The Last Budget of Spring

Article by Professor of Economics, Robin Bladen-Hovell.

As the final outing of the Spring budget and with a further budget scheduled for the Autumn, this was always going to a muted affair. It was underpinned by an upgrade to predicted economic growth for the year though the upgrade occurs largely in the first quarter, reflecting continuing buoyancy in consumer spending and the boost to exports following the post-referendum fall in the exchange rate. However, the improvement is scheduled to be short-lived with growth forecasts for the end of the year little changed from those delivered by the Chancellor last November. Alongside the boost to net exports, the falling exchange rate is stimulating inflationary pressures in the economy and higher prices will dampen the spirits of both consumers and exporters, as the squeeze on household budgets tightens and the recent gains in competitiveness are offset.

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Against this backdrop the Chancellor delivered very few surprises. For businesses, the budget contained transitional relief to offset the worse effects of the business rate revaluation. For self-employed, however, the news was far less welcome with an increase in the Class-4 National Insurance – a tax increase by another name. The latter is likely to prove particularly controversial for the Chancellor because while the tax revenue generated is modest, the increase breaks a clear manifesto pledge made ahead of the election which the current Prime Minister supported at the time. No doubt we will now see the entertaining spectacle of senior members of the government dancing on the head of a pin explaining how manifestos say they mean even when the politicians themselves do not mean what they say.

The changes announced for households yesterday were modest. A new sin tax on sugar was introduced and the duty on cigarettes was increased with the introduction of a new minimum tax targeting cheap tobacco, while duty on alcohol will increase with inflation. Many other, more significant changes, however, were announced ahead of yesterday’s budget but will only now be coming into force. Some, such as the uprating of personal allowances, will be gratefully received by those “Just About Managing” who are reputedly a focus for the current government. Others, such as the continuing freeze on many working-age benefits, will cause increasing hardship and despair for households who fall below the JAM threshold. For these families, the overall effect on family income is likely to be highly significant this year as inflation rises.

On the expenditure-side, Chancellor was forced into an about-face in relation to Social Care with an additional £2 billion promised over the next three-years. This reverses statements made by the Chancellor and other members of the government recently in relation to the (non) crisis in Social Care, but welcome nevertheless.

The obvious elephant in the room throughout the Budget Statement was Brexit. This received scarcely a mention by the Chancellor, the key message seemingly being one of “steady as she goes” and “don’t frighten the horses”. The reasoning behind this was apparent from the paperwork behind the Office for Budget Responsibility forecasts underpinning the budget: there is no clarity regarding the likely effect of our leaving the EU. Economic buoyancy could yet transform into an economic deadweight. Preparing for the worse while hoping for the best was therefore the order of the day, and with the return of prudence who had previously advised Gordon Brown before the economy went south, Philip Hammond decided to accumulate any spare cash into a life-belt that could be thrown to those members of society who find the harsh reality of Brexit too hard to bear. Of course, if no-one is deemed needy enough, a life-belt can easily be transformed into a war chest ahead of the next election.

Image (c) HM Treasury

Dr. Gabriella Legrenzi joins the World Economic Survey Experts Group

Dr Gabriella Legrenzi, from Keele Management School, has been invited to join the World Economic Survey (WES) experts group of the Ifo Institute, on the basis of her expertise in the Italian economy.

The Ifo Institute, one of the leading economic research institutes in Europe and internationally renowned for its business surveys, has been conducting the World Economic Survey (WES) for over 30 years. The WES assesses economic trends and is the only existing survey of global economic confidence in the world to this day; its results have proved to be a useful tool for governments and businesses, revealing economic changes earlier than traditional business statistics and various important economic media regularly report the quarterly WES results.

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As part of the WES experts group, Dr Legrenzi will be contacted on a regular basis to assess the latest developments of the Italian economy, based on a set of macroeconomic indicators. She will also be enabled to receive the results of the global surveys ahead of their official release, as well as benefit directly from exclusive information on current economic developments in around 100 countries.

Such appointment is expected to be very beneficial to Dr Legrenzi’s research in International Finance and Fiscal Policy, and she is also very keen to transfer such knowledge to the students of her taught modules in International Finance and Open Economy Macroeconomics at Keele Management School.

Jam tomorrow!

Professor of Economics, Robin Bladen-Hovell

Last Wednesday’s Autumn Statement was striking for its sobriety. Gone, largely, were the gimmicks that characterised previous Autumn Statements and rabbits were conspicuous by their absence from Philip Hammond’s first set piece.

The job, of course, was by no means easy. The austerity inheritance and recent adoption of the Brexit agenda saw to that. While the former continues to exert an unrelenting downward pressure on budgetary decisions, the latter has significantly increased the degree of uncertainty that surrounds the future thereby compounding the difficulty that the Chancellor faced in charting a prospective course for the economy. Added to this was the apparent desire to use the Autumn Statement as the first stage of a government make-over that seeks to associate the new government with more than austerity and Brexit, identifying the priorities of the new administration with the concerns of a poorly-defined group of low-to-medium income, in-work households classified as just-about-managing, or JAMs. Unsurprisingly, with so many competing claims, the resultant Autumn Statement offered relatively little to anyone.

As with all Autumn Statements it contained a variety of policy measures. The first and possibly the most important was the attempt to future-proof budgetary policy against the increase in uncertainty. This took the form of a significant relaxation of the budgetary framework within which government tax and spend decisions are taken together with the formal announcement that this would be the last Autumn Statement and that, from next year, it would be replaced by the Budget. The effect of this announcement is to provide the government next year with two opportunities to adjust tax and spending plans without either being necessarily perceived as an emergency response to changing economic conditions. Future-proofing the near term achieved. Over the longer-term, the commitment to reversing the effect of the financial crisis on the public purse during this parliament was relaxed to the point where the commitment has become simply lip service to the idea of there being a budgetary framework. To all intents and purposes the government can no longer be called for failing to achieve its targets because the targets themselves have conveniently all been moved into the next parliamentary period (2020/21). Moreover, the arbiter of whether these targets should change at any point before that date is the government itself.

Of course, much of this reflects the prospective effects of Brexit which, at present, are completely unknown. Fortunately, the economy has proven more robust since the referendum than was anticipated, with both exports and consumer spending stronger than expected. Background papers from the Office of Budget Responsibility (OBR) show total output growing over the year to the third quarter by 2.3%. However, this buoyancy has not translated into an improvement in government borrowing and the OBR predicts that government borrowing will continue to deteriorate, adding up over the next five years to a need to borrow some £122 billion more than previously predicted, with almost half of this increase due to Brexit itself.

Despite the improvement to exports, business investment declined in the third quarter reflecting the continuing effect of uncertainty on the sector and the prospects are for this weakness to spread more widely in 2017. Households, for example, are particularly vulnerable to the adverse effects of inflationary pressures that are currently building in the economy following the fall in sterling over the summer. Reflecting this, the OBR downgraded its forecast for output growth in 2017 to 1.4% which, while higher than the consensus forecast for the economy, is 0.8% lower than they predicted at the time of the Budget in March. Moreover, in a first-pass at quantifying the effect of Brexit over the longer term, the OBR also suggested that potential output for the economy will have grown by 2.4 percentage points less by 2020 than it would have done in the event of a vote to remain otherwise. It associates this weaker growth with two main factors: weaker investment and a reduction in immigration. However, in both cases the OBR acknowledged that considerable uncertainty remains.

In many respects, it was surprising that given the weakening business position, the Autumn Statement didn’t contain more assistance directed towards companies. Business taxation, including employer National Insurance contributions are scheduled to rise because of the decisions taken. Instead the corporate assistance appears to be primarily focused on the longer term – road, rail and broadband infrastructure – none of which will significantly impact in the short term. These investments, alongside investment in R&D and skills, are directed at improving productivity, an area where the UK has lagged the field for many years, reflecting the lack of a clear industrial strategy for the country. Recognising this lack is therefore welcome but much more is required before we can say that a major change in policy direction has occurred.

Another area where the Chancellor had to deliver was in relation to assistance for the just-about-managing households, or JAMs, whose prominence has risen in recent months on the back of commitments made by the Prime Minister. For this group the headlines included increases in the living wage from £7.20 to £7.50, adjustment to the rate at which benefits are withdrawn (the taper) under Universal Credit as income from work increases, together with a freeze on fuel duty and commitments to bear down on estate agent fees on those renting and raise the threshold for lower band income tax. However, these changes are dwarfed by the reduction in benefits of £3 billion that will impact on lower-middle income households in coming years since the effect of many of the measures announced fall largely on households who fall outside the JAM definition.

Taken together, the key points of interest in the Autumn Statement seem to be tacit acknowledgement by the Chancellor that the UK will pay a (potentially significant) price for Brexit. Economic momentum enabled the Chancellor to avoid making a major policy response to the referendum result in the short-term but nothing in the Autumn Statement prevents such a response being required in the future once the shape of the departure begins to emerge. As for the just-about-managing households, here it looks very much that, like Alice in Wonderland, it will be jam tomorrow.

Early response to the Brexit vote

Professor Robin Bladen-Hovell, Professor of Economics

With financial markets unwinding their immediate response to the decision to leave the EU, the initial dust from the referendum is beginning to settle and the nature of the likely short-term effect of the referendum on the economy is starting to emerge. While short of the gloom and doom prospects painted by the Remain Camp prior to the vote, the picture that is starting to take shape appears grim for the next few years at the very least with considerable opportunity for it to become grimmer should some of the downside risk-factors fall unfavourably.

The immediate response to the referendum result was a sharp decline in the UK stock market with the FTSE100 falling just over 5½% by June 27th while the broader FTS250 fell by just over 13½% in the same period. These effects, however, have been transient with the headline FTSE100 which represents larger, more internationalised, companies recovering within a week of the referendum and the FTSE250 eventually recovering the losses by August 5th.

Sterling also fell in the days following the referendum: 8% against the dollar and 6% against the euro. However, unlike the stock market movement, this decline has not been reversed as UK citizens who have travelled abroad over the summer have discovered to their cost. A falling, or depreciating exchange rate means that we receive fewer dollars or euros in exchange for our pounds than was previously the case or, put another way, each dollar or euro costs more sterling to acquire. Other things being equal, these changes make goods and services exported by the UK cheaper in foreign currency terms while increasing the price of goods and services imported into the UK, a potential stimulus to net exports and the demand for goods produced by the UK.

However, the overall benefits of this decline are likely to be small and temporary in nature. UK producers who depend upon imports for raw materials or components will find the benefits of the depreciation offset, at least in part, to the extent that depends upon the international character of their supply chain. Ford UK, for example, recently announced that 60% of their components for cars produced in the UK are imported from aboard with the result that increasing cost pressures will offset a significant portion of the benefit that otherwise flows from a lower exchange rate. Moreover, over time, the benefits of the depreciation will be offset more generally as domestic prices across the economy adjust to increased import costs.

Unfortunately, alongside the movement of the exchange rate, evidence is beginning to accumulate as to the deteriorating state of consumer and business confidence that was predicted ahead of the referendum. The evidence takes three forms: the sharp decline in the July Consumer Confidence Barometer produced by GfK NOP (UK) and the Markit/CIPS UK Purchasing Managers Index published for the same month and the equally dreadful results from the August CBI Business Confidence Survey. In each case either the headline figure or a key component recorded the sharpest decline since 2009 – in the case of the Consumer Confidence Barometer the 11 point decline represented the sharpest drop for more than 26 years.

Such movements suggest the onset of a slowdown in the economy with anecdotal evidence pointing the finger in large part to increasing economic uncertainty following the referendum. In the face of increasing uncertainly, households and firms are likely to delay decisions regarding expenditure generally and investment in particular, thereby reducing the level of aggregate demand in the economy and lowering growth.

Although no official economic data about the actual state of the economy has been published to confirm the onset of a slowdown in economic activity, or otherwise, City and other economic forecasters have in the main all revised down their predictions for the economy this year and next. Examining matched forecasts of output growth, produced by the same forecasters in June and July show, on average, a reduction in the growth forecast of 0.3% for this year and 1.6% for growth in 2017. Predictions for unemployment and inflation deteriorate similarly over the same horizon and the key factor influencing this worsening outlook is the referendum result.

This weakening of confidence seems to have played a key role in the decision by the Bank of England to relax monetary policy at last week’s meeting of the Monetary Policy Committee which cut the headline Base Rate to the historically low level of 0.25%. The cut was accompanied by a package of measures, including an Asset Purchase Facility known as the Term Funding Scheme, that are designed to ensure that banks pass-on the benefit of lower rates to households and firms. Despite this, however, the Bank of England’s actions are likely to have very little effect on the economy in practice. Base Rates have sat at 0.5% for since March 2009 so last week’s change is very small beer. Equally the relationship between interest rate policy and the economy is complicated and much more effective at constraining demand when policy is tightened than it is in expanding the economy when policy is loosened, sometimes compared with trying to move a weight with a piece of string: it works well when the string is tightened but doesn’t necessarily do much when the string is loosened.

While the current capacity for monetary policy to influence the economy is probably limited, changes in budgetary policy take longer to implement and are unlikely to be occur before the autumn should the slowdown in the economy be confirmed. This, in part, reflects the sensible decision to wait upon firm evidence of a slowdown in the economy and allowing its prospective depth to be assessed as well as judging whether it is likely to be temporary or more protracted. The delay also reflects the need for Philip Hammond, the new Chancellor to think through the detail of a new fiscal framework given George Osborne’s decision following the referendum result to abandon the budgetary target of running a surplus by 2019/20. The new framework will not represent an abandonment of austerity since government existing debt will still need to be repaid no matter what, but will have to reflect the new reality representing the changed circumstances following the leave vote. Any slowdown in growth will lead to tax revenues falling, worsening the deficit position and making that 2019/20 target less achievable. A discretionary stimulus, whether in the form of reduced tax rates or spending increases, will compound this with the result that the period of austerity will effectively extend beyond 2020.

All of this, of course, is before Article 50 is triggered and official negotiations to leave the EU commence. Only then will we begin to see what the Prime Minister meant by “a vote to leave is a vote to leave” and the precise shape Brexit begins to emerge. Taken together, all of this suggests that developments over the next couple of months will be critical.

Did Bank of England governor speech shore up confidence in Brexit UK?

Gabriella Legrenzi, Senior Lecturer in Economics, Keele University and Costas Milas
Professor of Finance, University of Liverpool have published an article on The Conversation in reaction to Bank of England Governor Mark Carney’s press conference last Friday.

“Bank of England Governor Mark Carney was admirably quick to read the unfolding economic dangers of a Brexit when the referendum result was declared. While stock markets and sterling plummeted amid developing financial stress, the governor’s statement immediately brought to mind the famous “whatever it takes [to save the euro]” intervention by European Central Bank chief Mario Draghi at the height of the eurozone crisis in July 2012…”

Read the full article here

Should the UK leave the EU? Thoughts on the forthcoming UK referendum on EU membership.

By Dr. Chris Tsoukis Senior Lecturer in Economics

The day of reckoning is approaching! The UK is due to vote on the 23rd June 2016, about one-and-a-half months away from the time of writing this, on staying in (the YES vote) or exiting from (NO – ‘Brexit’) the European Union. This development will be a defining moment in the, sometimes fraught, 40-something-year -old EU membership of the UK, which joined the EU in 1973. It will be defining not only for the UK, but also for the EU of (currently) 28, which, in the case of a Brexit, will see for the first time a ‘rolling back’ event that undoes integration.

This second referendum (the first one robustly re-affirmed the UK membership in 1975) has been prompted by some uneasiness in the UK about immigration from the EU and benefit tourism. Prime Minister David Cameron had promised that he would re-negotiate the terms of the UK membership with the EU and then would ask the country to either ratify the amended membership terms and vote to stay or reject and exit. The changes that the PM has secured amount to some restrictions on the benefits that new migrants are entitled to so as to curb benefit tourism; guarantees that the City of London’s financial industry will not be unduly harmed by excessive European regulation; and guarantees that the UK would be excluded from a (perceived) inexorable drive towards ever-closer Union. Critics may argue that the changes that David Cameron has secured amount to practically little; but they do help to assuage anxiety about issues of vital importance to the UK.
Much of the debate on membership that is now in full bloom centres on three issues:

  1. National sovereignty and related issues;
  2. The economic costs of benefits from a possible Brexit, with emphasis on trade;
  3.  Migration.

Accordingly, this contribution will be structured around these issues. It does not lay any claim on ‘objectivity’ – if that attribute ever exists, it should perhaps not be expected from someone who has made the UK his home over most of his adult life, but who remains a European national. This piece will attempt to deal with the issues with the seriousness that they deserve; the emphasis will be on analysis and information and the author’s opinion will only emerge gradually.

Going back to the 1957, when it was called the European Economic Community (or, Communities), the EU has always been driven by a double motive: Firstly, to leave behind, once and for all, the possibility of strife on the European Continent by building stronger links between countries; and relatedly, to deal at a regional level with issues that were of a regional/continental character. (Note: The word ‘region’ is used here in the sense of ‘European continent’.) Post-war reconstruction, trade and foreign policy were all of that nature. Subsequent developments took naturally lots of twists and turns, but the logic running through them was always the same: to deal with regional issues at a regional level. The ‘subsidiarity principle’ that was gradually established guaranteed that issues that were best dealt at a national level because of national importance (e.g., education, health, housing, etc.) should remain in the domain of national policy-making; as such, the ‘subsidiarity principle’ became a guarantee against excessive centralisation.

Today, the amount of truly regional issues has proliferated: From the environment to trade to migration to foreign policy, and many others that the global village continuously presents us with, these are issues of paramount importance that must be dealt with at a regional level, if they ever have a chance of being resolved. There are several of these that in reality are global, not even regional; but even there, the EU has a greater chance of intervening effectively if it acts as a regional bloc rather than as a disparate collection of national voices. In all these issues, uncoordinated national decision-making will in all likelihood lead to inaction, ineffectiveness and national initiatives turning against one another. To put it slightly more technically, co-operative solutions are superior to the individual ones that are motivated by partisan self-interest. This is a key point that has been well explored and verified in various subject literatures, including those in economics, politics, and game theory.

Being part of the EU naturally entails being part of this joint decision-making: Much of the time, the UK must follow legislation that has been decided by the European Commission or by the inter-governmental conference of the heads of national government; legislation into which it may have had little or no input. But, on the other side of the same coin, there will be a few issues which will have been determined by the UK’s decisive influence, and then these decisions will be carried out at Union, not just national, level. Much has been made of one side of this coin: the ‘loss of sovereignty’; but the other side, that UK-sponsored legislation will be followed by all, is not emphasised. We should be clear: Pooled sovereignty is not lost sovereignty. Pooled sovereignty means a drive for co-operation and greater effectiveness; and because the UK is one of the bigger EU countries, full engagement will ensure that the UK’s voice will be heard more than average.

The UK’s clout in the world also hinges on the UK’s influence inside the EU. A more isolated UK will obviously carry less weight, enjoy less of a ‘special relationship’ with either the US or the rest of the world. So, once again, exit in a time of interdependence in the global village will mean less, not more, clout for the UK, both in the region and internationally. Britain will find itself following and not leading, which means practically even less, not more, sovereignty.

Yes, there is of course the big issue of the democratic ‘deficit’: EU decision-making is bureaucratic, opaque, and expensive. But the answer here, in the mind of this author, is to seek reform with a view to strengthening the European Parliament: the only body that can enhance democratic, transparent decision-making by the European people against the confused horse-trading resulting from the current inter-governmental decision-making processes. Once again, full engagement is the answer, which carries greater promise that the UK’s voice will be influential.

There is often talk, and some confusion, related to the Council of Europe (CoE) and the associated European Convention on Human Rights (ECHR). The CoE comprises a Parliamentary Assembly and the European Court of Human Rights. It is not to be confused with the EU or the European Court of Justice or European Parliament, to which they are entirely separate. (Note that the CoE, Parliament and Court, is located next to the European Parliament in Strasbourg but that is a coincidence.) The CoE is an independent inter-governmental organisation, whose remit is to debate and enforce human rights, democracy and the rule of law among its 47 member states. Exit from the EU does not mean or preclude exit from the CoE and the ECHR, and vice versa. All signatory countries have judges on the Court and often receive admonition and penalties on matters that are in the jurisdiction of the Court as stipulated by the ECHR. There is lots of debate going on as to what are the appropriate boundaries of the Court’s jurisdiction; but this discussion is entirely separate from (the question of) EU membership. Suffice it to say that exit from the European Convention on Human Rights and the CoE will leave the UK outside the mainstream of Europe. (The CoE’s ‘membership’ of 47 is much wider than the EU membership of 28 and practically encompasses the entire Europe.)

The economic costs and benefits resulting from EU membership have also received a fair amount of attention. Here, people naturally turn to economics for enlightenment. Unfortunately, there is no agreement even among prominent commentators: Based on sophisticated technical analysis, the HM Treasury Report (2016; details at the end) shows a negative economic effect of Brexit, arguing that the typical UK household will lose about £2000 to £5000 per annum, depending on what the trade regime will be after a Brexit. These numbers are not trivial, but they are hardly show-stopping (or show continuing!). Against that, equally respected authorities, e.g. Minford et al. (2015; reviewed by Tsoukis, 2016), have come to different conclusions: Motivated by the basic assumption of economic theory that free trade maximises national welfare, they estimate that there is loss involved in EU membership: This results because there is free trade with other EU countries (this trade amounts to about 50% of UK trade) but restrictions in trade with the rest of the world (the other 50%). The sums involved here are also not enormous (they are couched in more abstract terms such as ‘loss of 1% of GDP’). So, these numbers are rather small to sway the debate either way (small in the big picture), too uncertain (such is the nature of the economy, it cannot be precisely be quantified and/or predicted) and reliant on too many assumptions and hypothetical scenarios for comfort.

Behind the lack of agreement, the deeper problem is that it is rather futile to seek precision in estimates about such momentous events; the economy is too fluid a system to allow reaching reliable and concrete conclusions – such is the view of this economist at any rate. Thus, decision should be taken on matters of principle based on the big picture, with technical calculations playing only a subsidiary role. And the big picture, in the mind of this author, is the interdependency and the regional problems that need regional solutions, as argued.

In a Brexit case, the UK’s net contribution to the EU will of course cease. The UK Treasury and the British taxpayer will benefit from that. But the amounts involved are, again, not show-stoppers if compared with the size of the UK economy. Against that, the UK will lose the support that it receives towards regional cohesion and regeneration, transport infrastructure and in sectors such as agriculture.

Naturally, the costs/benefits of Brexit depend on what arrangement will be followed after it, particularly in relation to trade. This is an area of considerable uncertainty, but three possible scenarios may be discerned:

  1. The ‘European Economic Area’ (EEA) scenario, with Britain pursuing free trade with the EU but having its own trade policies towards the rest of the world; such as the arrangement currently in place with Norway. It is well known that this is politically feasible but an admin and logistical nightmare, as the authorities need to track all goods imported into the UK and the EU from the rest of the world and adjust the tariffs when they cross the UK-EU borders. E.g., there will be an incentive to import from the world a good ultimately destined for the European market first into the UK with its (presumably) low tariffs and then transport it to the European market; this will have to be intercepted at Calais and the extra EU tariff will be levied there; a nightmare, considering the volume of such traffic and the tricks that will no doubt be employed. In such a case, there will no doubt be pressures for external tariffs to be harmonised. If so, the UK will follow policies decided in the EU without any say in them. There is a similar danger in policies in other areas, e.g. migration.
  2. A special trading arrangement may be pursued, like the one Canada is about to conclude with the EU. Even proponents of Brexit (e.g. Minford) agree that something like that must be done in order not to disrupt the existing close links between the UK and the EU. But it will be hugely time-consuming and laborious to negotiate.
  3. Britain may opt to trade freely with all countries (incl. the EU) under World Trade Organisation (WTO) rules. Guided on abstract theory, proponents of Brexit (e.g. Minford) argue that this is the best world. The reality is, as the former WTO Chairman (2002-13) Pascal Lamy reminded us (Newsnight, 19/4/16), the world does not work like that. There is reprocity: I give you access to my markets if you give me access to yours. There is no free trade in the abstract – all countries impose trade restrictions of one sort or another. As a result, Brexit without negotiation of a new arrangement (costly, as argued above) would deprive Britain of the EU market (currently 50% of the UK trade) plus the countries that are associated with the EU with agreements (another 15% of UK trade).

A probable net result here is that in the case of Brexit, Britain will lose access to the big EU market (the biggest economy in the world, taken as a whole), with very uncertain benefits, if at all, from access towards the rest of the world. Uncertainty and protracted negotiations will be the by-word here for many years and on all fronts.

Then there is migration, a vexed issue. The complaint here is of big inflows of EU migrants, seeking higher welfare benefits here, displacing local workers from work and putting pressure on local resources (schools, health). But only about half of the immigrants into the UK last year (2015) were of EU provenance, the rest came from third countries. And benefit tourism exists, but may not be as dramatic as often claimed. It is well known in the literature that immigration benefits the host economy overall, as it provides fresh, cheaper labour; witness construction, health, agricultural and domestic workers. Against that, competition by immigrants for work may put downward pressure on wages for certain sections of the population and may increase the chances of unemployment (the effect of the legendary ‘Polish plumber’). The affected workers, even communities, lose out from migration. In other words, immigration has distributional effects (benefits and hurts different people), an issue that deserves more attention in both the literature but also in public discourse (where the voice of local communities is often ignored).

So, policy-makers should take appropriate measures to alleviate the distributional impact of immigration and spread the benefits more evenly (e.g. with unemployment benefits, support to local communities, etc.). In this way, immigration could be beneficial to all. Add to this the fact that immigrants work and pay taxes and can rejuvenate demographically both local communities and the (ageing) UK as a whole. With these considerations in mind, one comes to the conclusion that immigration, if managed properly, is part of the solution and not part of the problem, from a longer-term perspective. Human history is a history of migration; the issue will not go away. The best approach to it is a European-wide response (that would alleviate, e.g., the Syrian crisis) and managed immigration at national and local level. Working at EU level can help formulate more effective responses to the challenges than those achieved by isolated initiatives. At the same time, the millions of European expats in the UK and hundreds of thousands of Britons in the rest of the EU will find themselves stranded and confused in the case of a Brexit.

The question of membership of course involves still wider considerations: Despite the many criticisms it can and does receive, the European Union is a zone of economic prosperity, political liberty and social solidarity. Do we want this to break up? Are we sure of the alternatives that will emerge? If the break-up process of the EU begins, for the first time in its history, what is the ‘economic atom’ that will emerge, the smallest unit that will be immutable to break-up? If it is in the interests of the UK to be an independent, free-market economy, might that not be the case also of Scotland or Wales versus the UK or Catalonia versus Spain? Might we therefore see a large number of regions breaking away from the conventional current states? What will be their number? Who can guarantee stability in this possibly chaotic world? These considerations may lead one to suggest that wholehearted engagement and work towards reform, rather than exit, is the way forward.

So far, I have not touched Britain’s contribution to the EU, as, in a sense, the referendum is about the opposite, the EU’s contribution to British life. But one cannot conclude without a reminder of how much poorer Europe will be without one of its biggest, richest, influential, most culturally vibrant and diverse countries being an integral part of it. Britain’s history has always been interwoven with that of Europe, even though the UK has had a more cosmopolitan engagement and outlook than most other countries. A strong asset to Europe, Britain has always contributed to European civilisation, economy, public life, political strength. In equal measure, it benefits from European culture, ideas, lifestyle. These are two-way streets; a rupture would leave both sides poorer.
I started by saying that objectivity cannot be expected here, it might not even be possible; against that, I promised that I would offer an analysis without clichés or slogans. But I cannot help ending with one headline: Britain needs Europe and Europe needs Britain. The hope is that the British people will vote on the 23rd of June to remain a part of the common European home.

References:
Minford, P., with: S. Gupta, V. P. Mai Le, V. Mahambare and Y. Xu (2015): Should Britain Leave the EU? An Economic Analysis of a Troubled Relationship, Second Edition, Cheltenham, UK: Edward Elgar in association with the Institute of Economic Affairs, 2015.

HM Treasury Report (2016): The long-term economic impact of EU membership and the alternatives, April 2016. https://www.gov.uk/government/publications/hm-treasury-analysis-the-long-term-economic-impact-of-eu-membership-and-the-alternatives

Tsoukis, C. 92016): Review of the Minford et al. (2015) volume (see above), South-Eastern Europe Journal of Economics (SEEJE), Spring 2016, Vol. 14, No 1, pp. 97-101, http://www.asecu.gr/Seeje/issue26/issue26-tsoukis.pdf

Who is your best friend when you are looking for work?

By Dr. Panos Sousounis, Lecturer in Economics

Many people claim to have a broad social circle, but we are all more likely to consider only a handful of people as our “close” friends. These are the ones we turn to when we want advice or company. More importantly though, friends like these can give empathy and support at a time of need. Finding yourself out of work involuntarily is clearly just such a moment, and so naturally, you turn to your closest friends for help getting back in the job market. That’s what friends are for, right?

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Well, maybe not. Contrary to received wisdom, most social science research suggests that you are better off scrolling down the contacts’ list on your smartphone (or flicking through the pages of an old phonebook) to contact those outside your inner circle – acquaintances, if you will. Success with a job or career search seems to work better this way. But why?

Close friends (and by “close” I mean the people you are in regular contact with) are more likely to be either colleagues or ex-colleagues of some form. Or they may live in the same place as you. In contrast, your extended network of friends is likely to be made up of people from a mix of locations and include a diverse mixture of occupations and professions. This group will be exposed to more and different kinds of job-related information. Think of it like your own personal hive mind, where the availability and flow of information from them to you is crucial.

The trouble is that your close, employed friends – while their support might be invaluable – are likely to be privy to the same information as you. Your acquaintances, on the other hand, work for different employers, have diverse experiences and they themselves have friends who work elsewhere and so on. It is a numbers game. By getting job-related information from multiple points of origin – think tips about upcoming vacancies, or advice on search strategies, applications and interviews – you maximise the chances of finding work.

Horses for courses

Now, the above might suggest that your immediate social circle is of less value while you’re looking for work. This is not true. Indeed, a number of studies propose that they can be equally effective and bring great value in key areas.

Acquaintances will bring more job opportunities to your attention, but your friends know your skills, flaws, aptitudes, disposition and career aspirations and are thus able to screen both you and various job openings. In theory, that should lead to fewer but higher-quality suggestions. Employers are aware of such within network processes and any personal recommendations tend to be viewed more favourably than speculative approaches or referrals. Such recruitment channels can mean less employee turnover and reduced hiring and firing costs – after all, you are more likely to commit more to a job when sharing a workplace with friends.

Men’s social networks (of similar size) appear to be more effective in helping in a job search, which could be due to either women’s friends having less influence in hiring processes, or that women are seen as more likely to be voluntarily unemployed than men.

But for women, the effect of social networks on their labour market behaviour has an additional dimension. What we know is that the composition of women’s social circle matters. Women’s social networks are better at providing them with social support, such as in childcare. And the availability and affordability of childcare is a core factor in many women’s decision to return to paid work.

In this case, the effect of friends operates through a subsidiary channel in tandem with that of information distribution. A friend may not be able to offer a job recommendation but may be able to mind the kids for a few hours every week, allowing the mother to commit to a full or part time job. Equally, someone could offer financial assistance during a work-related training period while other friends could provide vacancy information.

Virtuous circle

Using your networks to exit unemployment brings obvious material and psychological gains to the individual. But why is your network important for the rest of society?

For a start, it means public employment services such as Jobcentre Plus or Universal Jobmatch in the UK can broaden their reach beyond job seekers in direct contact. Anyone who returns to work becomes a potential source of information to their social network. Additionally, someone may come across a job ad which may not be suitable for themselves but can be passed on through their network. This process can be particularly beneficial for those more “passive” job seekers – people who have perhaps become discouraged after long unsuccessful periods of job search. They are more likely to follow up a friend’s suggestion than actively going through job postings themselves.

The second advantage is that broad social networks – both traditional and of the Facebook age – can allow people to escape the trap of belonging to a kind of economic underclass where people out of work interact mostly, if not exclusively, with other unemployed people. A narrow cohort of close friends can encourage social exclusion as well as economic, social and, possibly, geographical marginalisation. Every unemployed person who can find work by calling on a wider circle of acquaintances in employment helps to grow that crucial wider network for others. It is indeed a virtuous circle.

We currently have little evidence on the exact magnitude of the effect of social networks on the probability of finding work, but we can confidently say that such an effect exists. We can also say that regardless how close a friend is, they can potentially provide invaluable help with finding work. You just have to make sure you’re using the right tool for the right job.