Sunday 15th October, 2006


Bite the bullet while young

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The Phillip’s Curve was an expression of the relationship between inflation and unemployment, popular in the 1950s and 60s. It said that high inflation was accompanied by low unemployment statistics in the economy.

But after 1970, the theory was challenged, because of the variety of other relevant indicators. Most of that had to do with the theory of aggregate supply and aggregate demand.

It remains true that when output is high, the largest percentage of the workforce will be employed, and unemployment rates will be lowest. But low unemployment rates alone are not a corollary to high inflation.

What matters most to us is the fact that during periods of high inflation, the savings rate goes down. I have my own hypothesis: the savings rate is a direct corollary to standard of living in retirement.

What is worse is that what little savings have been accumulated in the past are now subject to a rate of return that is likely low. Or else, less than the rate of inflation. That diminishes the purchasing power of the saved dollar, at a time when savings cannot normally be increased because of higher prices!

But even worse than that is the thought that the high level of employment may be temporary. The most recent statistics in The Review of the Economy, a government publication, reveals that some 96,300 people are employed in the construction industry. Compare that with 19,500 workers in the petroleum sector.

I compare these statistics, primarily because workers in oil and gas have relatively good compensation packages. Workers in construction are contract workers typically and have little or no entitlements to sick leave, maternity leave, health plans and pension plans, apart from National Insurance benefits.

Overtime pay

If these 96,000 odd jobs are maintained in the construction sector without a comprehensive compensation package, the workers will retire without pensions in keeping with their average wages over their years of work.

This is a serious threat to standard of living. The way out of the tunnel for them is a moratorium on consumption. Spending on the niceties will have to be curtailed. Neither the brand name clothing nor the plasma TV experience are likely to outlast the fall from “haves” to “have-nots.”

It is better to bite the bullet now when you are young, strong and can sacrifice, than later, when you are old and weak, and there is no room for personal sacrifice.

One good thing about low unemployment is that it opens a window of opportunity for workers to hold two jobs, or else to work longer hours in the same job. It may be the best solution yet.

The concept of working longer hours in the same job is one of the factors that led to the discounting of the Phillip’s curve theory.

This is because when output increases, employers first respond by using the existing workers to produce more. This leads to overtime pay.

It helps when the tax rate is fixed at 25 per cent, because overtime pay does not lead to taxation in a higher tax bracket, as used to be the case three years ago. This is why in times like these: longer hours can be beneficial from a total pay perspective.

In addition some firms have excess labour, and low unemployment allows the firm to maximise efficiency.

Of course economic theory is good, but is human behaviour the overriding factor?

You see, economists relied on Phillip, but the behavioural theorists have Peter. It is called the Peter Principle. It states that in the employment hierarchy, everyone rises to his highest level of incompetence.

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