A quick look at economic inactivity

 

Britain is on the sick

More Britons are out of work and claiming incapacity benefits than ever before – and it has little to do with Covid or waiting lists. What’s the problem? Simon Wilson reports

WHAT’S HAPPENED?

New official data, published last week, shows that the number of working-age Britons who are “economically inactive” due to sickness – that is, out of work and not looking for a job – stands at an all-time record of 2.6 million. That’s almost half a million more people than at the start of 2020, before the Covid pandemic, and 600,000 more than the figure in the late 2010s. This mass withdrawal from the workforce has helped fuel the UK’s labour shortages. It is also proving an expensive business in other ways. According to the Office for Budget Responsibility (OBR), the rise in long-term sickness has added £15.7bn (0.6% of GDP) to annual government borrowing because of lost tax receipts and higher welfare spending.

IS THIS ABOUT COVID?

No. The contribution of ill-health towards overall economic inactivity is at an all-time high – accounting for 29% of the total earlier this year, compared with 25% before the pandemic (according to the official Labour Force Survey). However, the largest percentage increases in inactivity due to sickness since the start of the pandemic have been among younger people, who were much less affected by Covid. The Office for National Statistics (ONS) says that the rise in work-limiting health problems predates the pandemic. In 2016, the proportion of 16- to 64-year-olds reporting these was 15.4%, which rose to 16.4% in 2019, and 18.1% of the population in 2022. 

HOW DO OTHER COUNTRIES COMPARE?

Since the turn of the century, the UK has had impressively low inactivity rates compared with similar countries. But today it is an outlier in that its inactivity rate has failed to bounce back following the pandemic. In the OECD group of richer developed countries, we are in the small minority of countries (about 20%) where that’s the case. In the OECD on average the rate of inactivity has actually fallen since 2020 by an average of 0.4 percentage points.  In the UK, like other countries, it surged in 2020. But unlike in most other countries, inactivity has continued to climb, and since 2020 overall it is up by 0.5 points. Some have ascribed the rise since 2021 to poorer mental health post-pandemic, and to those patients suffering from ongoing complications (“long Covid”). But this is an unsatisfactory explanation, since these conditions are not unique to the UK, and don’t explain why this country might be an outlier. Nor, argues The Economist, does the poor condition of the NHS, and long waiting lists, explain it. 

“THE RISE IN LONG-TERM SICKNESS HAS ADDED £15.7BN TO ANNUAL GOVERNMENT BORROWING”

WHY NOT?

Waiting lists for elective treatment have soared from 4.6 million in February 2020 to 7.6 million this summer. But more than half of those waiting for care are not of working age. And the treatments most in demand (for example, musculoskeletal issues) don’t match the reported conditions of the long-term sick. Here, mental health is a big contributory factor. According to analysis last year by the ONS, 60% of the long-term sick had a mental health condition as at least one of their health needs (it’s common for long-term illness to have more than one contributory cause). Moreover, according to data from the OBR, only around a quarter of the long-term sick are inactive because they are awaiting treatment. In other words, “problems in the NHS may be behind some of the rise in inactivity, but they are not the predominant cause”.

SO WHAT IS?

There may well be an element of hidden unemployment, says Sarah Neville in the Financial Times, in that claimants are better off claiming sickness benefit than they would be on unemployment benefits. Of the 34 OECD countries surveyed this spring (a fifth of which still had higher rates of inactivity than before the pandemic), the UK  had the least-generous benefits for the jobless after two months as a proportion  of previous in-work income. Even after  a year of unemployment, only four countries are less generous. “Basically  it’s quite hard to be out of the labour market in Britain, unless you’re disabled, because you won’t have enough money to live on,” reckons Torsten Bell of the Resolution Foundation. 

IS IT EASY TO GET SICKNESS BENEFITS?

It has got much easier in recent years, and there are a number of perverse incentives in the system that have boosted numbers. The number of people claiming incapacity surged in the 1990s, but since the early 2000s it had fallen gradually, as governments (Labour and then Conservative-led) made it harder to claim. Then, in the late 2010s, policy changes resulted in claims surging once more. The key change is that in 2019 the government made it far easier to claim sickness benefit. In the fiscal year 2019-2020, over 80% of claims were successful, compared with just 35% in the decade before. When the pandemic hit, the wider benefit system was swamped, and incapacity claims were waved through. If the approval rate had stayed at 2016-2017 levels, there would have been 670,000 fewer approved claims since.

WHY ARE MORE CLAIMS BEING PASSED?

The old system “did a fair job of nudging those who were temporarily incapacitated back into work as soon as they were better”, argues The Economist. The new one “has sharply raised the relative rewards of claiming to be permanently incapacitated”. If you are deemed incapable of working again, you now get twice as much benefit as those expected to return to work one day. Obviously, that creates a strong incentive for some to overstate their conditions – and it’s a big contrast with the situation as recently as 2017. Before then, the short-term sick were given benefits at a slightly higher rate than the unemployed. The government faces a tough task in readdressing this debate in the run-up to an election. But ignoring the welfare system’s increasingly clear flaws comes with a large and growing cost. The system needs recalibrating. Politicians “must not shirk or dodge” this urgent task.

MONEYWEEK

More from the esteemed Sam Dimitriu

 Please read right to the end - a little snippet that encapsulates it all:

Forwarded this email? Subscribe here for more Infrastructure Costs: Feedback and future posts What next for Britain Remade's infrastructure cost research SAM DUMITRIU SEP 26   READ IN APP   It has been a few weeks now since we released our data showing that Britain pays more than almost any other country to build new transport infrastructure and there’s been one common (and unsurprising) response: “Why?” Some have chipped in with their own explanations. One Telegraph reader suggested that the problem was the use of smartphones on building sites. While Michael Walker of Novara Media asked me if neoliberalism was to blame. Others have focused in on the English language and the Common Law as the underlying source of costs. Before we published our data, we shared it with the Financial Times’s John Burn-Murdoch. His column on the data homed in on one key cause: NIMBYism. “Supersized costs and bloated durations are not unrelated. In a 2019 study, two American economists wrote that the rise of the environmental movement and the emergence of homeowners as organised lobbyists — they call this “citizen voice”, others might call it Nimbyism — have added significant delays, alterations and associated costs to construction projects in the US. “The authors calculated that a 0.01 mile per year increase in the “wiggliness” of a road — the type of thing that could result from the requirement to add additional tunnels, cuttings or noise barriers to a route — comes with a $9.7mn increase in costs. These exact sorts of alterations have already added significant time and cost to HS2.” Britain’s planning system clearly pushes up costs. The Lower Thames Crossing’s £267m planning application is powerful evidence of that, but the real harm comes from how projects are re-designed to avoid objections Take this long list of costly changes made to the Lower Thames Crossing in response to consultation. Or the 1.7mile “green” tunnel being built in Northamptonshire for HS2. I put scare quotes around “green” because of course producing 5,410 massive concrete segments is anything but the green option. In Powerbook, Britain Remade set out over twenty key reforms to speed up the planning processes that hold back the deployment of clean energy. Many would be equally helpful at making it easier to build new transport infrastructure quickly, flexibly, and cheaply. Yet, planning and NIMBYism are clearly not the only problems.  Alon Levy, who has done more to raise awareness about the fact that some countries build infrastructure cheaply and some don’t than anyone else, offered some thoughts on our research on the Pedestrian Observations blog. While praising our research, Levy reckons there were a few things we missed.  First, Levy argues our research would benefit from looking back further, writing: “The construction costs as presented are a snapshot in time: in the 21st century, British (and Canadian, and American) costs have been very high compared with Continental Europe. … The biggest missing numbers are from London in the 1960s and 70s: the Victoria and Jubilee lines were not at all atypically expensive for European subway tunnels at the time – at the time, metro construction costs in London, Italian cities, and German cities were about the same. Since then, Germany has inched up slightly, Italy has gone down due to the anti-corruption laws passed in the 1990s, and the United Kingdom has nearly quadrupled its construction costs over the Jubilee, which was already noticeably higher than the Victoria. “The upshot is that whatever happened that made Britain incapable of building happened between the 1970s and the 1990s. The construction cost increase since the 1990s has been real but small.” Second, Levy draws attention to what are termed soft costs. “Britain has a soft costs crisis. Marco Chitti points out how design costs that amount to 5-10% of the hard costs in Italy (and France, and Spain) are a much larger proportion of the overall budget in English-speaking countries, with some recent projects clocking in at 50%. In the American discourse, this is mocked as “consultants supervising consultants.” Every time something is outsourced, there’s additional friction in contracting – and the extent of outsourcing to private consultants is rapidly growing in the Anglosphere.” Levy is also critical of the media’s singular focus on NIMBYism. This is a little harsh in my view for two reasons.  First, by far the most explosive stat in our analysis was that of the Lower Thames Crossing’s incredibly expensive planning application - £267m. And it chimes into a wider true narrative on infrastructure, major infrastructure projects are forced to wrestle with much greater bureaucracy than ever before. Compare the Jubilee Line Extension’s less than 400 page Environmental Impact Assessment with the 44,000 page equivalent for Sizewell C. The latter of which may not yet be deemed long enough as opponents of Sizewell C recently won an appeal to have the project judicially reviewed on the grounds that not all environmental impacts had been assessed. So while NIMBYism isn’t the only problem, it clearly is a major one and I’m glad it is being highlighted. Second, in the weeks since the media has covered a wider range of causes. In particular, I recommend Helen Thomas’s recent FT Column on how indecision and delay pushes up costs. She argues stop-start investment pushes up costs in a number of ways. First, there’s the skills issue:  “Companies have little incentive to invest in training and career development without a pipeline of work. Specialist skills, such as that taught at the welding academy set up for the nuclear construction at Hinkley Point C, dwindle when there isn’t more work to move on to. Knowhow isn’t transferred from one (preferably standardised) project to the next.”  Second, Thomas makes an important point about industry structure. Companies don’t build bigger in-house capabilities or invest in advanced technology when their biggest client is erratic. The UK’s biggest construction group, Balfour Beatty, with about £9bn in revenues last year, is dwarfed by French or Spanish contractors such as Vinci with €62bn in revenues or ACS with €34bn.  Large UK contractors employ only 14 per cent of the construction workforce, with 86 per cent in small and medium-sized enterprises, according to Noble Francis at the Construction Products Association. “The volatility of infrastructure demand means that the business models of contractors are not based on the most efficient ways of working but on dealing with volatility, which means subcontracting out the cost, activity and risk to smaller specialist contractors,” he says.  Our initial research was heavy on comparisons but relatively light on causes and even lighter on solutions. In the coming weeks, we’ll try to fix the first part of that at least and set out what we think are some of the key reasons why infrastructure is more expensive to build in Britain than almost anywhere else. Here’s what you can expect future posts on: The planning system (or how NIMBYs make everything cost more) Short-termism (or how stop-start infrastructure cycles push up costs) State capacity (or how a lack of engineering expertise within the civil service and bad procurement practices leave us paying more) How we build (or how a lack of standardisation and a desire to ‘be world-leading’ comes at a price) We’re also going to be posting deep dives into rail electrification and why Edinburgh's tram cost more than twice as much per mile as the most expensive French tram project we looked at. Watch this space! *** What I’ve been reading It’s not just roads, railways, and trams that Britain pays over the odds on. Harry Rushworth’s Full Steam Ahead Substack points out that installing zebra crossing (i.e. painting a few lines on a road) is more expensive here than almost anywhere else. Why? Britain somewhat uniquely gold-plates zebra crossings by requiring that “to legally paint a zebra, you must also erect black and white totem poles with flashing yellow bulbs on top, or to use their technical name, Belisha Beacons.” The good news is that fixing this would be easy, it only requires an update of the Traffic Signs regulations, and councils such as Greater Manchester are desperate to paint beacon-less zebras.

Not economic analysis but all about economics (and business)

 Are you a "skills sceptic" (see previous post by Sam Dimitriu); this pitches at the idea entrepreneurialism is essential and needs nurturing as a cultural concept:

MATTHEW SYED

We need to rediscover the frontier spirit that is keeping America rich

Fiddling with A-levels is the easy part: filling our kids with entrepreneurial zeal is the missing link

Matthew Syed

Sunday September 24 2023, 12.01am, The Sunday Times

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There was a period in the 18th and 19th centuries when Britain was arguably the most entrepreneurial nation on earth. The Victorians rightly celebrated the brilliant inventors and businessmen who pioneered the Industrial Revolution, men whose ideas propelled these islands to the top of the world in prosperity. Watt and Boulton, Clegg and Murdoch, Marshall and Murray, Cooke and Wheatstone: icons all.

But the explanation for this transformation — perhaps the most significant in the history of our species — wasn’t just about these great figures. Joel Mokyr, an American economist who has done much to illuminate the cultural foundations of economic growth, argues that the credit deserves to be spread much more widely: to small businessmen, shopkeepers and practical thinkers whose ingenuity is often left out of the headlines.

As he put it in a wonderful paper in 2006: “Beside the ‘heroic inventors’ ... who are immortalised in high-school textbooks, the Industrial Revolution could rely on a much larger army of less famous highly skilled craftsmen and instrument-makers who could turn original ideas into a physical reality and actually build the machines that their clever colleagues designed, not just once but over and over again. These mostly anonymous craftsmen and mechanics were the unsung foot soldiers of the Industrial Revolution.”

I love this paragraph because it hints at perhaps the most overlooked insight about growth — namely, that it emerges from the interplay of components in a complex ecosystem. It hints at something else, too: the role of culture. Britain in the 19th century didn’t just have people with good ideas but also those with the will, drive and ambition to convert them into practical reality. We were a nation of thinkers and doers and, very often, thinkers who could do.

And this, I believe, has tremendous relevance today in a world of ever faster technological change. You might have noticed that ministers often argue that we need an education and skills revolution, the intuitive idea that the success of a “knowledge economy” derives from the knowledge of its people. Rishi Sunak is an evangelist for this thesis: building on a proposal about maths a few months ago, he now wishes to replace A-levels with a baccalaureate, according to reports on Friday. And, on the face of it, he has an arguable case.

But the bigger picture is worth pondering, too. America has a productivity rate 38 per cent higher than ours, despite coming lower on the Pisa table of educational attainment, and Americans enjoy correspondingly higher wages. This means, as the economist Sam Bowman has pointed out, that a newly qualified nurse in the US earns £42,000, compared with only £27,000 here, and that a car wash manager at an Alabama Buc-ees (a chain of gas stations), earns more than $125,000. The average American could stop working each year on September 22 and still be richer than a Briton working for the whole year.

Why this gulf? One reason, I’d suggest, is that American society is more adept at translating knowledge into action. This nation — built by immigrants, people who were willing to risk everything to travel to the New World — retains its frontier spirit. Gross capital formation remains impressively high, as does the number of business failures. The latter may sound negative but it offers the most eloquent testimony to a people willing to take risks at all levels, from mega start-ups to craftsmen, small business owners to inventors. As one observer put it: “In most nations they ask: ‘What might go wrong?’ In America they ask, ‘When do we start?’”

It’s dangerous to extrapolate from personal anecdote, but my greatest educational experience was starting my first business. The concept was to stage TV sports events at prestigious venues like the Royal Albert Hall, and I quickly learnt about the gulf between ideas and action. I suddenly found myself having to raise capital, hire staff, rent office space, negotiate with TV firms — and that was just in the first week. I remember a period of cold-calling every marketing director in the FTSE 250 to raise commercial income, with a call-back rate of 1 per cent. I learnt a lot about failure but perhaps even more about resilience.

I know, I know. The idea that we can bring a spirit of entrepreneurialism into our classrooms may seem pie in the sky. It’s tough enough for teachers to sustain discipline in crumbling schools and equip kids with rudimentary English and maths. How are overworked staff supposed to wave a magic wand to shift something as mysterious and complex as a nation’s culture? All I’d say in response is that I am certain there is a critical mass of children with both the potential and willingness to benefit from the psychological research that emphatically demonstrates that entrepreneurship can be learnt.

If you are interested in the evidence, I’d direct you to the work of the psychologist Michael Frese, who has shown that courses on initiative (and on techniques for converting ideas into reality) cash out in the real world. Students become more agile, adaptive and proactive. As Frese told me: “We all know how to regurgitate ideas to answer an exam question. But we are not given enough encouragement to link them, powerfully and habitually, to action. This is the missing link.”

I am not saying America is perfect, by the way; we all know about the political dysfunction and inequality. But I do think it has a spirit that we would do well to ponder. Entrepreneurship, after all, isn’t merely about starting a business; it’s a state of mind. American professors are far more attuned to how to turn ideas into applications that change lives, often alongside commercial partners; in the UK brilliant ideas sit inert in academic papers. The same can be seen in crafts and trades (we desperately need to expand apprenticeship courses in the UK). In the US practical skills are constantly fused with new technology; in the UK, not so much.

The closing paragraphs of The Great Gatsby are, to my mind, the most beautifully ambiguous in western literature. To many they are mournful and fatalistic, but I’ve always been moved by how they capture the great mystery of human ambition, the magical ingredient that propelled our species from a small strip of Africa and out into the wider world. “Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that’s no matter — tomorrow we will run faster, stretch out our arms farther ... And one fine morning — ”

Britain is in decline. Tweaks to A-levels won’t cut it. A new spirit of entrepreneurialism just might.

Market failure - one that you can help reduce

 And if you ask me nicely I'll buy the book for our Econ library:

BOOK REVIEW

The real cost of  the world’s rubbish

A new book reveals the dirty truth about what we chuck in the bin, says Stuart Watkins. What is to be done?

 

Every day, we throw our rubbish away. But as Rachel Salvidge notes in the Literary Review, there is no such thing as “away”. Our rubbish is moved from one spot on Earth to another, where it is either buried or transformed, whether through burning or recycling. “One person’s ‘away’ is another’s ‘here’.” 

And where does it go? In his book Wasteland, Oliver Franklin-Wallis lets us in on “the dirty truth”. He “journeys to some of humanity’s least fragrant locations to literally wade among our rubbish, discovering how it got there and exploring its  effects on the lives of the people charged with  dealing with it”.

His book is “heavy on facts, many of them interesting and sobering”, says The Economist. Twenty thousand plastic bottles are sold around the world every second. The world produced two billion tonnes of solid waste in 2016, an amount that will rise to 3.3 billion tonnes by 2050. An Indian landfill Franklin-Wallis visits is piled almost as high as the Qutub Minar, a well-known minaret in Delhi. 

He also visits towering mountains of toxic waste from mines, defunct nuclear power plants and rivers in Africa choked with microparticles from discarded clothing. Our rubbish, as the author says, is often deposited “on the margins, and on the marginalised”: shipped by wealthier countries to poorer ones, where the poor pick over it to scrape a living. 

When we think of waste management we tend to think of plastic bottles and discarded fast-fashion clothes, but fixing the “vast and seemingly intractable problem” of consumers’ rubbish would be a simple task compared with taking care of commercial and industrial waste, says Salvidge. The scale of that problem is unimaginable, not least because quantities are not systematically recorded. 

“IN THE UK 48% OF RUBBISH WAS BURNED IN 2021, A 435% RISE IN 20 YEARS. ”

In 1987, the US Environmental Protection Agency estimated that 97% of all waste is produced by industries, not households, Franklin-Wallis tells us. That figure is “outdated, vague and impossible to verify”. Nevertheless, it is clear that the volumes of waste produced are gargantuan. Canada alone,  we are told, produces 35.5 million tonnes of  household waste and 1.12 billion tonnes of industrial waste per year. Whatever the global figure is, it is  clear that “mankind is wreaking awesome damage” on the planet. 

A GLOBAL TREATY ON PLASTIC POLLUTION

It all makes for pretty uncomfortable reading, says Chris Stokel-Walker in New Scientist. And there’s  not much in the way of a happy ending. Solutions are hard to find. Attempts are being made to improve waste and recycling laws, and 175 nations have agreed to develop a global treaty on plastic pollution, but  such efforts move at a snail’s pace while the rubbish keeps piling up. People wash their yogurt containers and tear the plastic windows off cardboard sandwich boxes so they can be recycled, yet much of it ends up in landfill anyway. 

And the modern economy upon which we rely is itself “built on trash”. A third of what we throw  away is less than 12 months old. And the people  and places that take it off our hands have often built whole microeconomies on the back of it. 

There may be no easy answers, but Franklin-Wallis does provide a useful “public service” by fact-checking dubious claims, says Rose George in The Spectator. Only a tenth of the donations of old clothes that charity shops receive are sold through their outlets, for example; the rest, much of which is “unusable, stained tat”, is sent overseas, whether it’s wanted or not (countries that have tried to stop the flow have faced US “bullying” in the form of trade sanctions). 

We’re told to buy T-shirts made of recycled plastic, but clothing made from blends of that and organic fabrics are typically less recyclable that those made from a single fibre. The most common label put on our packaging indicates that it is not recyclable, and in the UK 48% of our rubbish was burned in 2021, an increase of 435% in 20 years. No one has figured out what to do with plastic. Companies continually make promises that they fail to keep.

So what is to be done? “It’s complicated” is a refrain throughout the book, as Salvidge notes. But the ultimate and most powerful action, according to Franklin-Wallis, is “laughably simple: buy less stuff”. Clamping down on corporate “greenwashing” would help too. 

Nevertheless, there’s also a case for “tighter, smarter regulation”, says the Financial Times. “Individual litterbugs” have for too long been blamed for a “packaging waste problem caused by companies that have successfully dodged full responsibility after decades of lavishly funded lobbying effort”. Franklin-Wallis has at least succeeded in outlining the size of the challenge, says The Economist, and his book “should prompt serious discussion in boardrooms and parliaments”.

However, Wasteland is worth reading for more than such practical consideration, or for the mountains of grim facts. “Waste is monstrous to look at because it is a mirror,” says Franklin-Wallis. That’s what makes his book “so captivating”, says Salvidge. “It is an unflinching account of the best and worst of us, related through the things we choose to discard.”

Wasteland: The Dirty Truth About What We Throw Away, Where It Goes, and Why It Matters
Oliver Franklin-Wallis
Simon & Schuster UK, £20