Sizing up fiscal events and looking back at lockdowns

Afternoon all,

What a quintessentially Westminster week – a plethora of potential policies aired, but a paucity of concrete proposals to parse. That said, it’s likely we’ll see details on changes to disability and incapacity benefits next week.

And we’ll also be contextualising the Chancellor’s upcoming Spring Statement on Monday –  register now to avoid disappointment.

Below you’ll find a labour-market-lean in our reads, reflections on five years post-lockdown, and thoughts on fiscal rules and forecasts in Chart of the week. Especially keen beans among you may also want my more detailed take on the headroom bind here.

Have a great weekend,

Ruth

Chief Executive
Resolution Foundation

Leading ladies. More women are working, but we remain underrepresented in some sectors. This research (from Germany) suggests one reason why – preferences for gender diverse workplaces. Turns out, women serving on majority-male boards earn significantly more than women on balanced boards – which this study interprets as women valuing (and taking a pay cut to get) a gender-diverse work environment. In fact, by surveying German PhD students, the authors find that people (including men, who like hanging out with women, actually) will forgo 4 per cent of their earnings for (30 percentage points) more female colleagues. That preference is stronger among women, who will sacrifice 7 per cent of their earnings. Hopefully this research points towards a future where the gains made by women already in leadership positions (ahem) will help young women to pursue any career, or leadership position, they fancy. Hell yeah.

Barred by bias. People in professional occupations do not reflect the population as a whole – with working class and ethnic minority background folks notably underrepresented. This analysis of UK recruitment data on 2 million young people ascribes these inequalities to employer decisions during recruitment. In other words, employers are disproportionately filtering out candidates from underrepresented groups. Applicants from lower socio-economic backgrounds are 32 per cent less likely to get an offer than similar applicants from professional backgrounds. That gap is 45 per cent for Black applicants, and 30 per cent for Asian. One notable exception is that women are *more likely* to receive a job offer than similar male applicants. The paper recommends that recruiters monitor the diversity of applicants and offers, prioritise potential over past achievements, and help universities prepare students for job applications, to minimise biases.

Value for vacancies. What can the cost of job ads tell us about labour market equilibrium? This blog explores how the (falling) costs of advertising vacancies this century might distort our measures of the balance between labour market demand and supply. Standard models propose that when demand for labour is high and unemployment is low, vacancy rates are driven up by labour productivity growth and better job matching. *But* we have not been accounting for the fact that job ads are 80 per cent (!) cheaper to run since 2000, as online advertising has been swiftly adopted. So now, the number of vacancies for a given level of unemployment is higher, which needs to be accounted for when assessing labour market tightness. Chatting to parents of recent graduates, the number of applications per vacancy is also going wild – the marginal cost of an application has gone down too after all.

Gauging German fiscal reforms. Financial markets seem to have welcomed proposed fiscal reforms in Germany. Yields on Bunds are up, but this has mostly been linked to the prospect of investment-fuelled growth rather than debt sustainability worries. This analysis considers the consequences of the reforms – forecasting a GDP boost of 0.5 percentage points from 2026. The policy change could boost demand within Germany and with its trading partners. Although, as ever, the actual effects may well be smaller than some suggest, with the additional spending taking time to feed through as growth. Plus, the effect of defence spending on GDP is typically low. But what about the affordability of the reforms? The authors’ view is that it should be fiscally sustainable to implement – *but* would necessitate significant cuts to other spending to meet the deficit constraint. Not to mention, the change would cause Germany’s steady-state debt levels to (gulp) break EU fiscal rules, barring a bloc-wide rule change.

Something for the weekend? | Observing a Covid-iversary

This weekend five years ago Western Europe was locking down (Spain on the 14^th, France on the 17^th, the UK on the 23^rd), and while the day of reflection was last Sunday, we’re using the fifth anniversary of European lockdown to reflect on the pandemic’s long shadow.

Lockdown tiggered a 26 per cent fall in GDP between February and April 2020 – the biggest since reliable records began. Within three years the UK had experienced 208,000 excess deaths. The Government spent £311 billion responding to the crisis according to the OBR. The good news? High unemployment did not materialise, and vaccines were rolled out at astonishing speed. But questions remain.

Firstly, did we take the right approach? The government concluded that the furlough scheme was good value for money “with a clear positive social benefit”, and international comparisons refute the notion that it caused high economic inactivity. But America took a different approach, increasing unemployment benefits and sending stimulus checks, rather than funding job insurance for employers. European real GDP contracted nearly twice as much as American (-6.4 per cent vs. -3.4 per cent) and the US recovered faster – although it’s impossible to know precisely why, especially with divergent post-pandemic fiscal policy.

And secondly, what will be the pandemic’s economic legacy? On the upside, the crisis was the making of Universal Credit, which proved its (comparable) agility, providing vital support to low-income families at short-notice. But Clare Lombardelli has flagged persistently high economic inactivity and education disruption as the two long term economic concerns. Lockdown, and the pandemic, changed the country for ever – and mostly, not for the better.

Chart of the week

Strictly speaking, it remains to be seen whether we’ll get a fiscal event this month – but we know a forecast is coming on 26th March. So, what have recent policy decisions at fiscal events done to the fiscal position? The chart below shows the total size of policy in recent fiscal events. The dark blue bars are averaged across the five years, the pale blue are the impact in just the final year. A positive number means an improvement in the government’s fiscal position – meaning they’ve raised money and decreased borrowing. Dark blue bars tend to be negative, indicating that Chancellors rarely net tighten through policy decisions – hasn’t happened since 2016! The light blue bars show how loosening has often happened in early years, with promises of tightening to come (that’s the sound of a can being kicked). This makes for volatile fiscal policy. Speaking of stability, let’s not forget how enormous recent fiscal events have been. In the 2010-2015 Parliament total policy in fiscal events (whether cost or saving) was worth on average 0.2 per cent GDP a year. Since then they’ve been three times that at 0.6 per cent GDP. Even if the Chancellor makes policy announcements this month, it won’t be hard for the numbers involved to be dwarfed by preceding fiscal events.