Archive for April, 2015

UK Only Article: 
standard article

Issue: 

Who should govern Britain?

Fly Title: 

The economics of low wages

Rubric: 

Salaries in rich countries are stagnating even as growth returns, and politicians are paying heed. They may struggle to improve things—and could make them worse

Main image: 

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ACCORDING to the rich world’s politicians, economics has a new villain. The modish scoundrel of the past seven years—the immoral banker outwitting inept regulators—has been edged out by a returning blackguard: the tight-fisted boss crushing the hopes of honest workers with miserly pay. In America workers have been demonstrating for higher pay and stronger union rights in the profitable but poorly paying food industry. Hillary Clinton has blasted CEOs who earn 300 times what the average worker does, pledging that her run for the presidency will champion the “everyday Americans” who have the “deck stacked” against them. In Britain Ed Miliband, leader of the opposition Labour Party, has told …<div class="og_rss_groups"></div>

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AMERICA’S labour-force participation rate—the proportion of the population available to work—has been falling for years. The figure is now&nbsp;just&nbsp;62.7%, the lowest level since 1977. The decline really sped up during the Great Recession, falling much faster&nbsp;than government wonks had predicted before the&nbsp;financial crisis&nbsp;hit (see first chart). How you interpret this trend has&nbsp;big implications for where American wages are going. So what is going on?

The obvious culprit for lower participation, of course, is the recession. As people lost their jobs and then struggled to find new ones, the argument goes, they decided to drop out of the labour force entirely. In other words, they no longer registered themselves as unemployed, or took early retirement, rather than find a new job.If you believe this argument, then you are likely to be pessimistic about the future path of American wages. If people left the labour market for economic reasons, then as the economy improves you would expect those same people to move back in. In recent months wage growth has picked up a bit; that may entice those out of the labour force to compete for jobs, thus pushing down wages again.

But if people outside of the labour force are very unlikely to rejoin it—then the outlook for wages is better. A new paper from the IMF assesses what is most likely to happen. …<div class="og_rss_groups"></div>

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UK Only Article:&nbsp;
standard article

Issue:&nbsp;

Dynasties

Fly Title:&nbsp;

Reform in China

Rubric:&nbsp;

A slowing economy commands headlines, but the real story is reform

WITH China, the received wisdom belongs to the pessimists. Figures this week revealed that growth has slowed sharply and deflation set in, as the economy is weighed down by a property slump and factory production is at its weakest since the dark days of the global financial crisis. In the first three months of 2015, GDP grew at “only” 7% year-on-year. Growth for 2015 will probably be the weakest in 25 years.
Fears are rising that, after three soaring decades, China is about to crash. That would be a disaster. China is the world’s second-largest economy and Asia’s pre-eminent rising power. Fortunately, the pessimists are missing something. China is not only more economically robust than they allow, it is also putting itself through a quiet—and welcome—financial revolution.

The robustness rests on several pillars. Most of China’s debts are domestic, and the government still has enough sway to stop debtors and …<div class="og_rss_groups"></div>

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UK Only Article:&nbsp;
standard article

Fly Title:&nbsp;

Australia's economy

Rubric:&nbsp;

The country suffers from plummeting iron-ore prices as China’s economic growth slows

Location:&nbsp;

SYDNEY

Main image:&nbsp;

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ROSS GARNAUT, one of Australia’s most eminent economists, describes the country’s current slump as its “economic dog days”. These are, he says, only set to get stickier, for they concern China—Australia’s biggest trading partner—and iron ore, the country's biggest export product.
Chinese demand for steel soared over the past decade as the country’s economy boomed. That sent prices sky-high for iron ore, the raw material from which steel is made; sustained demand helped keep Australia prosperous. Now China’s economic slowdown and the accompanying plunge in iron-ore prices has put the Australian economy in the doldrums. It is bad news for Joe Hockey, Australia’s treasurer, as he prepares to deliver the government’s second budget, on May 12th.

The warnings arrived in quick succession. A …<div class="og_rss_groups"></div>

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THE International Monetary Fund has just released its World Economic Outlook, a biannual health-check on the world economy. Americans will not be delighted with what they see. Back in January the IMF expected America to grow by 3.6% this year; now it is expecting 3.1% (see chart). These data continue a run of bad form for the world’s biggest economy, which we discuss in detail in this week’s issue. Problems are legion. Thanks to the strong dollar, exports are falling. That is eating into corporate profits, which fell by 1.6% in the fourth quarter of 2014 and were 6.4% lower than in the same quarter of 2013. Investment is not doing well either, as energy producers hold back in the hope of higher prices.

But there is better news elsewhere: the euro zone is doing badly, but things have improved. The IMF has upgraded its growth forecasts for the zone by 0.3%, and 0.5% for Spain, one of the hardest-hit countries. The weak euro and low oil prices are proving an economic boon, it seems. Quantitative easing, which began in March, has boosted equity and bond markets. However, the euro-zone upturn should not be mistaken for a renaissance. Neither France, the second-biggest economy in the currency bloc, nor Italy, the third-biggest, is expected to muster growth above 1% this year. The longer-term prospects are even worse.&nbsp;The IMF also pours some cold water on the euphoria that …<div class="og_rss_groups"></div>

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AMERICA’S unemployment rate is 5.5%. By historical standards, that is low. It is also falling rapidly: unemployment is down more than a percentage point from a year ago. Economic theory suggests that in such circumstances, workers should begin to enjoy healthier pay rises. Low unemployment means that employers have to try harder to find new workers, while existing workers can threaten to move elsewhere. As a result, workers should be able to demand higher wages. Yet firms in America seem not to have gotten the message. Inflation-adjusted wages for typical workers are stagnant. In fact, they have barely grown in the last five years; average hourly earnings rose 2% year-on-year in February of 2015: about the same as in February of 2010. Why hasn't America's falling unemployment translated into faster wage growth?To understand current patterns one first has to remember how American firms behaved during the 2007-09 recession. At that time, they were desperate to cut costs. They would like to have foisted pay cuts on their staff. But cutting pay is harder than it sounds (just imagine what would happen to workplace morale if your boss tried to cut everyone’s pay by 10% overnight). Instead, employers reacted to the deep downturn by firing as many workers as they dared, beginning with the least productive. Better workers, meanwhile, were squeezed in order to boost their …<div class="og_rss_groups"></div>

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UK Only Article:&nbsp;
standard article

Fly Title:&nbsp;

GE breaks up

Rubric:&nbsp;

An iconic firm abandons its finance business

Main image:&nbsp;

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IT MUST be annoying for Jeff Immelt, the boss of General Electric (GE), when articles about his firm start with a reference to his predecessor, Jack Welch. Mr Immelt has been in charge of the world’s biggest industrial concern for 14 years. His latest move, GE’s exit from its vast finance arm, announced on April 10th, will mean Mr Immelt has changed the firm as dramatically as anyone in its 123-year history. But to understand this landmark in American capitalism—and why investors are so happy about it—you have to start with Jack.
GE’s finance arm is one of America’s largest financial entities, with assets of half a trillion dollars, about the same as Lehman Brothers had in the run-up to the financial crisis of 2008. It does everything from consumer loans to property. It exists because of Mr Welch. When he became the head of GE in 1981, his initial mission was to make an industrial champion fit again, by cutting costs. …<div class="og_rss_groups"></div>

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