Last week, I asked whether the enormity of the economic fallout from the pandemic meant that reforming our economies as we come out of the lockdowns is a luxury we could not afford, or on the contrary, that with radical change thrust upon us anyway, an opportunity had opened up to “rebuild better”.
As I wrote, I leaned towards the latter, because it is easier to undertake big systemic changes when the disruption they would otherwise entail has already happened. Our economies have been yanked so far from normal that it makes sense to consider whether we want to steer them to a new place rather than back to the status quo ante.
There is a second reason to embrace a careful radicalism. The Great Lockdown has laid bare flaws in the social contract that were already fuelling demands for change. Even before the coronavirus outbreak our economies suffered deep underlying conditions, so to speak, that needed curing.
These conditions mean that those already worst off suffer the greatest economic impact, and can also pose obstacles to the best economic policy responses. Fixing them is required both to do right by the hardest hit and to react better in a future crisis. The post-pandemic recovery is our best — and perhaps last, seeing where our politics was headed — chance of doing this. In the next few Free Lunch articles, I will be offering thoughts about how.
Tomorrow is International Workers’ Day, so let us start with the labour market. While coronavirus can be caught by anyone, the economic crisis inflicts greater pain and insecurity on some than on others. Our labour markets are suddenly defined by dividing lines between essential and non-essential jobs; between those who must work, those who are banned from work and those who have to work from home. Unfortunately, these differences map too closely on to how well or badly people were doing in the labour market before.
Economists Jonathan Dingel and Brent Neiman have asked how many jobs can be done from home and found that, for the US, the answer is about 37 per cent. What is more, these jobs account for about 46 per cent of total wages, reflecting that they are relatively highly paid.
This pattern holds geographically as well: the areas with the highest share of work-from-home jobs are affluent administrative or high-tech centres such as Washington, DC and San Francisco. Internationally, too, the richest countries have the most jobs that can be done from home: Scandinavia and financial centres Switzerland, Luxembourg and the UK.
A recent study by the Resolution Foundation gives a richer picture, from the UK, of how jobs more vulnerable to the pandemic are also worse in other respects. That includes in terms of pay, of course: those who can work from home earn on average almost twice as much as those in shutdown sectors. This is linked to educational background, as
almost half (47 per cent) of those with degrees are able to work from home, while just 6 per cent of those in work with no qualifications are able to do so.
More insidious types of precariousness sadly align in the same way, according to the Resolution Foundation data. Those on irregular (zero-hours), part-time, or temporary work contracts, as well as single parents, are over-represented in shutdown sectors and in “key worker” groups exposed to contagion. Such workers are also less likely to own their own house, and spend more on housing as a result.
Morally speaking, the case for improving the lot of the lower end of labour markets can only be strengthened by the pandemic. But what about economically? It is easy to articulate a well-meaning scepticism: though we owe much to the people who have borne the brunt of this crisis, we simply cannot afford to jeopardise the recovery and employers’ willingness to hire by raising their pay and labour standards.
A case in point: on March 31, the eve of a scheduled 6.2 per cent rise in the UK’s over-25s minimum wage, the chair of the Low Pay Commission warned the government that “a very challenging set of circumstances for workers and employers alike” might warrant pushing back planned wage floor increases.
This is too pessimistic. As the lockdowns are lifted, it is possible not just to bring people back to work, but back to better jobs — for them and for those who kept working throughout. This is a time to accelerate, not push back, a shift to better-paid and more productive jobs.
That requires three things. An ambitious programme for rapidly lifting and enforcing legal wage floors and tighter employment standards would improve job conditions. Well-resourced active labour market policies and income support between jobs would make it easier for workers to move from worse to better jobs. And an aggressive aggregate demand policy could ensure sufficient demand growth to spur hiring.
This used to be a heretical view. But experience shows that when such policies have been consistently implemented, above all in the Nordic economies, businesses have responded with increased capital investment and productivity, and strong demand has helped workers move from less to more productive companies.
The UK government seems to agree on the wage floor component: it let the rise go ahead on April 1 despite the economic collapse. Having accepted that higher wage floors may spur productivity improvements, it — and other governments — could do well to embrace the other parts of an agenda for better jobs.
Some stricter workplace standards are now impossible to gainsay — hygiene and physical distancing rules, for example. Others will be resisted, namely limits on loading business risk on to the shoulders of workers by means of practices such as unpredictable shift patterns or irregular contractual relationships.
But if higher wages can force productivity improvements, so should forcing employers to shoulder more of the business risk. Most companies will, in any case, have to rethink their business models and businesses practices fundamentally, so this is a good time to encourage them to adjust to more expensive labour by making their own workers more productive.
Of course this means some jobs — or some ways of doing certain jobs — will disappear, if they relied on cheap labour before. The answer should be to create more of the better jobs. That is why the need for demand stimulus will not go away for a long time.
To think the immediate crisis spending needs to be followed by spending cuts to “right the ship” in short order would be a grave mistake and would waste an opportunity to seek both higher productivity growth and a better future for the hardest-hit workers — what I call an “economy of belonging” in a new book.
To sustain high government spending against a background of soaring public debt will, of course, necessitate some innovative thinking about government financing — a topic for a future Free Lunch.
• Two University of Warwick economists, Andrew Oswald and Nattavudh Powdthavee, argue for lifting lockdown restrictions by age cohorts because of how steeply the risk of dying from Covid-19 increases with age.
• Central banking is being transformed by the magnitude of the economic crisis caused by the coronavirus pandemic. The Federal Reserve is on course to double or triple its balance sheet this year, and wading into lending it has never undertaken before.
• Gavyn Davies thinks that as far as price stability goes, our challenge is deflation not inflation. The FT’s leader column agrees. So does Olivier Blanchard, who nevertheless sets out the — possible but improbable — conditions that all have to hold for higher medium-term inflation. For reasons Free Lunch set out a month ago, we may well see a short-term inflationary rise as our friend.
• US gross domestic product fell 4.8 per cent on an annualised basis in the first quarter of 2020. But that is nothing compared with France and Spain, whose economies shrank by 5.8 and 5.2 per cent on a quarterly basis.
• The best unbiased estimate of how many deaths Covid-19 has caused is excess mortality — the extent to which more people are dying in this pandemic than is typical at the same time of year. My FT colleagues have crunched the numbers to find that on average, the real death toll is about 60 per cent higher than the official count on average — with big differences between countries.
• Market pricing suggests investors expect the Federal Reserve to go negative with official US interest rates.
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