Effect on British Business for Joining Euro Zone - Essay Example

?UK Economy Contents Contents Answer Employment, Wages and Unemployment 3 Main Characteristics and Causes of Unemployment 3 Measures for Reducing the Unemployment 4 Answer 2: Firms, Industries and Structure and Policies 5 Relative Size of Firms 5 Role of Foreign Direct Investment and Multinational Companies 6 Answer 3: Single Currency 7 Perceived Benefits and Costs of a Single Currency 7 Effect on British Business for Joining Euro Zone 9 Reference 10 Answer 1: Employment, Wages and Unemployment Main Characteristics and Causes of Unemployment In a latest data released by Office of Nation Statistics in December showed that employed people aged 16 and over reduced by 63,000 Q-o-Q and 14,000 Y-o-Y. The count of people employed in public sector fell by 67,000 whereas the number of people employed in private sector has risen by 5,000 since last quarter leading to total number of employed people 29.11m and 2.64m unemployed people. The unemployment rate is 8.3% of economically active population. This percentage is highest since 1996 and the count of unemployed people is also highest since 1994. The claimant count which provides the number of people claiming the JSA (Jobseeker’s Allowance) is at 5% up 40 bps from last year (ONS, 2011, p.1-2). The main characteristics of the current unemployment are: Employment: The employment rate for people aged between 16 and 64 is 70.3% down 0.3% points from previous year. The employment rate for men in the same age group is 75.2% and for women is 65.5% down 0.3% points and unchanged, respectively (ONS, 2011, p.3). Employment-Country of birth or Nationality: The number of non-UK born where some of them are also UK nationals, are more in employment that non-UK nationals. However these estimates relate to employment and not number of jobs. Hours Worked: This measures the number of hours worked in UK economy. The total number of hours worked per week was 918m in 2nd quarter of 2011 where the average hours worked were 31.6. The growth from previous quarter was 0.2% (ONS, 2011, p.6). Earnings: Earnings include salaries without unearned incomes, arrears of pay or in0kind benefits and are gross of taxes. The weekly average total pay with bonuses was ?464 in Oct 2011 which increased by 2% from previous years. The weekly average pay without bonuses was ?438 up 1.8% from previous year (ONS, 2011, p.7). Labour Productivity: The output per worker is the ratio of total output and total employment and the unit labour cost is total labour costs-to-output. The output per worker has remained unchanged in the last two quarters but unit labour costs have increased by 0.3% in the last two quarters (ONS, 2011, p.8). Labour Disputes: These are associated with the strikes with respect to the terms and conditions related to employment. During the last 12 months before October 2011, there were 417,000 lost working days from 135 strikes (ONS, 2011, p.9). Unemployment: This measures the unemployed people who are actively seeking work and ready to join work immediately. The unemployment rate was up 40 basis points from previous year leading to 8.3% unemployment rate. The unemployed youth formed 22% of economically active population. As per the international guidelines, people in full-time education are unemployed if they are looking for jobs since last four weeks (ONS, 2011, p.11). It can be seen that the public sector cutting of jobs has worsened the employment situation in Britain. The Conservative Party seeks to bring down the deficit to maintain the record low interest rates and avoid situations faced by Greece, Spain and Portugal (Politics.co.uk, 2011). Some people view the reasons for unemployment especially youth unemployment is because of too much reliance on unemployment benefits provided by the government and unwillingness to accept the jobs offered whereas the corporate sector believes the burden of red tape, taxes and minimum wages have tied up their businesses and prevented them from hiring more people (Palmer, 2011). Measures for Reducing the Unemployment There are three types of unemployment- Frictional, Structural and Cyclical. The frictional unemployment is short-term in nature and occurs when an individual leaves one job and searches for another. Even the students after completing their education take time to get employed. Therefore this is for short-term only and considered good sign for an economy. The structural unemployment is usually caused by technological and demand changes and therefore can be for long-term. The individual losing employment due to technological shifts usually does not have the required skill to maintain level of income in different industry. Cyclical unemployment is a result of business cycles such as during recessionary phase of the business the cyclical unemployment will be high and during the growth phase it declines. The government policy measures are mainly aimed at reducing the business cycle fluctuations to counter cyclical unemployment and other measures such as counselling and job training to reduce structural and frictional unemployment (Boyes & Melvin, 2007, p.165-166). Presently UK is facing structural unemployment and there have been a number of measures taken by UK government to reduce the unemployment such as incentives for small businesses to recruit fresh trainees below age of 25 years, JSA, training, efforts in boosting economy and reduce deficits. However the government should also adopt a stricter jobseeker’s allowance policy to bring the economically inactive people to seek work and accept the jobs available in the market. It should also devise a more flexible tax policy so as to reduce tax burdens and boost the new hiring by the private sector. Every step taken to boost employment should be to increase economic growth of the country. The SMEs’ development and growth is essential in creating more jobs in the economy. UK can adopt the U.S. Small Business Administration model to provide support to small businesses and entrepreneurs. Answer 2: Firms, Industries and Structure and Policies Relative Size of Firms Like all the other countries the economy of UK is also comprises of small, medium and large firms. There is importance of all the firms for the right balance of the economy and it is also the same in case of UK. As per the data of November, 2011 there were 4.5 million businesses are there in UK. These SMEs are 99% of all the companies are taken in account. Nearly 58.8% of the turnover of the private sector turnover is coming from these small and medium enterprises. The number of sole proprietorship business is gradually increasing (Federation of Small Business, 2011). Among all the sectors the construction sector is the largest in UK. It accounts for 20% of all the enterprises in UK. The largest percentage of employees is employed by the wholesale and retail sector. Among the Small and Medium enterprises the sole trader are the maximum, though the maximum turnover is coming from the large companies where the employee number is 500 or more. The total turnover of UK private sector is nearly ?3200 billion. London is the base of maximum enterprises and it is also the region from where the turnover is largest (Stockwood, 2011). Small and medium enterprises are the important parts of the economy of a country. In this era of globalization the small businesses have the opportunity of exploiting new opportunity of business in the global market. A small business owner can target a niche market, where he or she can focus only limited target customers. The owner can take steps to lower the costs and thus increase the profit using the expertise of the domestic labours. These small and medium enterprises account for the largest part of the UK enterprises. The main advantage of the SMEs is that they can realize their potential by accessing new markets in this era of globalization and gross domestic product of that country can be increased. The high growth firms of UK are also stable. No high growth firms are gorilla; it is also evident from the reports that the performance of the high growth firms of UK is better than the high growth firms of the remaining European countries but the performance is lagging behind U.S.A.; though the country is not lagging far behind U.S. These high growth firms are the job creators for a country, and there are many high growth firms are there in UK. The large firms of UK are efficient as they are delivering the highest revenue among the private sectors. So along with the small and medium enterprises, the high growth firms and the larger firms make the base of the economy strong for the country. Every type of firms are needed for the right balance for a country and those are present in UK and the performance of those firms are good, instead of the recent slowdown. As the base of the economy is strong it can be said that the economy will revert back. Role of Foreign Direct Investment and Multinational Companies In an open economy foreign direct investment plays a crucial role for the economic development of a country. The foreign direct investment mainly means the flow of money from the foreign countries in the domestic countries. It is necessary for specially the small and medium enterprises that are running out of funds sometimes. Then the company uses the funds which are of the people of foreign countries. But there is a problem also; the cost of the foreign funds is more than the loan taken from the bank. The income of the people of the domestic country also decreases. There is also another positive aspect of the foreign direct investment. The foreign technology can flow in the domestic country through this process. The investment of foreign individuals in the domestic firm also allows the foreign investor to look after to ensure that they can have more return from the investment. They like to bring new ideas and technologies in that sector, thus the companies get benefited from the foreign direct investment. It has been proved that the foreign direct investment affected the technical progress rate in UK (Barrel and Pain, 2006, p.1772-1774). It can be said that the foreign direct investment has been proved successful in case of UK. In the open economy and the era of globalization, multinational companies also play an important role in the development of the economy. The multinational companies are the corporations who are doing business all over the world. When a multinational company starts to do business in a new country that is the source of new ideas for the local competitors of that country, also open up new target markets for them. The supply chain process of the business improves and the customers get felicitated by this improved supply chain system. This opens up a new window for the local businessman and they also try to take new initiative and they want to expand their business in the foreign countries. In this present era every country of the world is open for the multinational companies. So the companies of UK also can enhance their business in the foreign countries like the companies like BP, GlaxoSmithKline, Tesco, Barclays etc. This multinational company has made the world globalized. There is also a negative effect of the multinational companies. When the companies are not doing well in the domestic country then the company management can take the decision to wind up the business in that country and that would cost the unemployment of the workers who are the natives of the domestic countries. Also the management of the company are lead by the executives of the foreign countries. The cost cutting for retaining the market by the multinational companies cost the jobs of the workers and subsequently that affects the economy of that country. But in a country like UK, where the base of the economy is strong, despite of the recent unemployment problem the multinational companies are not probably going for wind up the branches, though the foreign direct investment can be decreased. Answer 3: Single Currency Perceived Benefits and Costs of a Single Currency The perceived benefits of a single currency in a single market are as follows: A single currency can ensure the stability of the particular zone. The exchange rates of the different countries remain same in the participating zone as their currency is same, the transactions are not different. Individual currency can be speculated but when the country is participating in the currency zone then the chance of speculation would be decreased. As the currency is used by a larger zone, as in the case Euro is used by 17 different countries certainly that step increase the credibility of that currency in the remaining world. The businessman would not have to pay the hedging costs which they have to pay when there was no single currency in the Euro Zone because the currency of different countries may be fluctuating. The transaction process between the businessmen of the two countries becomes smoother. The single currency system in a specific zone make the interest rate of that zone lower which make the currency more credible and important in the present scenario of the world. The businessmen also find it attractive to take loan from the central bank of the country as the interest rate is lower. This single currency system would lead to more investment; the job opportunities would have also increased as well as the mortgage rate also has decreased. This single currency system has opened up a new window for the promoters to use the opportunity to spread their business in the area where the same currency is used. They can also use the vast workforce available to them, this system is the opportunity for make stronger the economic base of a country. The costs of a single currency in an integrated market are as follows When a country of the integrated economic zone is in a position of bankruptcy then the other countries have to take steps so that the concerned country don’t go bankrupt as it happened in case of Greece. If one country goes bankrupt then the value of the currency would come down, so that the countries which are in the same currency zone they have to take measure as the situation also affect the economic condition of that country also. So the country has to change the monetary policy of that country which affects the economic condition for the shorter period as well as for the longer period. This change surely cost the country’s economic condition. When some countries are preparing a new economic policy then the regulatory body generally make a new policy which may not match with the economic policies of the participating countries. The regulatory body select the best policy fit for all the countries and then prepare the new policy. So for participating in the single currency zone the countries have to change the economic policies, which are achieved by incurring the cost. So if a country wants to participate in the Euro Zone then the government of the country has to change certain policies to cop up with the policies of the Euro Zone. This initiative initially incurs the cost but that has been proved good for certain countries. The change of the currency also incurred cost for the country. When a country want to change the currency then it has to cancel the existing one and start the new currency. This total process is a time consuming and costly process. The government have to educate the people about the new currency, also have to change the existing software. Effect on British Business for Joining Euro Zone The British economy has been affected at first due to joining the Euro Zone as the government has to cop up with the new policies of the regulatory body which make the laws for the Euro Zone. The British government has to incur certain costs for adopting with the new policies, for educate the people so that they can cop up with the new currency and new policies. Though the government had to face some initial costs but the economy are benefited from a long term view. The businessman of UK would get the new opportunity for enhance their business in the other Euro Zone countries. As the currency of 17 countries is same the transaction cost of the business has got lower. The interest rates of the country’s central banks getting lower, the mortgage also get down. Along with this the credibility of the Euro currency is improving as the same currency is used by 17 countries. The currency is not fluctuating as the previous so the investor doesn’t have to hedge their investment. The opportunity for the business owners is that they have access for a larger base of customers as well as they can utilize the larger workforce available to them. The British small and medium companies will have the opportunity to get the foreign funds as the transaction costs are not as high in the Euro Zone as there is the same currency operating in every country. The UK business owners can also have the ideas and the technologies which can enhance the revenue and subsequently profit of the company and thus the gross domestic product of the country can be improved. So if the UK as a whole joins the Euro Zone then the GDP of the UK would get a chance to be improved if the businessmen take the steps with a proper planning. When the sterling which is the currency of Euro would join the Euro Zone then the government has to incur some initial costs for the restructuring of the currency and educating the people but this initiative by the government would open up a new window for the businessmen. It would be also a chance for the countrymen to get the job opportunity in the other countries of the Euro Zone. Subsequently the companies which is based in the UK, they would get the chance to employ the people of the other countries of the Euro Zone, that would provide them the opportunity to explore new talent and thus the productivity of the company can be increased. The country would be felicitated by the new opportunity to do trade with the other Euro Zone countries in a lower transaction cost as well as the companies would get the opportunity to explore new talents, thus increase the productivity and the people of the country would also get the job opportunities in different countries, after all this would result in strengthen the economy of the UK. Reference Barrell, R. and Pain, N. (2006). Foreign Direct Investment, Technological Change and Economic Growth within Europe. [Pdf]. Available at: http://people.pwf.cam.ac.uk/mb65/library/barrell.and.pain.1997.pdf. [Accessed on: January 21, 2012]. Boyes, W. & Melvin, M. (2007). Economics 7th ed. Cengage Learning. Federation of Small Business. (2011). Small Business Statistics. [Online]. Available at: http://www.fsb.org.uk/stats. [Accessed on: January 21, 2012]. ONS. (2011). Labour Market Statistics: December 2011. [Pdf]. Available at: http://www.ons.gov.uk/ons/dcp171778_245812.pdf. [Accessed on January 21, 2012]. Palmer, A. (2011). Youth unemployment: can’t work or won’t work? – Telegraph. [Online]. Available at: http://www.telegraph.co.uk/comment/columnists/alasdair-palmer/8276212/Youth-unemployment-cant-work-or-wont-work.html. [Accessed on January 21, 2012]. Politics.co.uk. (2011). Unemployment. [Online]. Available at: http://www.politics.co.uk/reference/unemployment. [Accessed on January 21, 2012]. Stockwood, J. (2011). Why SMEs are Key to the UK’s Economic Recovery. [Online]. Available at: http://www.startupdonut.co.uk/blog/2011/08/why-smes-are-key-uks-economic-recovery. [Accessed on: January 21, 2012]. Read More