further into the future, there are reasons to believe that the long-running trend of higher employment rates among older workers will return. Each successive generation approaching retirement has more labour market attachment than the generation before it, particularly for women, which would be expected to increase employment rates at these ages. In addition, the upcoming increase in the state pension age to 67 between 2026 and 2028 will also push up employment rates among 66 year olds.

Where can I find out more?

• Labour market effects of the increase in the state pension age from 65 to 66: Institute for Fiscal Studies (IFS) report summary by Jonathan Cribb, Carl Emmerson and Laurence O’Brien.
• Recent and future patterns of work around state pension age: IFS report by Jonathan Cribb and Carl Emmerson.
• The rise in economic inactivity among people in their 50s and 60s: IFS report by Bee Boileau and Jonathan Cribb.
• Movements out of work for those aged over 50 years since the start of the coronavirus pandemic: Office for National Statistics (ONS) report.
• Labour Market Statistics, May 2022: Institute for Employment Studies (IES) report.
• State pension age increases and the circumstances of older women: Chapter in ‘The Dynamics of Ageing: Evidence from the English Longitudinal Study of Ageing 2002-16’ by Neil Amin-Smith and Rowena Crawford.

Who are experts on this question?

• Bee Boileau, IFS
• Jonathan Cribb, IFS
• Carl Emmerson, IFS
• Ricky Kanabar, University of Bath
• Laurence O’Brien, IFS and University College London
• Andrew Scott, London Business School

Authors: Bee Boileau, Jonathan Cribb and Laurence O'Brien

Picture by Jacob Lund on iStock

The post How has employment of older workers changed since the pandemic? appeared first on Economics Observatory.

Earlier in September, the Bank of England predicted that output would contract by 0.1% over the third quarter of 2022 (July to September). This prediction implied that the UK economy would enter a recession – defined as a contraction of GDP growth in two consecutive quarters. But looking at the new estimates of growth over the summer period, this no longer appears to be the case.

But it’s not all good news. The data also show that UK output is 0.2% below pre-pandemic levels. The GDP data available prior to this release indicated that it was 0.6% above. This means that the UK is now the only G7 country yet to recover to pre-crisis levels in terms of real GDP. It has fallen behind Germany, which has current output equal to prior to the pandemic.

This is due to the quarterly accounts data being accompanied by comprehensive revisions to GDP data in the years 2020, 2021 and 2022, which suggest that there were larger contractions in 2020 than earlier estimates had suggested.

Figure 1: Previous and revised GDP estimates from 2018 to 2022 Q2

Source: ONS

Note: 2019 = 100

Relative to the pre-pandemic 2019 average, the newly revised data differ from previous estimates of GDP (see Figure 1). Here the deeper contraction that took place in 2020 can be seen. Notably, the data show stronger growth in 2021 despite GDP settling at its lower current level.

In the first quarter of 2022 (January to March), the economy was estimated to have grown by 0.8%. So, the reported 0.2% output growth in the second quarter reflects the fact that the economy is slowing down compared with the previous quarter.

Which sectors are expanding or shrinking? According to the ONS, the 0.2% growth figure is made up of increases in the output of construction and services, and a fall in the output of production. In particular, services output slowed from 0.8% in the first quarter to 0.2% in the second quarter.

Figure 2: Growth stemming from the services sector in 2022 Q1 and 2022 Q2

Source: ONS

Figure 2 shows how different industries have contributed to growth in the services sector over the first and second quarters of 2022. The general fall in services output is the result of lower growth in areas including professional, scientific, and technical activities, transport and storage, and accommodation and food services.

Changes in healthcare also played a part in the revision to quarterly GDP. Figure 2 shows a 3.5% fall in health and social work, slightly up from a 4.3% drop in the previous quarter. This sector was hit hard by the pandemic and even now remains 10% below its pre-pandemic output levels.

Indeed, there were large downward revisions in the new data release from the ONS for the year 2020 for health and social care. This contributed to the sharp contraction estimated to have taken place over this period.

Growth in the accommodation and food services industry has eased between quarters, despite a boost driven by increased activity during the Queen’s Platinum Jubilee celebrations and subsequent bank holidays.

There are warning signs that this sector has been under increasing strain: the ONS data show the industry’s highest ever level of company insolvencies over the quarter. This is largely underpinned by business failures due to the increasing price of energy.

Where does this leave the UK economy?

This data release has come at a precarious time in the UK growth policy debate. Liz Truss started her short-lived premiership by vowing to pursue economic growth at any cost. But weeks later, nearly all of the economic policies set out by her Chancellor Kwasi Kwarteng have been reversed. Nevertheless, growing the economy is likely to remain a priority for Rishi Sunak’s government.

The new data reveal that the UK entered the cost of living crisis before recovering fully from the pandemic, making the policy trade-offs more politically challenging. In any case, the prioritisation of growth needs to be backed up by policy.

But here the government has been found wanting. After unveiling the ‘mini budget’, which included a £45 billion package of debt-funded tax cuts, financial markets were sent into turmoil, as the pound fell to its lowest level against the dollar since 1971. The plan has since been all but scrapped by the new Chancellor, Jeremy Hunt, in an attempt to reassure financial markets.

An increased strain on public finances alongside the updated measures of GDP will place greater importance on the upcoming forecasts from the Office for Budget Responsibility. Earlier this month, the Institute of Fiscal Studies (IFS) released a report stating that the government would need to find £60 billion worth of spending cuts to fund its full growth strategy – a move the IFS has warned would be ‘big and painful’. Reports of a potential black hole in public finances have been accompanied by much open criticism regarding fiscal responsibility, including direct disapproval from the International Monetary Fund (IMF). The latest ONS data release also reveals that real household disposable incomes have fallen by 1.2% in the second quarter of 2022. This squeeze on household budgets, alongside the uncertainty around how mortgage rates will settle in the wake of the government’s policy announcements (and subsequent U-turns), mean that the cost of living crisis still casts a large shadow over the UK economy.

Even if the economy didn’t go into reverse over the summer, monthly estimates from the ONS, which reveal that GDP got smaller in August, suggest that it might be turning now.

Many are waiting to see if the Bank of England will raise interest rates and by how much. And further what this might mean for economic growth, tax revenues and household finances.

Where can I find out more?

• ONS quarterly national accounts data.
• ONS GDP monthly estimate for August.
• IMF criticism of UK tax plans.

Who are experts on this question?

• Jagjit Chadha
• Michael McMahon
• Huw Dixon

Author: Elias Wilson

The post What can the latest UK GDP data tell us about the economy? appeared first on Economics Observatory.

The prize has not been without criticism. The 1997 award to Myron Scholes and Robert Merton for option pricing theory was subsequently criticised when Long-Term Capital Management, a hedge fund that implemented their theories and on whose board they sat, collapsed in 1998.

More recently, it has been argued that the Nobel Prize has had a malign effect on the discipline of economics in that it has legitimised free-market thinking and deregulatory economic policy (Offer and Söderberg, 2016).

Who won the prize in 2022?

The winners of the 2022 prize are Ben Bernanke, Douglas Diamond and Philip Dybvig. Ben Bernanke, currently at the Brookings Institution in Washington DC, was Chair of the Federal Reserve (the US central bank) from 2006 to 2014 and prior to that a professor of economics at Princeton University; Douglas Diamond is a professor of finance at the University of Chicago; and Philip Dybvig is a professor of banking and finance at Washington University in St Louis.

The Nobel committee awarded the 2022 prize to these three economists because they ‘have significantly improved our understanding of the role of banks in the economy, particularly during financial crises. An important finding in their research is why avoiding bank collapses is vital.’

Why did Diamond and Dybvig win the prize?

Diamond and Dybvig produced a seminal theoretical piece of work that explains what banks do, why they are vulnerable to runs, and how government provision of deposit insurance makes banking systems stable (Diamond and Dybvig, 1983).

Why do banks exist? Why don’t households lend their savings directly to firms? If they did, then their money is tied up in an illiquid project. Savers are therefore reluctant to lend to firms because they may want liquidity – that is, they want access to the money that they have lent to the firm because of future unexpected spending needs such as unemployment or the birth of a child.

In Diamond and Dybvig’s work, banks provide households with mutual insurance against shocks that affect their consumption needs. Banks collect funds from lots of savers and invest a proportion in illiquid loans and hold the remainder in a cash reserve. Those households who have consumption shocks can simply withdraw their savings early. Banks thus provide liquidity insurance (Diamond and Dybvig, 1983).

Deposits at banks are on a first-come-first-served contractual basis. Thus, when depositors fear that enough other depositors will withdraw their deposits and because banks will have invested a sizeable proportion of depositors’ money in illiquid projects, their incentive is to get first in the queue. This results in a bank run.

Banks are fragile because anything – and in the Diamond and Dybvig (1983) model, it literally is anything – can spark a bank run. The policy conclusion from Diamond and Dybvig’s work is that bank fragility can be mitigated with government-provided deposit insurance. Their work has also influenced bank regulation, which has been designed to prevent banks from becoming fragile.

As Figure 1 shows, the number of bank failures in the United States fell dramatically after the introduction of federal deposit insurance in 1934. Most economies have introduced deposit insurance schemes since 1983.

The UK’s deposit insurance scheme came into existence in 1982. But its presence did not prevent the UK banking system becoming fragile in 2007 and 2008. Most notably, it did not prevent a bank run by depositors at Northern Rock in September 2007.

The problem with the UK’s deposit insurance scheme in 2007 was that only 90% of deposits up to £35,000 were protected. In other words, depositors at Northern Rock were completely rational in their run on the bank because only 90% of their money was insured.

Today, depositors in UK banks enjoy 100% protection up to £85,000. So, unless they have more than £85,000 in UK banks, depositors have no incentive for a run on their bank.

The work of Diamond and Dybvig (1983) has been criticised because it ignores the role of shareholder capital and shareholder liability in preventing banks becoming fragile (Turner, 2014). It has also been criticised as having little basis in historical experience (White, 1999).

Why did Bernanke win the prize?

Ben Bernanke’s seminal piece of work was also published in 1983 (Bernanke, 1983). It seeks to answer a simple question in economic history: why did a mild recession in the United States in late 1929 turn into the Great Depression of the 1930s?

The standard answer up until 1983 was the one given by a previous Nobel laureate, Milton Friedman, and his co-author Anna Jacobson Schwartz in their 1963 book A Monetary History of the United States.

They argue that the failure of over 9,000 banks or 20% of the US banking system in panics between 1930 and 1933 (see Figure 1) caused the money supply to contract sharply (Friedman and Schwartz, 1963).

In addition, the collapse of banks made depositors withdraw money from banks and hold more cash. This increase in the cash/deposit ratio resulted in the money multiplier contracting, which meant that the injection of reserves of the Federal Reserve had limited effect on the money supply.

Figure 1: Number of bank closures or suspensions in the United States, 1921-70

Source: Federal Deposit Insurance Corporation, 2018

The collapse of the money supply arising from bank failures resulted in a steep fall in GDP and in the price level. Friedman and Schwartz argue that the failure of the Federal Reserve to act as a ‘lender of last resort’ and provide liquidity support to banks facing runs was a major contributor to the depth and length of the Great Depression (Friedman and Schwartz, 1963).

Bernanke points out a major flaw with the Friedman and Schwartz (1963) story: the fall in the US money supply was too small to explain the subsequent falls in output. Something else – a non-monetary phenomenon – was at play (Bernanke, 1983).

That something else was that bank failures increased the cost of credit intermediation. In other words, bank failures made it much more costly for banks to channel funds from depositors to borrowers. This resulted in a collapse of bank credit by 50% between 1929 and 1933. This non-monetary effect was particularly acute for households, farmers and small businesses.

The policy implications of Bernanke’s work are clear. Policy-makers should not let banks collapse and they should keep lending channels open during financial crises to avoid a repeat of the Great Depression. Serendipitously, Bernanke was Chair of the Federal Reserve during the global financial crisis of 2007-09, during which his main policy objective was to prevent a collapse in credit and a steep rise in the cost of credit intermediation.

Where can I find out more?

• The laureates explained the central role of banks in financial crises: the laureates’ work explained at the Nobel Prize website.
• The political slant of the Nobel Prize in Economics: an interview with Avner Offer in The Atlantic about the Nobel Prize and the free-market turn in economics
• The Diamond and Dybvig model: a short explainer by Tyler Cowen at Marginal Revolution.
• The Nobel Prize goes to Bernanke and Diamond and Dybvig: Alex Tabarrok at Marginal Revolution on the 2022 Nobel Prize.
• Explaining the rationale for the 2022 Nobel Prize in Economics: a piece by Anil Kashyap at the University of Chicago, who is a member of the Bank of England’s Financial Policy Committee.

Who are experts on this question?

• Anil Kashyap
• Paul Krugman
• Richard Portes
• John Turner

Author: John D. Turner, Queen's University Belfast

Picture by rrodrickbeiler on iStock

The post Banking crises: who won the 2022 Nobel Prize in Economic Sciences and why? appeared first on Economics Observatory.

But this development has raised questions about the effects on workers’ productivity. A review of recent evidence indicates that policy-makers should be sceptical of general claims being made about the impact of home working on productivity, either negatively or positively.

Some quantitative studies indicate that the pandemic has had a negative effect on labour productivity. But at the same time, more qualitative studies provide important insights that are relevant to public and private decision-makers.

Indeed, productivity is a complex variable to determine, and different studies have applied varying approaches to capture the impact of Covid-19 on labour productivity. Recent studies have used three main approaches, which appear to give different results. These are based on: accounting data; systems for monitoring the activities and hours worked by employees; and self-assessment by workers.

While the first two approaches show a mainly negative relationship between working from home and labour productivity, the self-assessment approach reports mixed results.

Specifically, although some research seems to imply that a return to the workplace is necessary to recover economic performance, the preferences and perceptions of employees seem to suggest that working from home at least some of the time (‘hybrid working’) may become a permanent option.

This implies that employers will have to adapt to this situation by supporting its implementation, agreeing on a strategic position on hybrid working with respect to the specific organisational context, and facilitating it through training, provision of appropriate equipment and so on.

How might the pandemic have affected productivity?

In economic terms, the pandemic has led to a fall in investment, an erosion of human capital due to unemployment and a decline in global trade and supply chains. In addition, it could also be associated with a constraint on the ability of economies to raise incomes in the long run and a reduction in productivity (World Bank, 2021).

In the short term, the negative effects of the pandemic are most evident when considering the depletion of the labour force (people made redundant, becoming sick and/or on furlough), the tightening of financial conditions and the disruption of supply chains (World Bank, 2021).

Similarly, the measures to contain Covid-19 have increased firms’ intermediate costs, pushed down value-added relative to sales – that is, reduced the difference between the selling price of a product or service and its cost of production – and reduced productivity (Bloom et al, 2021a).

There are other effects that are less clear. The pandemic forced many firms to adopt working from home. At least initially, many employees were not provided with the necessary support or infrastructure for remote work, nor did many have the skills required.

As a result, productivity may have gone down due to increased distractions and communication costs. These include the time spent on coordination activities and meetings both within and outside companies, which has meant a reduction in the number of uninterrupted hours when working from home (Gibbs et al, 2021).

On the other hand, in this new way of working, greater job autonomy and self-leadership could have led to higher individual productivity (Galanti et al, 2021).

The adoption of working from home has also meant that at least a fraction of the time saved in commuting is devoted to work-related activities, which may increase productivity (Barrero et al, 2021). In addition, the closure of less productive firms due to the pandemic tends to increase average productivity in the short run (Bloom et al, 2021a).

Many of these mechanisms that can explain productivity changes in the short term may also apply further down the road. A prolongation of the pandemic would continue to have supply-side effects, mainly in terms of labour depletion (that is, people made redundant, sick and/or on furlough) and supply chain disruptions.

In addition, social isolation, family-work conflicts and longer working hours can affect workers’ wellbeing and their mental and physical health. This is likely to have a negative impact on their long-term productivity at work.

Similarly, it is likely that the time that senior managers have had to devote directly to the pandemic has in part been taken away from other long-term productivity-enhancing activities (Bloom et al, 2021a). Further, the effect of lower investment in research and development (R&D) and innovation during the pandemic is likely to affect productivity in the long run.

Nevertheless, while the adoption of working from home may have had negative effects on productivity in the short term, these can, in principle, be mitigated and even reversed in the long term. Indeed, there is scope for improving the management of remote working, and labour productivity can be increased by enhancing managerial support (Farooq and Sultana, 2021).

What do recent empirical studies say about the impact of Covid-19 on productivity?

Research in this area has focused on analysing the effects of the pandemic on productivity in specific economies, sectors and firms, mainly considering the effects of home working. This is due to the specific objectives of each study, the availability of relevant information and the complexity of measuring productivity in practical terms.

Although measurements in this context are diverse, three main practical assessment methodologies can be identified in recent studies.

First, there are studies that examine labour productivity on the basis of mass accounting or numerical information from statistical databases. For example, using data from the Decision Market Panel of the Bank of England, one study finds that the pandemic would have reduced total factor productivity – that is, productivity including changes in capital as well as labour inputs – in the UK private sector by up to 4%, estimating a 1% reduction in the medium term (Bloom et al, 2021a).

The study also suggests that the increase in intermediate costs associated with the pandemic would influence the reduction in ‘within-firm’ productivity, that is, how productive individual firms are. This is notwithstanding the compensating effect coming from the contraction of less productive sectors (and firms), which is known as the ‘between-firms’ effect (see Figure 1).

There is evidence of a negative relationship between Covid-19 and productivity in another study, which estimates that the pandemic reduced labour productivity by 4.9% in Latin America and by 3.5% in the 24 countries included in the sample, considering direct and indirect sector-level effects on the economy (Ahumada et al, 2022).

Figure 1. Contributions to the impact of Covid-19 on productivity

Panel A: Labour productivity per hour

Panel B: Total Factor Productivity (TFP)

Source: Bloom et al, 2021a

Second, other studies determine labour productivity on the basis of employee activity monitoring systems. One, which uses employee activity tracking systems in Asian information technology (IT) service companies, observes a reduction in labour productivity by 8-19% due to the pandemic (Gibbs et al, 2021). This is explained by the fact that employees worked longer but less productively, as output remained about the same (see Figure 2).

Another study, using a dataset of the daily activities of developers in one of China’s largest IT companies, finds varied results depending on the different comparison metrics used (Bao et al, 2021). The researchers observe that working from home has both positive and negative effects on overall project productivity depending on the metrics evaluated and the characteristics of each project.

Figure 2: Average outcome by month

Panel A: Input – Time worked per working day

Panel B: Output –tasks completed relative to target

Panel C: Productivity

Source: Gibbs et al, 2021

Note: the vertical line (month 0) indicates the switch to working from home.

Third, there are a large number of studies that analyse labour productivity from a self-assessment point of view. In other words, they address the workers’ own perceptions of their performance.

Only one study fully supports the negative relationship between working from home and labour productivity during the pandemic, particularly considering the possible influence of a less supervised work environment (Farooq and Sultana, 2021).

The results of other research show mixed or positive incidences. For example, one study observes that difficulties in reconciling family and work and social isolation negatively affect work productivity, while autonomy is positively related to work productivity (Galanti et al, 2021).

Another finds negative impacts in terms of decreased work motivation, distraction and multi-tasking, as well as positive effects related to work-life balance, flexibility and time savings (Mustajab et al, 2020).

Other work shows that factors related to working from home – such as having a comfortable workplace, making one’s own decisions about how to schedule work, combining work with household chores or avoiding commuting – can have a positive effect on job satisfaction and a negative impact on job performance, with positive and negative effects on productivity, respectively (Ramos and Prasetyo, 2020).

Other studies find no significant changes overall in workers’ perceptions of productivity before and during the pandemic. But this does vary by sector, occupation, worker characteristics and work context.

For example, one study observes that workers in industries and occupations that are less suitable for home working, such as those related to food, report a decline in productivity. This was also observed among low-income earners, the self-employed and women, particularly those with children (Etheridge et al, 2020).

Another study finds that women, older and high-income workers were likely to report increased productivity (Awada et al, 2021). Other research finds that self-reported productivity was higher while working from home despite self-reported negative effects on physical health, such as a significant increase in back pain and weight gain related to decreased physical activity and increased consumption of junk food (Guler et al, 2021).

Evidence also indicates that home working will boost productivity in the post-pandemic economy by 0.8-1% as conventionally measured, or by 3.6-4.6%, on a wider definition of productivity that includes reduced commuting time (Barrero et al, 2021).

In the data used by the latter large-scale survey, 45% of the respondents answered that their efficiency when working from home was about the same as working on company premises, while 39.7% answered that their efficiency at home is higher (see Figure 3).

Figure 3: Efficiency of working from home versus working on business premises

Source: Barrero et al, 2021

Note: Responses to the question ‘how does your efficiency working from home during the Covid-19 pandemic compare to your efficiency working on business premises before the pandemic?’

Overall, in studies that could be called more ‘objective’ – that is, those that use mostly accounting data in measuring the productivity of the corresponding economies, sectors or firms – it appears that Covid-19 has negatively affected productivity.

But when the monitoring of workers’ activities and workers’ perceptions of their performance are taken into account, the results are more diverse. They depend on the context and characteristics associated not only with the work, but also the workplace and workers themselves.

In addition to the studies mentioned above, a recent investigation of 1,612 engineers, marketing and finance employees at a large technology firm based in Shanghai used a randomised control trial (RCT) methodology in which half the group were arbitrarily assigned to being able to work from home for two days per week, while the other half worked full time in the office (Bloom et al, 2022).

Among other findings, this study found no impact in the group that were working from home or in any individual sub-group in terms of performance reviews or promotions. Lines of code written by the home working group – one measure of employee productivity for IT engineers – rose by 8% (as measured over the whole working week) compared with the control group. Employees' self-assessment of their productivity while working from home was also positive, with an average post-experiment assessed impact of 1.8%.

What are the implications of the results of the impact of Covid-19 on productivity?

The pandemic is a unique crisis that has affected both the supply and demand for goods and services. It has created a context in which incentives for product innovation and quality improvement are reduced, technological progress is held back and productivity is reduced (World Bank, 2021).

Consequently, a pro-active approach from both the public and private sectors is needed to boost productivity growth. Policy-makers will need to facilitate investment in physical and human capital. Firms will need to revitalise their capabilities to drive technology adoption and innovation.

Economic shocks caused by the pandemic may lead to structural changes that can improve productivity in certain sectors. The option to work from home could increase and may positively affect labour productivity due to the re-optimisation of labour arrangements (Barrero et al, 2021).

Additionally, the various measures taken by firms to deal with the productivity consequences of the pandemic, such as investment in home equipment to facilitate working from home, have not only mitigated the decline in output but also significantly changed work dynamics (Eberly et al, 2021; Bloom et al, 2021b).

The shift to home working seems to have affected not only labour productivity but also workers’ wellbeing, especially in the context of work-life balance.

One study observes that individuals working from home due to the pandemic reported lower stress, higher efficiency and better quality in their work. But the same study also finds self-reported weight gain and increases in lower back pain, both of which may have longer-term health implications (Guler et al, 2021).

Workers’ perceptions of home working are still subjective and depend on multiple factors, such as the complexity of the work performed, the need for interaction (or not) with other colleagues to complete certain tasks, the awareness of being observed and evaluated, and, even more importantly, family and workspace conditions at home.

Indeed, there is currently no consensus in economic research on the productivity effects of working from home, as it can be very unequal across people and locations (Behrens et al, 2021; Barrero et al, 2021).

Undoubtedly, policy-makers should be sceptical of general claims being made about the impact of home working on productivity, either in a negative or positive direction. The quantitative studies reviewed here mostly support the notion of a negative effect on labour productivity, indicating a necessary return to the workplace to regain pre-pandemic economic performance.

Yet those studies of a more qualitative nature provide important insights – on employee preferences and wellbeing – that should be considered by relevant public and private decision-makers.

Where can I find out more?

• London’s workforce during the pandemic: Report by the Policy Institute at King’s College London and King’s Business School.
• The WFH revolution: how new ways of working are changing London: King’s Business School and Policy Institute at King’s.
• Nick Bloom describes findings of why working from home will stick: National Bureau of Economic Research.
• Julia Hobsbawm ‘The Nowhere Office’.
• WFH Research.

Who are experts on this question?

• Nick Bloom, Stanford University
• Philip Bunn, Bank of England
• Steven Davis, The University of Chicago
• José María Barrero, Instituto Tecnológico Autónomo de México

Authors: Cristian Escudero and Mark Kleinman

Picture by monkeybusinessimages on iStock

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The currency had yet to go through decimalisation and computers were human beings who did complex computations.

In this article, using a contemporary lens, we review how the UK economy has been transformed since 1952 – and where one or two things don’t seem to have changed much.

Table 1: The UK economy, 1952 versus 2022

Sources: Bank of England; Higher Education Statistics Agency; Office for National Statistics; Mitchell, 1988; Turner, 2010; World Inequality Database.
Notes: Where data for 2022 are not available yet, data for 2021 are used.

The health and wealth of the nation

The UK economy has grown by 332% over the past 70 years as measured by real GDP per capita. Therefore, in purely material terms, UK citizens in 2022 are much better off than in 1952.

The increased wealth of the nation is also more evenly distributed than it was in 1952. For example, the top 1% of wealth holders then held nearly half the wealth. Today, that figure is close to 20%.

As can also be seen from Table 1, life expectancy has dramatically improved over the past 70 years. In 1952, the average man died about three years after retiring. Today, life expectancy in the UK is nearly 82, on average.

Infant mortality, another indicator of improved health, has fallen from 29.1 deaths per 1,000 live births to just 3.4. These improvements in life expectancy and infant mortality have their origins in improvements in healthcare provision, better nutrition, reduced pollution and developments in pharmaceutical and medical technology.

Ultimately, the increased wealth of the nation has been a fundamental driver of these improvements in health outcomes. The National Health Service, created just four years before the coronation, has played an important role in providing universal access to healthcare and therefore to these improvements.

The rise in life expectancy has created difficulties for both the government and employers when it comes to pension provision. The National Insurance Act of 1946 set the state pension age for men at 65 and women at 60. Employers and pension schemes quickly followed suit.

These retirement ages made economic sense in 1952, but as people have lived longer, the cost to the state and the burden on pension schemes has meant that state retirement ages have been creeping upwards. Employers have dealt with increased longevity by moving away from defined benefit pension schemes over the past couple of decades.

End of growth?

The increased GDP per capita of the UK since 1952 has largely come as a result of improvements in productivity. Productivity in the UK enjoyed a halcyon period of growth in the 1950s and 1960s.

This slowed somewhat after the 1970s and into the 1990s. But since the global financial crisis of 2007-09, UK productivity growth – and hence economic growth – has been at its lowest rate in 250 years (Crafts and Mills, 2020).

So, is this unprecedented fall in UK productivity growth temporary or permanent? If it is the latter, then this has major consequences for policy-makers who have operated in a world of economic growth for decades.

Economic historians suggest that the UK’s low productivity in recent years has been the culmination of an adverse set of circumstances – the worst financial crisis in the country’s history, Brexit and the weakening impact of information and communications technology on productivity (Crafts and Mills, 2020).

Indeed, the productivity growth that the UK has enjoyed since 1952 can be largely attributed to the technological revolution of the computer, which had transformed business practices by the 1990s, and then the internet, which transformed commerce.

The recovery of productivity growth, and the performance of the UK economy, will largely be determined by whether there is another technological revolution.

Techno-pessimists argue that the effect of innovation and new technologies, such as artificial intelligence (AI) and nanotechnology, on productivity and economic growth will be much less than it was in the past (Gordon, 2016). In other words, the 2020s will not repeat the productivity growth witnessed in the 1950s and beyond.

On the other hand, techno-optimists argue that productivity growth in the early years of general purpose technologies such as AI is underestimated (Brynjolfsson et al, 2020).

The UK’s poor productivity performance may be exaggerated because GDP is not a great measure for the new digital age. Some argue that the mismeasurement of GDP arising from the digital revolution means that we are likely to be underestimating productivity growth (Coyle, 2018).

Environmental sustainability

GDP is not everything (Coyle, 2016). It fails to take account of natural capital – the environment. A nation’s GDP may be soaring, but it may come at a great environmental cost. So, has the UK’s economic performance come at the expense of environmental degradation?

In early December 1952, the Great Smog of London hit the capital for five days. A combination of unusually cold temperatures, fog and a lack of wind combined with pollution from coal fires and coal-fired power stations to create possibly one of the most severe smog episodes that London has ever experienced.

The smog caused severe respiratory disease, which contributed to the death of approximately 12,000 people and 100,000 people falling ill (Stone, 2002; Bell et al, 2004). It also had long-term health effects on children in utero and new-born infants (Bharadwaj, 2016).

Recent research means that we know that coal pollution had major negative effects on the economy. Coal pollution in the UK had major adverse effects on infant mortality and child development (Beach and Hanlon, 2018; Bailey et al, 2018). The industrial use of coal also had a major negative effect on employment growth in UK cities between 1851 and 1911 (Hanlon, 2020).

The Great Smog was instrumental in the passage of a series of clean air acts, which sought to replace coal fires with alternative forms of heating. 1952 was the apex of employment in the coal industry. As can be seen from Table 1, nearly three-quarters of a million people (mainly men) were employed in coal mining in 1952. By 2022, less than 1,000 were employed by UK mines. Coal went from supplying 88.5% of the country’s energy needs in 1952 to about 6.5% in 2022.

Cost of living crisis

Before we leave our retrospective look at 1952, one striking parallel in Table 1 is that inflation in 1952 was as high as in 2022. In other words, it appears that some things have not changed about the UK economy.

High inflation in 1951 and 1952 was attributable to a boom in world commodity prices caused by an inventory build-up in advance of the Korean War (Dow, 1998; Radetzki, 2006). The end of that conflict in 1953 ushered in a period of low inflation and stable commodity prices until the 1970s.

The parallels with 2022 are remarkable. A post-pandemic boom and the Ukraine war have pushed commodity prices to high levels, feeding into inflation. This historical analogue might suggest that inflation will fall rapidly next year.

But unlike in the early 1950s, the inflation of 2022 has been preceded by government largesse to help the economy to recover from the pandemic. This might mean that high inflation will not be as transitory as we may wish.

We must hope that high inflation will be brought under control in the early days of King Charles III. But if policy-makers repeat the mistakes of the 1970s, high inflation might only be tamed in the reign of King William V.

Where can I find out more?

• The Great Smog of 1952: A short documentary on London’s big pollution event in December 1952.

• Why does productivity matter? A Productivity Puzzles podcast with Bart van Ark, Andy Haldane, Kate Barker and Nick Crafts.

Who are experts on this question?

• Stephen Broadberry
• Nick Crafts
• Diane Coyle
• Jagjit Chadha

Author: John Turner, Queen’s University Belfast

Editor's note: This is an update of the article Platinum Jubilee: how has the UK economy changed over the past 70 years?, first published on 1 June 2022

Photo by PicturePartners for iStock

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Like the Covid-19 pandemic, these are challenges that affect the whole country but not in the same way or to the same degree. A common thread is that they each affect individuals and households on low incomes far worse than those with more money.

As the temperature soared in July, the BBC released new analysis showing that people in deprived areas were disproportionately living in places far hotter than nearby, less deprived neighbourhoods.

The impact of this was exacerbated by pre-existing health inequalities, meaning that those on low incomes were more likely to have conditions that are aggravated by heat. They also tend to live in poor quality housing and lack the cash to spend on things that can help with the heat – such as a fan or an ice lolly.

Similarly, the high inflation driving the cost of living crisis is a global phenomenon, but the degree of exposure to it in the UK has been increased by policy choices. Before the pandemic, there were sharp rises in the numbers of people living in deep poverty (with incomes below 40% of median) and destitution (those with incomes so low they can’t afford the bare essentials such as food, shelter and clothing).

A decade of cuts and freezes to social security eroded support for people on low incomes, both in and out of work. Large numbers of workers were trapped in insecure, low-paid work with little chance of moving up to a better job. A dysfunctional housing market locked too many people into expensive, insecure, poor quality private rented housing. This is alongside a shortage of social housing and seemingly insurmountable barriers to ownership.

The economic impacts of the pandemic then fell most heavily on those who were already struggling. Many people on higher incomes were able to continue with well paid jobs, safely at home. Many were even able to build up savings as their leisure opportunities were curtailed by lockdowns and social restrictions.

By contrast, many on low incomes lost their jobs, saw their pay drop or were exposed to the higher risks of continuing with essential work in the community. Many also used up their savings and accrued debt trying to stay afloat.

The government’s decision to raise the rate of the main benefit – universal credit – gave significant protection to those receiving it during the pandemic. But the decision then to cut it again for those on the lowest incomes plunged many back into dire hardship. The universal credit cut imposed a drop in annual income of £1,000 for 5.5 million families – the biggest ever overnight cut to benefits.

As the cost of living crisis took hold, the ability of households to endure sharp price rises was therefore enormously unequal. The inflation rate they faced also varied.

Inflation has been driven up largely by the cost of essentials, particularly energy and food, on which poorer households spend far more of their budget than those on higher incomes. As overall inflation reached 9% in April, the effective inflation rate being experienced by those on the lowest income was already 10.9%, while those on the highest incomes faced a rate of only 7.9%.

The immediate impacts of this were evident in the numbers going without essentials such as food, heating or toiletries – seven million people, according to research carried out in May 2022 by the Joseph Rowntree Foundation (JRF).

There have also been spikes in the numbers turning to charities, such as food banks, to get by. The support package put in place by the government in May was very welcome, offering most low-income families additional support of about £1,200 (when added to previous announcements). This largely covered the rise in energy bills, but it is unlikely to be enough support for families facing many other cost rises and already in debt with average arrears of £1,600.

Going without daily essentials is, of course, appalling and can have long-term consequences for both physical and mental health. But the rise in debt and arrears, which has received less attention, is another deeply troubling consequence of the cost pressures bearing down on people.

Across the UK, 4.6 million people were already behind with bills in May, up a fifth compared with October 2021 (JRF, 2022). The average amount owed by low-income households in arrears was £1,600 and more than a million people were taking on debt just to cover essential bills.

Very worryingly, almost a fifth of low-income households were in debt to high-cost lenders including loan sharks, amounting to £3.5 billion in debt. Another £2.3 billion is owed to ‘buy now, pay later’ providers such as Klarna or Clearpay.

These debts will not disappear when inflation starts to fall and the economy returns to something closer to stability. The scope for many on low incomes either to save for future expenses or to pay off debt is severely constrained.

Debt and arrears also often have a significant impact on people’s mental health. Nearly half of people with problem debt also have a mental health problem and 40% say their finances have made their mental health problems worse, according to the Money and Mental Health Policy Institute. Financial difficulties also affect recovery rates, with people 4.2 times as likely still to suffer from depression after 18 months if they are in problem debt.

National crises and traumas always have long-lasting consequences that affect people across all income groups and parts of the country. But these are often disproportionately severe and long-lasting for those with fewer financial and other resources.

Children from low-income families experienced greater pandemic-related learning loss than those from better off areas. People in deprived areas are more likely to suffer from long Covid.

The current cost of living crisis is similarly likely to cast a deep shadow over people on low incomes, long after those who are better off feel that the sun has come out once again.

Where can I find out more?

• Not heating, eating or meeting bills: Managing a cost of living crisis on a low income: Report by the Joseph Rowntree Foundation.

• Going without: Deepening poverty in the UK: Report on the effects of deep poverty and forgoing essentials by the Joseph Rowntree Foundation.

• The facts – links between mental health and money problems: Money and Mental Health Institute.

Which organisations are experts on this question?

• Joseph Rowntree Foundation
• Citizens Advice
• Stepchange
• Resolution Foundation

Author: Helen Barnard

Picture by Richard Johnson on iStock

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While a recovery is under way, limitations, ambiguity and complexity as a result of the pandemic and the war in Ukraine – which is also driving higher airline costs – might still prevent some passengers from travelling abroad this year.

A priority for policy-makers should now be to restore travel connections, to protect an industry worth 11.3 million jobs. Prior to the pandemic, the sector contributed almost $9.2 trillion (£7.6 million) to the global economy.

The global tourism industry, as it recovers from the effects of Covid-19, might have contributed $8.6 trillion (£7.1 trillion) to the world economy this year, according to data from the World Travel and Tourist Council (WTTC). That would be just 6% less than before the pandemic struck.

This forecast came just before the Russian invasion of Ukraine in February 2022 and was contingent on the vaccine and booster rollout continuing at current rates and restrictions to international travel being eased.

Currently, the recovery of the travel industry risks being delayed by 12-24 months to 2024 because of factors such as persistent inflation, high energy prices, labour shortages at airports, and lockdowns in China. The partial rebound this year is being driven mainly by the lifting of travel restrictions in many locations. Starting from June 2022, the United Nations World Tourism Organization (UNWTO) reported that there were no Covid-19-related restrictions in place in 45 locations, 31 of which are in Europe.

As more places reduce or remove travel restrictions, and the demand pent up during the pandemic is released, the expectation is that there will be a steady recovery, supported by the summer holiday season in the Northern hemisphere.

Before the war, international travel increased by 182% during the first three months of 2022, compared with the same period last year, according to the most recent UNWTO World Tourism Barometer.

Around 60% of international arrivals in the first three months of this year were registered in March alone, indicating that the recovery in the tourism sector was gaining momentum.

According to the same UNWTO data, the first quarter of 2022 saw over four times as many foreign arrivals (+280%) in Europe as in the first quarter of 2021. This increase was mostly due to high intra-regional demand. Arrivals in the Americas increased by 117% in the same three months.

Despite these encouraging signs, the global economy is projected to falter in the second half of 2022. Several forecasters have recently revised trade and GDP figures downward worldwide.

The war in Ukraine represents a threat to the recovery of the global economy and to the tourism industry itself. Besides causing travel problems and increasing country-risk in Europe, the conflict is also driving up already high oil prices and inflation. It is also causing further disruption to global supply chains.

This may suppress demand through higher costs of travel and accommodation. Indeed, with expanding operations and increasing fuel prices, travel costs will go up in 2022. Prices for kerosene surged to an average of $74.50 (£61.70) per barrel in 2021, and it is anticipated that they will rise to $77.80 (£64.41) per barrel in 2022. As a result, international tourism remains 61% below 2019 levels, based on the latest available (June) UNWTO data. In particular:

• Arrivals in the Americas and Europe are still 46% and 43% below pre-pandemic levels, respectively.

• Although there was significant growth in the Middle East (+132%) and Africa (+96%) in the first quarter of 2022 compared with the same quarter last year, arrivals were still 59% and 61% below 2019 levels, respectively.

• Asia and the Pacific saw the smallest growth among international destinations, remaining 93% lower than in 2019. This is largely because China has still not completely re-opened to international tourism, as well as further virus flare-ups that have required localised lockdowns.

How has international travel been affected by Covid-19?

International tourist arrivals

Between January and October 2020, the pandemic triggered a 70% decline in international tourist arrivals compared with the same period in 2019. This was caused mainly by people not wanting to spend money on flights or not being allowed to fly due to government restrictions.

Although the sector is recovering, tourist arrivals were still below pre-pandemic levels between January and March 2022 (see Figure 1).

Figure 1: Change in international tourist arrivals since 2019 (year-on-year percentage change)

Source: UN World Trade Organization (UNWTO)

As demand in Europe started to rebound, the industry struggled to keep up, particularly in the UK, as airports could not hire enough staff to meet passenger traffic that was higher than expected. While the UK is currently facing a tight labour market with more vacancies than job-seekers in the service sector, the travel industry has been hit particularly hard due to the high number of layoffs during the pandemic.

Number of commercial flights

One significant effect of the removal of travel restrictions has been the increase in the number of commercial flights in 2022. By the end of 2020, commercial flights were down 41.7% compared with 2019, having plunged initially by 74%, according to Flightradar24.

During the first seven months of 2022, flight traffic continued to follow seasonal trends in line with a gradual recovery from the previous years, although commercial flights in July remained about 16% below 2019 levels (see Figure 2). This is higher than the air traffic seen in July 2021, where commercial flights were about 34% lower than pre-pandemic levels.

Figure 2: Number of commercial flights (seven-day moving average)

Source: Flightradar24

Hotel occupancy rates

Hotel occupancy rates (the percentage of occupied rooms at any given time compared to the total number of available rooms) have been recovering steadily. The proportion of people staying in hotels fell dramatically across all regions in 2020, with an average drop of nearly 50%.

Before the war in Ukraine, hotel occupancy rates and room revenue were projected to approach 2019 levels in 2022. Occupancy was projected to hit 63.4%, exceeding the 44% reached in 2020.

As of 11 April 2022, the UK's rolling 28-day occupancy was 87% of what it was in 2019. The next-highest occupancy indexes were recorded by Poland (84.5%) and Ireland (81.3%), according to the STR. In the former case, the increase in occupancy has been, in part, the result of housing refugees during the early stages of the invasion of Ukraine.

Industry profits

After a $51.8 billion (£42.9 billion) loss in 2021, net industry losses are predicted to fall to $11.6 billion (£9.6 billion) in 2022. But while the peak of the crisis has passed, the net industry loss is over $200 billion (£166 billion) from 2020 to 2022 (see Table 1).

Table 1: Travel industry demand, capacity and profits

Source: International Air Transport Association (IATA)

The only region registering positive net profits is North America. Overall, the industry’s capacity and demand remain below pre-pandemic levels, with the highest losses recorded in Africa, the Middle East and the Asia-Pacific region – the last mainly driven by China’s slowdown.

Is a recovery under way?

Revenues

In 2022, revenues from international travel increased by 4% in real terms from 2020. The strongest outcomes were seen in the Middle East and Europe, where earnings increased to almost 50% of pre-pandemic levels. The increase follows a drop of about $1 trillion (£828 billion) in revenue from foreign travel in 2021, on top of the trillion lost during the first year of the pandemic.

Confidence

As long as the virus is contained and destinations continue to relax or lift travel restrictions, 83% of tourism professionals predict better prospects for 2022 compared with 2021. But the prolonged closure of a few significant outbound markets, namely in Asia and the Pacific, as well as the uncertainty brought on by the war, might postpone a full recovery of global tourism this year.

Just under half of UNWTO experts (48%) now see a potential return of international arrivals to 2019 levels next year, while a slightly smaller percentage suggest this could happen in 2024 or later (44%).

Passengers

The rebound in air travel intensified with the start of the summer holiday season in the Northern hemisphere. Compared with May last year, total traffic increased by 83.1%, driven mainly by international traffic, although remaining about 31.3% below pre-pandemic levels. Compared with May 2021, international traffic increased by 325.8% in May this year. In particular, between May 2021 and a year later:

• Traffic on Asia-Pacific airlines increased 453.3%. While the majority of travel restrictions in Asia are being lifted, the main exception remains China. Here, domestic travel plunged by 73.2% from the previous year, as a result of its zero-Covid-19 policy.

• Traffic for Europe increased by 412.3%, although uncertainty and high energy costs due to the war in Ukraine will have a direct influence on certain locations.

• Middle Eastern airlines saw traffic increase by 317.2%.

• Traffic for North America increased by 203.4%.

• Latin American traffic increased 180.5%, with some routes, such as those to and from Europe and North America, performing better than expected.

Drivers of the international recovery

Global demand

Global demand is anticipated to increase to 61% of pre-crisis levels in 2022 – 20 percentage points higher than in 2021. The recovery is being driven by domestic demand, with most countries now imposing fewer travel restrictions.

One of the main components of the global demand for travel will be pent-up savings. But persistently higher inflation globally is resulting in a sizeable hit to household spending in real terms, as incomes fail to keep up with prices. In the UK, the number of households that have run down their savings is set to double by 2024, according to research by the National Institute of Economic and Social Research (NIESR). This suggests that savings-driven demand for travel might be limited or absent for some income brackets due to soaring bills.

Overall, international demand is recovering but at a slower rate than previously forecast. IATA expects that by 2022, global demand for travel will be only 44% of what it was pre-pandemic.

Vaccinations

With a few exceptions, rapid progress in vaccine administration – particularly among advanced economies – has resulted in a gradual re-opening of borders. It will take longer for tourism to be revived fully, particularly in regions where vaccine distribution has been slower, such as in low- and lower-middle income countries. This will also be the case where vaccine efficacy is lower against new variants (such as certain developed economies in the Asia-Pacific region, including China).

What else do we need to know?

The effects of Covid-19 on the travel industry provides an opportunity to reconsider the future of tourism and accelerate longstanding priorities such as addressing climate change and promoting a renewable energy transition (Organisation for Economic Cooperation and Development, OECD, 2021).

Governments must encourage the structural changes required to transform the sector in line with future health and environmental challenges. This should include implementing digital solutions that make it safer and simpler for consumers to travel, such as using artificial intelligence and data-sharing, implementing enhanced harmonised biometric standards for identity verification and travel eligibility, as well as prioritising digital border management through e-visas and e-gates.

At the same time, international cooperation and multilateral agreements should continue to ensure that COVAX-supplied Covishield vaccines are accessible evenly and widely , which will help to avoid double standards that risk penalising low- and low-middle-income countries even further.

In response to the pandemic, the G20 in Rome has issues several recommendations for the future of tourism. These are based around seven interrelated policy areas: safe mobility; crisis management; resilience; inclusiveness; green transformation; digital transition; and investment and infrastructure. Addressing these will require international organisations to use the full extent of their resources to restore travellers’ confidence, while helping the tourism industry to adapt and survive.

Where can I find out more?

• G20 Rome guidelines for the future of tourism.
• Global Economic Outlook – Fraying at the Edges: NIESR’s Global Economic Outlook No. 361, Summer 2022.
• Organisation for Economic Cooperation and Development (OECD): Preparing the tourism workforce for the digital future.
• UNWTO World Tourism Barometer: May 2022.

Who are experts on this question?

• Corrado Macchiarelli (NIESR)
• David Roberts (ONS)
• Dawn Holland (NIESR)
• Donald Houston (University of Portsmouth)
• Simeon Djankov (LSE)

Author: Corrado Macchiarelli

Editor's note: This is an update of an Economics Observatory article originally published on 22 April 2021.

Picture by Heychli on iStock

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The UK is up against a sea of troubles. Inflation is in double digits for the first time in over four decades – considerably above the annual rate of increase in the world’s other big economies and expected to go higher. The costs of energy and staple foods are rising even more sharply, leaving many households facing a potential winter choice between warmth and sustenance. And the country is stricken by drought, floods, strikes and the looming prospect of recession – to mention just a few of today’s challenges.

Yet the country’s leadership seems unaware of the gathering crisis. The lame duck prime minister has gone on holiday before he leaves office next month. The two candidates to succeed him are pandering to the tiny electorate of Conservative party members that will decide between them with fantasy economics about ‘lazy’ workers, tax cuts and a smaller state. And all politicians remain in denial, at least publically, about the self-inflicted harm of Brexit on business, trade, investment, science and the labour market.

Summertime blues

So what do economists have to say about the UK’s perilous position? Contrary to one particularly ill-informed commentator, a great deal. For example, just this week in response to the latest official data on inflation and the labour market, the National Institute of Economic and Social Research (NIESR) has reported on falling real wages and the rising cost of living. The NIESR commentary includes a piece by one of our lead editors, Huw Dixon (Cardiff University), on surging food prices and the likely future path of inflation.

Yesterday, another essential institution of UK economic policy analysis, the Institute for Fiscal Studies (IFS), posted evidence on the likely impact of permanent tax cuts on the public finances under the August Bank of England forecasts of inflation reaching a high of 13% and remaining elevated for some time. And the IFS director Paul Johnson published an exasperated newspaper article about the ‘cakeism’ of UK politicians – and what really needs to be done to tackle weak growth, stagnant living standards, energy market problems and creaking public services.

Here at the Observatory this week, Jonathan Wadsworth (Centre for Economic Performance, CEP) has provided detailed insights into the relationships between prices, pay and productivity, addressing the question of whether wages are keeping up with the cost of living. And Stuart McIntyre (University of Strathclyde) has explored the considerable differences in unemployment rates, economic inactivity and wage growth relative to inflation both across and within the regions of the UK.

We’ll be posting new pieces on the UK’s economic crisis over the coming weeks, following up some of our recent analysis of energy markets, industrial action, the Bank of England’s response to inflation, the Russian invasion of Ukraine, climate change policy, and much more.

We’ll meet again

Meanwhile, next week, there are four big international meetings in economic research and policy-making that are likely to interest Observatory readers. Let me also alert you to three notable events upcoming in the UK in the autumn, not least the second edition of our annual #TalkingEconomics gathering in November in Bristol, now fully integrated with the Festival of Economics presented by Bristol Ideas.

European Economic Association (EEA) 2022 annual congress (#EEAESEM2022), Milan, 22-26 August

Starting on Monday is the annual gathering of economists from across Europe. This will be the first time back in person since the summer of 2019 – but with many plenary sessions available to watch online – and this year combined with the annual European meeting of the Econometric Society

The EEA congress programme features a presidential address by Oriana Bandiera (London School of Economics, LSE) on the evolution of women’s employment during the process of economic development. There’ll also be a keynote lecture by Michele Tertilt (University of Mannheim) on the economics of women’s rights in the United States, an issue we’ve touched on in a recent piece on the potential impact of the removal of constitutional protections on access to abortions.

Seventh Lindau Meeting on Economic Sciences 2022 (#LINOecon), Lindau, Germany, 23-27 August

The Lindau Nobel Laureate Meetings, which have taken place since the early 1950s, bring together acclaimed scientists with the next generation of researchers. The first economics meeting since 2017 begins on Tuesday, with 19 laureates and several hundred young economists.

Standout sessions, which will be available to watch online, include Paul Milgrom (Stanford University), the 2020 co-recipient of the economics Nobel, on the market for water in California; a panel discussion on social change and social media with 2001 laureate Joseph Stiglitz (Columbia University) and 2017 laureate Richard Thaler (University of Chicago); and a panel on the economics and politics of war and sanctions with 2017 laureate Oliver Hart (Yale University), 2007 laureate Eric Maskin (Harvard University) and 2010 laureate Christopher Pissarides (LSE).

American Association of Wine Economists (AAWE) 2022 annual conference, Tbilisi, Georgia, 24-28 August

This meeting, which starts on Wednesday, is the one I’m most sorry to be missing. It brings together wine economists from around the world for a combination of tastings and technical discussions of the industry.

The programme includes an opening keynote by Georgia’s deputy prime minister Levan Davitashvili – and presentations by Orley Ashenfelter (Princeton University), the godfather of wine economics, and Olivier Gergaud (KEDGE Business School), who has written for the Observatory about the future of the champagne industry after the pandemic. Orley and Olivier have done striking research on the role of ‘terroir’ and wine-making technologies in the quality of wines.

Jackson Hole 2022 Economic Symposium, Jackson Hole, Wyoming, 25-27 August

Thursday sees the start of the Federal Reserve Bank of Kansas City’s annual Economic Policy Symposium in Jackson Hole, one of the longest-standing central banking conferences in the world.

This year’s gathering of economists, financial market participants, academics, US government representatives and news media will discuss ‘Reassessing constraints on the economy and policy’. Highlights from previous meetings are available on the Kansas City Fed’s website.

Money Macro and Finance Society (MMF) 2022 annual conference, Canterbury, 5-7 September

MMF brings together researchers, practitioners and policy-makers in monetary economics, macroeconomics and financial economics. Standout sessions at its next annual gathering include keynote speeches by Catherine Mann (a member of the Bank of England’s Monetary Policy Committee, MPC) and 2019 Clark Medalist Emi Nakamura (University of California, Berkeley), and a Bank of England special session on ‘quantitative tightening’ and monetary policy normalisation.

With the Bank under fire for inflation well above its target level and politicians asking questions about its status as an independent central bank, there will be also a topical discussion of lessons from 25 years of the MPC.

The session, chaired by Paul Mizen (University of Nottingham) will feature Jagjit Chadha (NIESR’s director and one of our lead editors), former Bank governor Mervyn King and former Bank deputy governor Paul Tucker. One of the Observatory’s early videos in the summer of 2020 was a conversation between Jagjit and Mervyn on uncertainty, crises and central banks; Paul Mizen has written for us on the pandemic’s impact on commuting and businesses; and Paul Tucker has contributed a piece on whether we need a new constitution for central banking.

Seventh World KLEMS conference on productivity and growth accounting, Manchester, 12-13 October

The World KLEMS Consortium – the acronym standing for capital (K), labour (L), energy (E), materials (M) and service (S) inputs into economic growth – was an initiative launched over a decade ago by Dale Jorgenson (Harvard University), the doyen of growth accounting who passed away earlier this year. The seventh edition of the World KLEMS conference will be hosted by the Productivity Institute, a UK-wide initiative established to understand the drivers, measurement and impact of productivity.

Like the Observatory, the project is funded by the Economic and Social Research Council (ESRC), and it involves many of the researchers and institutions that work with us. Its October conference includes presentations by MPC member Jonathan Haskel (Imperial College London), who has written for us about the future of working from home, and Diane Coyle (University of Cambridge), another of our lead editors and founder of the Bristol Festival of Economics.

Festival of Economics 2022 (#economicsfest #TalkingEconomics), Bristol, 14-17 November

Finally, our event in Bristol in mid-November will bring together economic thinkers and practitioners from universities, thinktanks, business, politics, central banks and the media to discuss the immediate challenges of the UK’s cost of living crisis and war in Europe, as well as pressing issues around geopolitics, technology, cryptocurrencies, big data and financial market bubbles. The programme is here, along with audio highlights from our 2021 event.

Tickets will be available from September. We will be sharing registration details on our Twitter feed and in future newsletters. Please do share this sign-up link with any friends or colleagues who may be interested.

Author: Romesh Vaitilingam

Photo by Martin Holden for iStock

The post Crisis? What crisis? appeared first on Economics Observatory.

Indeed, talking about pay rises, the prime minister Boris Johnson stated that ‘we are constrained in what we can do not just by the fiscal position – the risk of borrowing too much – but by the risk that we will fan the flames of further price increases […] we cannot fix the increase in the cost of living just by increasing wages to match the surge in prices. I think it is naturally a good thing for wages to go up naturally, as skills and productivity increase’ (GOV.UK).

But are productivity growth and wage growth incompatible with high inflation? And what exactly do we mean by inflation?

Most economists wouldn’t baulk at the idea that wages can grow in line with productivity. If the economy is more efficient, that is usually reflected in growth in pay. Everyone shares the gains.

Standard economic textbooks link productivity to wages net of the level of prices. This link should hold regardless of the rate of inflation since what matters are the real rates of productivity and wage growth – the rate of growth minus the rate of inflation.

Productivity – or, more strictly, labour productivity – is measured by dividing the total value of output of goods and services produced minus the value of inputs (known as gross value added or GVA) in the UK by total hours worked. This calculation also takes into account (or ‘nets out’) the prices of these goods and services.

Think of an economy with a yearly inflation rate of 2% and nominal productivity growth over the year of 5%. The real rate of productivity growth in this case is 3% (the 5% growth in productivity less the 2% inflation rate). Such an economy would allow a real wage rise of 3%, if wages went up in line with productivity.

Equally, an economy could have an inflation rate of 5% and nominal productivity growth of 8%, which would also allow real wage rises of 3% (8% minus 5%), or even inflation at 10% and nominal productivity growth of 13%. Real wage growth is the same in each case.

Of course, these calculations assume that inflation does nothing to harm the growth of productivity or the wider economy. Yet there is quite of lot of evidence that higher rates of inflation might reduce people’s ability to buy things, particularly if they are on fixed incomes (usually the less well off). Higher inflation may also deplete people’s savings (usually among wealthier people, who tend to have more savings) and even hamper government finances (since debt payments are often linked to the rate of inflation).

The process of netting out prices, rather confusingly, is called deflation. A deflator is just a number used by economists to re-scale another number – in this case to convert the headline (nominal) growth in wages into a ‘real’, inflation-adjusted value.

Deciding which prices to use as a deflator is not straightforward and depends on which economic issues are being looked at. The Office for National Statistics (ONS) produces a vast array of indices that are used to measure the change in different types of prices (an index is not a specific price, rather a way of capturing the relative movements in prices over time). Which to use is a matter of fine judgement.

The current debate about inflation and the cost of living is focused on the rate of change of consumer prices and what wages can buy net of consumer price inflation. This is referred to by economists as ‘the real consumption wage’.

It should also be noted that these prices are not the prices that are important to firms. What matters to businesses are the costs of inputs, the prices at which they can sell goods and services, and the wages they pay their workers relative to these prices (the real product wage).

As a result, different prices matter for different aspects of the economy. As such, we shouldn’t be too surprised if these prices do not all move together or change at same rate over time, since they are influenced by different things.

But it does mean that using different prices to deflate (re-scale) wages will give different results. Used well, they can convey various sets of important information about how well or how badly various parts of the economy are doing. Used less well they can be confusing.

Figure 1 shows the percentage growth of several UK-wide price indices since 2007. The prices of materials used to make things have clearly gone up most over time (producer inputs), followed by the prices charged by manufacturers for goods (producer outputs).

The rate of change of prices is next – the consumer prices index including owner occupiers' housing costs (CPIH) is one measure of consumer prices. This is closely followed by the prices of goods and services in the whole economy (GVA) and then the prices charged by producers for services (services outputs).

Figure 1: Price growth since 2007

Source: ONS

How much does this matter for the calculation of real wages (wage growth minus inflation)? Just to make things even more complicated, there is no single source of wage information for the UK economy.

Figure 2 makes use of the average weekly earnings series – the most up to date and high frequency source of earnings data. This is based on a 7% sample of all firms registered for VAT or PAYE in Great Britain (the prices series are all UK-based).

Firms are asked about their total pay bill and the number of employees in the workplace. Dividing the former by the latter gives the average (mean) weekly earnings. Unlike the median calculation (the wages of the people in the middle), the mean calculation can be affected by people with very high pay at the firm relative to others. Regardless of its merits as a measure, the main aim here is to understand whether a given indicator of pay is sensitive to different deflators (price indices) when calculating real wages.

Figure 2 shows the yearly percentage change in real average wages based on different price deflators alongside the growth in (real) productivity. Before the pandemic, the choice of price deflator didn’t make much difference to the estimate of real wages. The prices of producer inputs were growing a little faster than other prices, which made the cost of labour a little cheaper, but not by much. Average real wages were also growing broadly in line with productivity.

The pandemic made the estimates of wages, output, hours worked and prices more complicated. The number of hours that people were working dropped, many were furloughed and sample responses to surveys/data collection fell.

These factors combine to make comparisons over the past year very difficult. By 2022, they are beginning to work out of the system and the estimates, but caution is still advisable. That said, the arrival of near double-digit inflation this year appears to coincide with a large deviation in the price signals coming from different sectors of the economy.

As a result, the real wage estimates based on different deflators have diverged widely. Applying the same deflator used to estimate productivity growth (the GVA deflator), real wages are growing by 3%. Using one measure of retail prices (CPIH), real wages are falling by around 2%. Deflating by the price of services, real (product) wages are constant. Using the price of producer outputs, they are falling by around 8%; and deflating by the prices of inputs to the production process, real wages are falling by around 15%.

Figure 2: Productivity and real wage growth using different price deflators

Source: ONS

What can we conclude from this? In short, we should never take a single figure too seriously – they are estimates after all. But used carefully, we can say something about the trends and their implications for different parts of the economy.

The costs of some inputs into the production process are clearly rising faster than wages. This makes labour relatively cheap and should help to support the demand for workers. The prices of consumer goods are now rising faster than both wages and the prices of other services. This limits how far people’s wages can go (reducing their purchasing power), making individuals and households poorer. Average pay growth has not diverged rapidly from the growth of productivity over this period.

What this all means is that different deflators reveal different things. Understanding the cost of living crisis requires looking at the relationship between wages and growth from many angles. With prices predicted to rise across the board during the remainder of the year, understanding different deflators and what they tell us is crucial.

Where can I find out more?

• More information on different consumer price indices used by the Office for National Statistics.
• Producer and service price data can be found here.
• UK productivity data are available here.

Who are experts on this question?

• Jonathan Wadsworth
• John Van Reenen
• Steve Machin

Author: Jonathan Wadsworth

Picture by Shaun Wilkinson on iStock

The post Are wages keeping up with the cost of living? appeared first on Economics Observatory.

Indeed, even before the inflationary pressures of this year had emerged fully, the pandemic had increased demand. Over half (57%) of charities reported a growth in demand for their services in a survey published in November 2021, of which only 4% expected this to decline (National Council for Voluntary Organisations, NCVO, 2021).

Charities themselves also face rising costs of energy and other essentials – and potentially increasing wage pressures. Those that rely on public donations may also be concerned that people will cut back on their giving as their own budgets are squeezed.

Looking at the effects of past recessions on charitable giving can provide some insights into what might happen to donations in the coming months.

Giving and the economy: recessions in the 1980s, 1990s and early 2000s

In the 1980s, 1990s and early 2000s, giving in the UK appeared to be largely recession-proof (Cowley et al, 2011). The value of donations increased in times of economic growth and did not fall at the same rate as the economy during periods of recessions.

Total giving was positively correlated with GDP growth over this period, but the positive relationship was driven by boom times (particularly the 1980s boom). Further analysis shows that the boom caused givers to give more, rather than increasing the number of donors.

Evidence from the United States shows a similar pattern. Analysis of data for the period from 1968 to 2007 found that overall donations were affected by fluctuations in the economy. But they were more sensitive to economic upturns than to economic downturns (List and Peysakhovich, 2011). In other words, economic booms were more likely to lead to an increase in donations than recessions were likely to reduce them.

The study also found that donations were more sensitive to changes in the stock market – movements in the S&P 500 – than to changes in GDP, and that donations were more responsive to stock market upturns than downturns (List and Peysakhovich, 2011). Negative changes in the S&P 500 did not affect donations significantly.

What might explain these different effects of macroeconomic conditions on donations? One explanation is that the increase in need during economic downturns leads to a ‘substitution effect’ – donations are more valuable – that can partly or fully offset the ‘income effect’ that would tend to reduce giving. This might be amplified by charities increasing and intensifying their fundraising activity. 

Another factor behind the strong positive effect of boom times, particularly the rise in the stock market, is that people may be more likely to donate windfall income – that is, unexpected increases in income that people may feel that they haven’t earned.

Evidence from laboratory experiments confirms that people are more likely to donate bonus income rather than similar amounts of earned income. Further, research shows that this behaviour may reflect a social norm about what is the morally appropriate thing to do (Drouvelis et al, 2019).

Giving and the economy: the global financial crisis

More recent research, which examines the effects of the global financial crisis of 2007-09, paints a more negative picture for charities.

In the UK, data on aggregate donations produced by the Charities Aid Foundation show a small fall in nominal donations in 2008/09, with signs of a recovery in 2010. But more striking than any short-term recession effect is the fact that the value of donations has steadily declined since 2010 both in real terms (2021 prices) and as a share of GDP (see Figures 1 and 2).

This fall was briefly halted in 2020 – a positive effect of the pandemic – but in 2021, donations as a share of GDP were at 0.48% compared with 0.62% in 2004 (and 0.68% in 2005). This is consistent with previous evidence that the number of households donating to charity has been in long-term decline (Cowley et al, 2011).

Figure 1: Total donations (direct donations to charity and sponsorships)

Source: UK Giving, Charities Aid Foundation; various years

Figure 2: Total donations (% of GDP)

Source: UK Giving, Charities Aid Foundation; various years

In the United States, giving also fell during the global financial crisis, according to analysis of data from the Panel Survey of Income Dynamics between 2001 and 2013 (Meer et al, 2017). The research shows that the fall was driven mainly by a reduction in the share of households making a donation.

Further, the decline in giving could not fully be explained by reductions in income and wealth, and giving had not recovered by 2012. The study concluded that other factors, such as changing attitudes towards donating or increased uncertainty, may be at work and that these could permanently lower charitable giving.

The finding from survey data – that the financial crisis negatively affected donations beyond an income effect – has been mirrored in a laboratory experiment. This study compared the outcomes of what are known as dictator games – in which people decide how much of a pot to keep for themselves and how much to give away – played before and after the global financial crisis had begun (Fisman et al, 2015).

The researchers found that people who took part in the dictator games prior to the economic downturn were significantly more altruistic than those who took part in identical experiments after the onset of the recession.

The economic slump made people behave more selfishly and this was true even when they themselves had not been directly affected. The study also found that participants exposed to recessionary conditions were more likely to favour efficiency (choices that maximised total resources) over equity (fair outcomes) when there was a trade-off (Fisman et al, 2015).

A related study discusses possible reasons for the mixed evidence on the relationship between inequality – specifically, changes to inequality levels within a country – and support for redistribution (Stantcheva, 2021).

In principle, one would expect higher inequality to increase support for redistribution, but this is not always the case. Indeed, this research concludes that people’s perceptions of inequality matter more than the reality (Stantcheva, 2021).

This includes perceptions about the degree of inequality and social mobility in a society, but also about the identity of welfare recipients and beliefs about immigration. Even priming people to think about immigration may reduce their support for redistribution and welfare spending. People’s beliefs about the effectiveness of policies to tackle inequality and help recipients also matter.

Although these findings relate directly to redistribution by government, they may have important lessons for charities. In times of recession and rising inequality, a clear narrative is likely to be important for maintaining donation levels.

What are the implications of these findings?

Charities are right to be concerned about donations over the coming months and years. Taking a long-term perspective, the evidence shows that recessions do not automatically reduce giving, but UK charities appear to be facing a decline in the real value of donations, at a time when their costs will be rising.

A big caveat to this analysis is that most of the studies referred to in this article focus on donations made by typical households, while total giving is becoming increasingly concentrated in the hands of the very wealthy.

In the United States, for example, an estimated 1% of the population gave close to 40% of total donations, while the top 0.01% accounted for a striking 14%. Many of the wealthy elite saw their wealth increase during the pandemic and they are likely to be immune to the cost of living crisis.

The wealthy have the resources to help those in rising need, but many may prefer to take direct control of their philanthropic activities. They may choose to direct their resources through their own foundations rather than to long-established charities, which will have implications as the cost of living crisis continues.

Where can I find out more?

• UK Giving Report: from the Charities Aid Foundation.
• The new state of donation: three decades of household giving to charity.
• New research shows increased charity demand for services and support from sector infrastructure organisations during the pandemic: Report from the NCVO.
• Perceptions and preferences for redistribution: Report by Stefanie Stantcheva for the Institute for Fiscal Studies (IFS).

Who are experts on this question?

• Sarah Smith
• Kimberley Scharf
• Johannes Lohse

Author: Sarah Smith

Photo by fizkes from iStock

The post What happens to charitable giving in a recession? appeared first on Economics Observatory.