Strike one to the Unions?

Both sides of the fence when it comes to Wednesday's proposed strike action by almost 2 million public sector employees are relying on the public not to understand the quite complex nuance of their positions. Both sides of the fence are using misinformation to get the public onboard (Ed Balls on Andrew Marr this morning using a teaching assistant on £15,000 as an example for instance when the fact is that those on £15,000 and under aren't affected by the changes) . Trouble is, as with many political issues, both sides are right. And both are wrong. To understand this you have to understand the role and responsibility  of unions and the role and responsibility of government, and how they are clashing so seriously.

First, I think it's important to explain why the strike is taking place. Please imagine yourself in the situation of a teacher. Central to your financial planning over the years you have worked has been the safety of your pension entitlement.

• You are being told that you will have to wait until you are 68 (currently 60 for teachers) to take that pension. 
• You are being told you must contribute 50% more each month into your pension than you were already contributing (9% of salary instead of 6%). 
• You are being told that your pension payments will rise by inflation calculated under the far more anaemic CPI measurement instead of the RPI measurement (bear in mind the government, when it loans out money, expects payments back to it to go up by RPI). 
• You are being told that instead of being calculated as a percentage of your final salary (likely to be pretty high) it will be calculated over a career average salary (so much lower). 
• Furthermore, if you are a teacher in a private school you are being told that you are being removed from the teachers' pension scheme altogether, even though you were trained by the public sector and in a normal career ay switch from one to another.

So, just to clarify, striking workers are being told they will have to pay more to receive less and work longer to receive it. A triple whammy if there ever was one.

Now let's look at the government's position:

• The national debt - which is how much we owe to our creditors, is approaching one trillion pounds. That's 1 followed by 12 zeros, or £1,000,000,000,000. Just to cut this down - it is about £15,000 for every man woman and child in Britain, and about £35,000 per employed person in Britain. We ARE going to have to pay this back at some point. 
• The budget deficit - this is the difference between what the government receives in tax revenue and how much they are spending each year. This year it is projected to be somewhere in the region of £168 billion pounds. That's 168 followed by 9 zeroes, or £168,000,000,000. This amount is added to the national debt every year as the shortfall has to be made up by borrowing. 
• This means that we as a country are paying debt INTEREST (the money it costs just to service the debt - not even pay it back) of £130 million pounds A DAY.  That's about £50 billion a year in interest payments. This is about £2,000 a year for each UK household just on interest payments. That's more than the entire education budget for the UK being just the cost of the debt we have.

The Coalition government has decided to try and get the budget deficit down to zero by 2015 - although it may now take until 2017 - and that deficit reduction plan has been endorsed by the markets to the extent that the UK now can borrow money at a cheaper interest rate than it has for the last 50 years whilst the likes of Greece and Spain are near default and having to impose drastic austerity measures the likes of which would make even the most committed of deficit hawks shudder. BUT the price of doing this is that many parts of the economy are having tocontribute to deficit reduction - and the pension proposals above are how teachers and other public sector workers are being asked to do that.

The government asked Lord John Hutton (a former Labour secretary of state for work and pensions) to look into the cost of pensions after the independent Office for budgetary responsibility (OBR) suggested the gap between public sector pension contributions and payments would double over the next four years to £9bn. Many of the government proposals you see above are drawn from the report that Lord Hutton produced.

Spokespeople for the teachers' unions make the following points.

1) The teachers' pension scheme at the moment pays for itself - in that under an agreement made with the previous government it is affordable and viable in the long term.

2) The changes mean, for instance, that on a modest teachers' pension of £10,000 an annum a teacher would lose abot £50,000 over the next 20 years

3) The public sector workers didn't cause the financial crisis, so why should they have to pay for it?

The government has come back with the following points:

1) They dispute these figures and argue that at some point unless these changes take place the teachers pension scheme will not be affordable. After all - when the pension age was created life expectancy was only 18 months past it - now it is around 20 years past it, and getting higher - and something's got to give.

2) The government argue that whilst they accept this will affect many key workers badly, it is correcting the gap between public sector pensions and private sector pensions where the taxpayer is funding too high of a percentage of a liability that is growing.

3) That the financial crisis was caused by the debts built up by the previous government.

The Unions' point 3 is related to the oft-repeated conceit that the debt was caused by 'the bankers'. Whilst there is little doubt the RECESSION was triggered by problems with the financial services, it came after a sustained period of growth during which a responsible government should have built up a budget SURPLUS - but as we know we went into the recession with a massive structural budget deficit (meaning it cannot be explained purely by the economic cycle of growth and recession). The spending that came after that - some of which was very neccessary - worsened the debt to where we are now. Many of those who will be marching in the rallies on Wednesday are in their jobs funded by the unsustainable debt the previous government took on. I have pointed out in many previous articles that this spending was partly neccessary, but models of voting behaviour suggest that a Labour government might increase the size of the public sector to deliberately raise the number of workers naturally inclined to vote for them. Fact is that if you take on an unsustainable mortgage to buy a house you can't afford, at some point you may have to sell that house and trade down. Do we blame the bank for making us do that or accept that we have to take responsibility for taking on those debts? This is the reality the country faces.

Furthermore, let's say it is all about bankers. What do we do then? If we taxed all the bank bonuses paid ou in the UK last year at 100% (in which case they wouldn't be paid so it's a moot point) that would bring in about £8bn. That leaves £160bn to find from raising tax revenue or cutting spending. Any solutions?

Then there is tax avoidance. Conservative estimates say this is about £20bn - the "Tax Justice network" say it is about £70bn. Let's use that figure then. That leaves £90bn to find just to get rid of the deficit and we haven't even started paying back the debt!

A question that has been in my head this weekend as I played with my young children is - what am I going to tell them if we don't deal with the debt now and in 30 years time the UK's debt is £2 trillion, IMF bailouts are required and massive austerity measures are in place? That even though I benefitted from the prosperity of the boom years, when the bust came and the finger pointed at me I shook my head and said "not my fault"?

The changes DO affect teachers in a serious way, and given the government is a monopsony employer (it has dominant market power) the unions are doing what they are set up to do, which is representing what they feel to be the best interests of their members. The trouble is that trades unions represent sectional interests - the interests of their members, however hard they try to argue they represent a cause (i.e. their action is in the vest interests of the education of this country's young people).

Those interests may clash with what is in the best interests of the country. If you believe that everybody has to contribute their bit to bring down the debt then one could argue the teachers should take their medicine and get on with it. Should you believe that they shouldn't be asked to pay to help reduce the debt then one can argue that they should all be out on the streets striking.

Freedom of Association is one of the most important freedoms we have in our liberal democracy. Members of unions have a right to strike  as long as they have been balloted correctly - which they have - regardless of the anaemic turnout for those ballots. We should celebrate the fact that we can have these debates and workers can take these actions (within reason). In many countries, unions are banned. You'll know those countries - they are where the people are denied most if not all other freedoms.

I have a feeling the government may relent on the removal of the TPS from private school teachers and possibly the change from RPI to CPI. Possibly they'll make the additional pension contributions more progressive (e.g. only for those on much higher wages). But as I've said before, the raising of the retirement age should have happened a long time ago, and we can't really be protesting about the advances in medicine and life expectancy can we? Any changes in the teachers' favour will be seen (rightly) as vindication for Wednesday's industrial action. Or maybe they won't change anything, and we are on the cusp of a series of general strikes.

The polls at the weekend show the public are split on this. Whether they will be by next weekend remains to be seen.

The dismal science of getting disabled people into the workplace

It's hard to find a better reason why people call economics the "dismal science" than the fact that when Philip Davies MP says that disabled people should work for less than the minimum wage to increase their chances of being taken on by employers, he is backed up by economic theory.

In case you didn't know, here is Davies quoted directly on Thursday 16th June in the House of Commons:

"If an employer is looking at two candidates, one who has got disabilities and one who hasn't, and they have got to pay them both the same rate, I invite you to guess which one the employer is more likely to take on. Given that some of those people with a learning disability clearly, by definition, cannot be as productive in their work as somebody who has not got a disability of that nature, then it was inevitable that, given the employer was going to have to pay them both the same, they were going to take on the person who was going to be more productive, less of a risk. My view is that for some people the national minimum wage may be more of a hindrance than a help.If those people who consider it is being a hindrance to them, and in my view that's some of the most vulnerable people in society, if they feel that for a short period of time, taking a lower rate of pay to help them get on their first rung of the jobs ladder, if they judge that that is a good thing, I don't see why we should be standing in their way."

Reaction to this statement has been fierce. The Conservative party quickly distanced themselves from them and  Labour's Anne Begg, chair of the work and pensions select committee, called the remarks "outrageous and unacceptable", saying they showed "what a warped world some Tories....inhabit."

Yet, if you study basic Labour market microeconomic theory, you will know that Davies has a point. It sates that an employer, when deciding whether or not to take on a new employee will look at two numbers. One is the wage that person demands (the marginal cost of the unit of labour) and one is the monetary value of the goods or services that person provides (the marginal revenue product of the unit of labour). Should the latter be greater than the former, then they will employ that person. Should someone with a disability not be as productive, they are less likely to be taken on.

In the example Davies gives, a rational (in economic terms) employer, faced with two candidates, one with disabilities and one without, to whom they would have to pay the minimum wage, will choose the candidate who will be the most productive, as that is the only way to compare them, unless one of them accepts below the minimum wage, which they are not allowed to do.

I imagine Philip Davies will feel this is a similar argument to those who feel that maternity laws are making it less likely that a woman of child bearing age will get chosen for a job over other people, given the assumption is made that in the short term they may be less productive. Effectively, the argument goes, maternity laws are more of a hindrance than a help.

Davies believes he has some supporting evidence - he said he had talked to people with mental health problems when he met recently with the charity Mind, and he said they agreed with his analysis.

But that's because his analysis is basic microeconomic theory, and basic microeconomics is a science, and a dismal science at that. Because Davies has missed the point about what the National Minimum Wage is for.

The National Minimum Wage (NMW) is about dignity. It's about being paid a decent wage for the work you do. The reason it was necessary is that basic economic theory suggested that the equilbrium wage (where demand for labour meets supply of labour) should be paid and sometimes that equilibrium wage was so low that it was impossible to live off it. So a minimum wage had to be set above that equilibrium


The NMW also aimed to solve another problem, which was that of the "unemployment trap". In basic terms if the benefits you get are more than, equal to, or not much less than what you would get paid in work then you may as well stay unemployed and get paid to do nothing. So the NMW was seen as a "supply-side" policy as it incentivised people to join or rejoin the workforce.


Someone who is registered disabled will get disability benefit, and the wage they would earn in employment really needs to be far enough above the benefit to make it worthwhile for them to take a job.

Where Davies has a point though is that sometimes it's about getting that first foot on the job ladder and proving yourself. Many young people are sometimes prepared to work as "interns" for free for as long as a year to get themselves on the job ladder (even though that's normally funded by the 'bank of mum and dad'). Davies is suggesting that those with disabilities may want to be free to do the same without an employer breaking the law.

Recently, the Associated Press raan a story about the Ohio legislation that does exactly what Davies is suggesting. Despite the vitroilic reaction, the mother of an autistic man working for below minimum wage in Ohio said that her son's new job "allows him to have a purpose in life....he has a place to go and a reason to get up in the morning. I don't care about the money."

Also, a single adult under the age of 24 is entitled to benefits of around £70 a week, but the minimum wage would give him more than £200 a week. We talk about the need to be a significant difference between benefits and the lowest wage, well this may indicate that there is. So should the state be not allowing those who wish to earn say £140 a week (double benefits earning) to do so?

My point is, like most ideas in economics, there are two sides to this story. Despite the insults and rage Davies invited, should we really be dismissing his analysis out of hand?

In these times of mass unemployment do we not want as many people as possible in work? In this time of a massive deficit would we not prefer people in jobs earning and paying tax to people not working and paying benefits?

If so then we really should look at every option seriously, however unpalatable. Even though I will admit this one is particularly unpalatable.

Where were the Union leaders when their members really needed them?

Mark Serwotka - head of the PCS

If you want to go on a fruitless search, find a single union leader who uttered any words of warning about the dangers of the government building up so much debt. While you're at it, find a single union leader who expressed any concerns about so many jobs being created that had to be funded by borrowing due to the massive shortfall from tax revenue. Can't do it? Now find a story about union leaders warning about the cuts. Easy isn't it? Welcome to the world of vested interests.

If you have a vested interest in something, you have a very strong reason for acting in a particular way, for example to protect your money, power, or reputation.This is why the unions, and in particular the public sector unions, never complained about the enormous amount of money being showered upon their members. You might ask why they should, after all, that money brought them more power. Yet their role is to represent the interests of their members, and pointing out the dangers of the government getting into such debt would have been in their members' interests.

Why? Think about it this way, the Labour government created something between 750,000 and 1 million public sector jobs. When you get a new job, you may move home, including your family. You may take on a new mortgage or other debts. You may make major changes in your lives linked to the new job you have. All of these assumes your new job is secure. If, however, your new job was being paid for with borrowed money that will have to be paid back at some point then you should know about it as your new job may well not last long. 


But where were the union leaders then? "Be careful - these jobs are being paid for with borrowed money, there will have to be cuts at some point". Or "We would warn our members against making onerous commitments that depend on their income from these jobs that the government can't afford to give out". Nope, none of it. 

I'm not talking about jobs such as teachers or nurses or essential workers. I'm talking about the 'sustainability facilitator' or 'walking co-ordinator' or 'performance change champion' types of jobs that sprang up in every local authority over the past 10 years of so. Each time someone got one of these jobs, the public sector unions got another member. This increased the membership subscriptions and the power of the unions, which is why they were quite happy to cheer the creation of hundreds of thousands of jobs that made some contribution to putting the UK into a trillion pounds of debt.

Only now, the axe is falling. Government spending is being cut and the unions are shouting loudly, threatening to 'co-ordinate' their strikes around Easter (this skirts around the illegality of a General Strike). Mark Serwotka - Head of the Public and Commercial Services Union said strikes were 'inevitable' and that "The more of us that stand together against the cuts, the more problems we can create." 

The problem is that the country is a trillion pounds in debt and Mark Serwotka said nothing whilst that was happening. So claiming to stand on the moral highground is a bit rich now. 

I have nothing against unions. Without them, the exploitation of the workforce, in terms of pay and working conditions, would be far worse. 

But I am against self-serving 'have your cake and eat it' leaders who want your money from your pocket to pay their members wages regardless of the financial position it puts the UK into. Had they raised concerns about borrowed money being used to hire workers then I would be very happy for them to be bleating the way they are now about those workers being jettisoned. But they didn't, so I'm not.