CUTTING ROOM

CUTTING ROOM - Toynbee shows why low pay is no way to profits; my slow-motion euro cheque: how to hedge in the property market; mein hosts in Berlin ... Evan Davis at large.

by Evan Davis, economics editor of the BBC
Last Updated: 31 Aug 2010

Toynbee shows why low pay is no way to profits; my slow-motion euro cheque: how to hedge in the property market; mein hosts in Berlin ... Evan Davis at large.

I'm told that we're meant to get more right-wing as we get older.

I must be peculiarly counter-cyclical, because I find myself concurring more and more with that supposed ultra-liberal, Polly Toynbee, Guardian columnist and author of the recent social documentary, Hard Work: Life in Low Pay Britain.

The book is one of those simple but ingenious journalistic ideas that you wish you'd thought of yourself. Toynbee tried working in a selection of minimum-wage jobs and documented her experiences. It leaves one feeling that we've all been so preoccupied with getting people into work and out of unemployment that we've forgotten how challenging life can be on low pay.

Toynbee tried the same thing 30 years ago - and she points out that she was paid more in real terms then than now. Of course, part of the low-pay trend is a result of the huge increase in labour supply over recent decades, much of it from women coming into the jobs market.

But there's more to it than that. In an overreaction to the '70s, management have somehow got the idea that the only skill they need is to pay people as little as possible (except themselves), to hire all their low-grade staff from agencies, and to ignore issues of staff turnover, productivity and motivation.

I am deeply sceptical that this is a sustained way to profits. Management will ultimately find that this lazy style of personnel management runs counter to the interests of their shareholders - after all, Railtrack managed to bankrupt itself by pursuing these policies, and at last Network Rail inclines to the view that employing a few staff who understand the rail network is probably a good idea.

But why should Toynbee be the one to remind us of this? Shouldn't a few of us trained in mainstream economics have been a bit more on the ball with pay trends? She insults orthodox economics in her book. She should get an honorary economics degree for her efforts.

Last month, I promised to update you on my small experiment to pay a EUR500 cheque to the Inland Revenue. Gordon Brown had promised the Treasury select committee in February 1998 that he would 'create a legislative framework' to help British business pay British tax in euros. So would the Government accept my euro-cheque?

Well, I heard back from the Revenue post-haste, with a letter thanking me for my EUR500, and assuring me it would be accepted. Well done to them for that.

A pity, then, that they rather spoiled things by telling me that it will take up to 60 days to process the money. Perhaps they don't have a euro bank account. If not, they should get one as the first step to implementing Gordon Brown's five-year-old pledge.

We're now at the point in the housing market where you hear tales of people selling their homes and renting instead, confident that house prices are about to crash.

I considered this option myself, but decided it was an inconvenient way to short the housing market, so I looked at whether one can make a spread-bet on house prices falling instead. You can, it seems. It's possible to bet on the average house price as measured by the Land Registry up to June 2004. Unfortunately, the spread-betters are already anticipating a 9% or 10% fall in London house prices by then, thus undermining any opportunity to cash in on any impending crash.

But here's an idea. As there are different implicit house prices embedded in the housing market and in the central odds offered by the spread-betters, you can arbitrage the two markets. All you have to do is sell your house now and move into rented accommodation (in effect, betting on house prices falling); and then gamble on house prices rising with a huge spread-bet.

If you do the maths carefully, you'll discover that you win whether house prices rise or fall.

Perhaps the fact that we are not all doing this tells us all we need to know about the frictions and transaction costs that pervade most real markets.

Congratulations to the British Embassy in Berlin. I was in that city recently, and noticed not only that our embassy is one of the trendiest buildings in town, but that it is even available to hire for corporate functions. Direct Line and Volkswagen have been among the clients.

Nice to see the Foreign Office making money from functions, as well as just spending our money on them.

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