Work isn't working

Families and firms are at war. It will only be won when parents - fathers as well as mothers - can c

The Sex War is over. Girls outperform boys at school and are streaming through higher edu cation. Young women are now taking home the same size wage packets as young men. But the celebrations have to wait. A new, tougher battle has to be fought. It is not a duel between men and women, but between families and firms. This family war will be won only when parents - fathers as well as mothers - can care for their children without dumbing down their careers.

Women now compete with men on a virtually equal footing in both business and politics - but only until the precise moment they become mothers. It is not a question of old-fashioned notions about their capabilities. "Women don't lose out because of outdated views about them as women," says Mary Gregory, an economics lecturer at Oxford University and expert on gender and work. "They lose out because they make different choices about work when they have children." It is not possession of a womb that now holds women back, but its use.

This is fertile political ground, and the Conservatives are beginning to move on to it. David Cameron has proposed that maternity leave should be made transferable, allowing mums and dads to tag-team the childcare, or even take time off together. It is a modest proposal, not least because fathers will only be paid £112 a week (the current statutory maternity pay rate). Labour's John Hutton retorted that few families would be able to afford to make use of such a right. This is true: but why deny those people the possibility?

It is lack of choice that is now the issue. Legislation aimed at tackling direct discrimination, most importantly the Equal Pay Act, has helped to bring about a sea change in employer attitudes and pay scales. Barbara Castle, author and advocate of the Equal Pay Act, must sit beside Keir Hardie, Clement Attlee and Nye Bevan in the Labour pantheon. The latest research from the TUC shows that the gap between the full-time earnings of men and women in their twenties is only 3 per cent. Even this small gap is explained entirely by the very large salaries of a handful of men at the top of the income distribution, which pull up the male average, and the unwillingness of women to pitch for more money. As Gregory suggests, "Women don't ask."

But the good news comes to an end at 30, the age at which the typical married woman has her first child. Children strike women's careers like a meteorite, while glancing almost imperceptibly off fathers' working lives. The pay gap for thirtysomethings is 11 per cent; women in their forties earn 23 per cent less. The picture gets even worse when part-timers are brought into the picture. Female part-timers in their thirties and forties earn only two-thirds as much an hour as male full-timers of the same age. It is motherhood, rather than misogyny, that explains the pay gap. As Gillian Paull from the Institute for Fiscal Studies writes in the latest issue of the Economic Journal: "The 'family gap' in employment and wages - that is, the differences in work behaviour between women without children and mothers - may be more important than the gender gap alone." Meanwhile, men's working hours go up slightly when they become fathers: and dads do better in terms of wages than childless men.

Direct discrimination is no longer the prin cipal enemy. Three structural problems explain the pay gap. First, women and men work in different occupations, with women clustered in less well-paid sectors such as teaching, retail and health care. This occupational segregation has hardly diminished over the past few decades. Second, the significant increase in general wage inequality has had the unfortunate side effect of making the gap between men and women bigger. Third, the penalty paid by women for working part-time after having children has become much more severe, as a high proportion slide down the occupational ladder in what the erstwhile Equal Opportunities Commission termed a "hidden brain drain".

Campaigners for gender equality hope that the Single Equality Act, scheduled for inclusion in this year's Queen's Speech, will force companies to conduct equal-pay audits. It is in fact a forlorn hope, but they should not be too disappointed. As Barbara Petrongolo, a labour specialist at the LSE, says: "Equal treatment policies like equality audits will not have much bite. The problem is not that employers are paying women less for doing the same jobs as men - it is that women are doing different jobs after having children."

Occupational downgrading

A slew of recent studies has dissected the complex data on motherhood and part-time employment. The conclusions highlight the real problems facing British families, and the failure of the labour market to deliver real choice. Most mothers work part-time for some years in order to balance raising their children with staying in the labour market: only a third of mothers with pre-school-age children are in full-time work. A substantial minority - around a quarter - of these end up in a lower-status job: managers become clerical workers. Some professions, such as nursing and teaching, offer most women the chance to go part-time without loss of status or hourly pay. And those women who stay with their current employer are less likely to suffer "occupational downgrading". As Gregory and her co-author Sara Connolly lament: "This loss of career status with part-time work is a stark failure among otherwise encouraging trends for women's advancement."

It is important to be clear what the problem is. Is it bad news that women want to spend time with their children? Surely not, given the evidence for the importance of parental engagement in the early years of a child's life. Are these women "forced" into part-time work, and now just grinning and bearing it? No - the overwhelming majority say they positively chose part-time work, and their job satisfaction is higher than that of mothers working full-time. Most men and women, according to the British Social Attitudes Survey, think that a conventional division of labour is the right one, with mothers taking on the bulk of responsibility for childcare.

We may wish to change these attitudes, but equally we must respect them. The TUC, for example, struggles to take women's choices at face value, declaring: "Women take on a disproportionate share of caring responsibilities due to unequal pay and limited opportunities within the workplace." This presupposes a level of responsiveness to economic incentives that would make Milton Friedman proud. Like it or not, women are doing most of the caring because they see it as part of their role in life. Groundbreaking work by the American economists Rachel Kranton and George Akerlof suggests that being a mother is part of women's identity, and that this explains their otherwise irrational labour-market decisions.

Perhaps the problem is an economic one - the loss of productivity as a result of the underuse of women's skills? This is the argument adopted by many who are urging more government action, but it is a fragile one. The latest TUC report, Closing the Gender Pay Gap, estimates that £11bn a year is being lost. The Women and Work Commission puts the figure at between £15bn and £23bn. A strange, unholy alliance has in fact developed between old-fashioned feminists, who insist women ought to work full-time to gain economic parity with men, and Treasury economists, who worry about the apparently "irrational" squandering of "human capital" by educated women. The principal difference between these allies is that the feminists want to spend billions of pounds of public money on childcare to allow more women to work full-time - the "Swedish option", at which the mandarins generally baulk.

There are, however, grave dangers in relying on economic arguments. For a start, such estimates are notoriously difficult to generate and are open to subjective manipulation (another recent study even found that £5bn is lost each year as a result of bosses' failure to say "thank you" to their staff, which suggests there are easier ways to boost productivity). And even if there really is an economic cost, there may well be a counterbalancing social gain in better-quality family life and happier children.

"Cost" of legislation

Overall, welfare might be greater even if our GDP - the size of which is a source of constant anxiety to male politicians - is somewhat smaller. Employers and their representative bodies are also just as adept at producing studies showing the apparent "cost" of any legislation to help working families - whether it is to introduce a minimum wage, equal pay, better maternity leave or better rights for temporary staff. Equality then becomes a battle of numbers, each side wielding its own semi-fictional cost-benefit analysis. Once we start putting a price tag on equality, we have lost sight of its value.

The problem is not a dent in economic output. The problem is not that mothers reject a life as what the sociologist Heather Hopfl has called that of a "quasi-man". The problem is lack of choice, for women and men alike. Millions of women do not have the option of reducing their hours as well as maintaining their status. And very few men have the option of sharing the childcare responsibilities with their partner. Liberal societies should aim to offer individuals the maximum range of options from which to construct their version of a good life.

"The heart of the choice issue is limited opportunities for women to work part-time in high-quality jobs," says Petrongolo. Gregory agrees: "The crunch question is this - can part-time women continue at the same level?" The one area of dissatisfaction expressed by women working part-time is with their wages. That is not surprising.

Employers are reluctant to retain or hire senior part-timers. While 60 per cent of employers say they would allow a woman returning from maternity leave to switch to part-time status, of these only two-thirds would allow her to remain at the same level of seniority. So, less than half would permit a reduction in hours without loss of status. This may not just be the result of Jurassic attitudes, as Gregory admits: "We can't assume that employers are simply stupid." Assuming it costs as much to hire and train part-timers as full-timers, they will offer a lower return on investment. There may also be co-ordination costs, especially associated with part-time or job-sharing managers. But it is hard to know the true height of these barriers.

Since 2003, employees have had a "right to request" flexible working while firms have had a corresponding duty to take such requests seriously. Some one-off surveys suggest that since the law came into force, one in seven women have made a request, and that most have been accepted. But the Labour Force Survey - the main data source on workplace trends - shows no increase in levels of part-time work over the same period. This puzzles economists. The most likely explanation is that a similar number of requests was being made and granted even before the legislation, and that the law has made little difference. It also looks as if women are asking for part-time work in the sectors where they are most likely to be granted, such as nursing, rather than in the senior and professional jobs where the real problem lies.

Part-timer fathers

It is clear that British families do not want to outsource the raising of their children to others, and prefer to combine paid work and care. At the moment, this means mums, but in the future it could mean dads, too. The model we should be emulating is Holland, where workers have the right to convert a full-time job to a part-time one unless the employer can produce convincing evidence for damage to the firm. "We need to shift the burden of proof from the employee to the employer," insists Gregory. We need to go Dutch, and remove the words "to request" from the right to request flexible working.

It is possible that without the risk of occupational downsliding, more men may also choose to work part-time; but it is also necessary to give men the same freedom as women to take time off for childcare as women. Cameron's idea of transferability is a step in the right direction: it is high time the government stopped deciding for us which parent should raise our children.

Markets are usually good at offering choice, but at present the labour market is failing the family. Companies are not generally acting on the basis of a rigorous business case against senior part-timers. They are exhibiting what psychologists call "path dependency": doing what they do because that's what they've always done. A decisive legislative strike on the Dutch model could jolt them on to a fairer path. Rather than aiming at creating economy-friendly families, it is time to shape a family-friendly economy.

This is the kind of package Labour MPs used to advocate. Indeed, the Commission on Social Justice - under the influence of its deputy chair Patricia Hewitt - proposed just such a move back in 1994. But, in a battle between families and firms, Labour now leans towards the latter. Gordon Brown loves to praise "hard-working families". What families need now is for him to work harder for them.

Working parenthood: by numbers

1/3 of mothers, and one-fifth of fathers, use some form of flexible working pattern

£7,000 average cost of taking a full 12 months off work after the birth of a child

83% proportion of women who want to return to work after having children

1 in 3 proportion of female corporate managers who lose status after having children

94% of all new fathers take some time off after the birth to care for their children

90% of mothers take at least six months' leave

39 number of weeks women are entitled to statutory maternity pay at 90% or less of weekly earnings

2 number of weeks men are entitled to paternity leave (pay negotiable)

Research: Simon Rudd

This article first appeared in the 24 March 2008 issue of the New Statesman, The truth about Tibet

MILES COLE
Show Hide image

The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt