A Plea for Flexibility in Hard Times

Dr David Gray, senior lecturer, University of Lincoln Business School

 Although the economy, with a growth rate of 0.3%, recently limped out of recession, the recovery for many commentators is still beyond us. Indeed, following a survey of local authority chief executives, the public sector is about to feel the cold wind of austerity. The BBC correspondent, Mark Easton, suggested the 10% expected job cuts in local government could translate into 180,000 posts to go across all councils in England over the next five years. Across Lincolnshire, the numbers are as severe as anywhere. The County Council forecasts 1,000 full time jobs and the seven District Councils will lose at least a further 400.

 Local government revenue comprises selling services, raising local taxes and a grant from central government. Alistair Darling’s pre-budget report planned for huge cuts from the local councils budgets over 4 years. With consumers strapped for cash and a below inflation increase in local taxes (2.5% average), a cut in the central government grant would have a disproportionate effect at the local level. Costs will have to be cut, services downgraded or withdrawn, job go.

Is this wise, now?

 Of course, other areas of the public sector, such as the NHS and universities are being hit, suggesting a massive withdrawal of public expenditure. As an economy moves into recession, rigidities in local and central government employment prevent demand falling as much as in a flexible system, such as found in the US. Indeed, Robert Reich, a former Presidential economic advisor, lamented the downside of the American labour market flexibility, suggesting it could be a severe detriment to recovery. By reducing demand in the system before the private sector has recovered fully, it will lead to an unnecessary extension of the worst recession for 60 years. If anything is going to make matters worse, adding another quarter of a million to the jobs queue will.

Over the last year or so, the government has stimulated the economy in two broad ways: first, fiscally, through VAT and other tax concessions plus a scrappage scheme; and, second, through quantitative easing, a monetary stimulus. The UK entered the crisis with its budget in a worse state than any of the G7 so it was always hamstrung. Now it is thinking of addressing the deficit expected to be the same proportion as Greece’s, around 12.5% of GDP. The fiscal stimulus was weak and quantitative easing appears to have resulted in little other than a partial recapitalisation of ailing banks, resulting in record profits and bonuses for some. Unemployment is still at 7.8% or 2.46 million and growth is barely positive. With £200.2bn spent on quantitative easing, inflation, which should be rampant, is around 3.5%. We are now worried about a double dip recession. The deficit spooks the money markets, so much so that government debt has been implicitly down-graded. Our options are: reduce the deficit; ignore the money markets; or we pursue growth. The government appears to be pursuing option one.

 A fear expressed by the Moneratry Policy Committee is that the output gap is becoming very slight, but pressure on wages is not there. On top of the 2.46 million unemployed there are a further 2.8 million people working fewer hours than they would like because the work is not there. Beyond them there is another 8.08 million outside the labour force of working age, some of whom could work.

Is flexibility in the public sector unwise?

 No. In September the Labour administration signalled public services needed to be cut, but still committed to maintain front line services. This requires the more-for-less alchemy that only politicians appear to understand. However, some in local government have been trying. One approach could be to pass more on to the private and third sectors. In North Dorset, leisure services were passed on to Three River Partnerships, a charitable trust that had a tax advantage in that it could avoid VAT and property taxes and could more easily use volunteers. Richmond and Hambleton District Councils share a chief executive and have pooled staff. Bulk purchasing is then more possible and front line services can be maintained whilst cutting staff and other costs.

 An approach, associated with the phrase Total Place, appears much like concurrent engineering. This speeds up the design process of a new product, from concept to first unit produced, reducing time-to-market. The approach seeks to remove the problem of the project moving along a train of departments in sequence, all carrying out their ascribed task. If an insuperable problem emerges, the project returns up the line for a reappraisal: rather, representatives from each department/stage consider the problem jointly so that design hitches emerge more quickly. A similar approach can be seen emerging in the public sector. The desire is to cut out duplication and emphasise prevention. In one of 13 pilot schemes, Cumbria County Council works with 6 district councils, a PCT, the police and the national park. It saved £14,000/capita or £7.1bn in 2008. Birmingham saved £7.3bn by the same route.

 These saving are enormous but come with a poison pill. The current method of dealing with public services entails league tables and targets – measurement or bangs-for-bucks that fosters a focus on addressing part of the picture to which the public service is charged. In this new system, the sharing of funds is central, and seeking to identify the problem early is crucial. Police work may entail stopping crime and healthcare ameliorating the issue of addiction. Both may be associated with falling into petty crime at a relatively early age. This could be associated with persistent absence from school or prolonged unemployment. Poor attendance at school may be associated with a disruptive family life or being in care. This may be associated with dysfunctional parenting. Thus, by investing in parenting classes, some problems that may emerge later on may be reduced. Stephen Hughes of Birmingham City Council estimates that for every £1 of prevention spending it could generate £4 worth of savings later on. Sadly for the number crunchers, the link between buck and bang is not clear. Efficiency saving may actually result in less measurement and monitoring: not the central government way.

What about the jobs to go?

 Cost cuts may be savage but, perhaps again with a flexibility of approach jobs can be retained, but in an amended form. It is instructive to see what has happened to former manufacturing workers following the demise of a company. Following the collapse of MG Rover, a survey found that 90% were in some form of employment within three years, but two thirds of whom were earning less than before, with the falls averaging £5,640 a year. Perhaps losing a job can be costly both temporarily and permanently.

 This recession appears different, at least in the flexibility seen in the private sector. Noting the direct cost of making an average worker redundant is £16,375, the Chartered Institute of Personnel and Development (CIPD) found that half of firms hoarded labour, launching recruitment freezes. Indeed, the CIPD estimates the average cost of recruiting a worker is £4,667, with additional training adding £1,133 = £6,800 in total. Perhaps making a worker redundant only to replace them a few years later is short-sighted.

 Recently, firms in the car industry reduced hours and pay right across the globe. In October 2008, JCB staff across the UK voted for a 4-day week, and a pay cut, which the company claimed preserved over 300 employees. In December 2008, unions representing 25,000 workers at the steel maker, Corus, offered to take a pay cut of 10% to prevent the Llanwern plant in Newport, South Wales, from closing.

To ameliorate the situation, private staff have taken a pay cuts; accept no increase in pay or have taken unpaid leave; and worked longer hours or worked overtime for no pay. Given the option one might suggest it is better for an employer to keep a known and trusted employee on reduced hours than recruiting an untried replacement. Also, it is better to stay in employment, with all the signals of quality and loyalty that it offers than testing the job market and be found mismatched with what is desired. People find dignity in employment. During the miners’ strike of the 1970s when the government moved the economy onto a three-day working week, output was greater than under a five-day regime. It appeared that workers enjoyed the leisure/labour time split so much that they were more productive: they worked harder for less money. Surely, this is a lesson for those that provide our public services to consider.

 Citizens of Greece have continually protested for a considerable period over their recently proposed austerity packages. This is in sharp contrast to the Irish and Latvians who took pay-cuts as a necessary evil. The Institute for Fiscal Studies advocates decisive action on the budget deficit. The reality is the more-for-less alchemy is limited. Whilst protecting some, a cumulative cut of 18-24% in other government departments’ budgets is likely by 2014-15. Either we pay more taxes or accept worse services. Given the lack of political will to pursue higher direct taxes to maintain these services, budgets will be slashed. It would make more sense for the public sector worker to opt for under, rather than un-employment: it should be better for them, their employer and the economy.