BEWARE THE POWER OF STRUCTURAL CHANGE

Peter Warburton – 18 May 2021

The UK economy is undergoing a structural transformation due to pandemic-related shutdowns. A large swathe of corporate activity and employment will not survive this protracted disturbance. While the macroeconomy will rebound strongly over the next few months, for many small businesses and sole traders, the die was cast when the second lockdown was announced last November. Their savings are depleted, their trade has dwindled, and their franchise has evaporated. Maybe we should no longer worry about Haldane’s “long and lengthening tail of lower-productivity firms”: lockdown has lopped it off. This extraordinary interruption to activity has crafted the opportunity and granted permission for a radical re-shaping of the economy. Metaphorically, a lot of balls have been thrown up into the air and as they fall, longer and stronger arms will reach up to catch them.

It is becoming increasingly clear that small businesses are out of favour with the government. Big government prefers to deal with big companies and to co-opt them as partners in its grand designs. The army of shopkeepers and small traders that was once hailed as a sign of British entrepreneurial flair has become an embarrassment to the establishment. The self-employed are falling like flies. The latest labour statistics contain many discrepancies and divergencies (see figure 1), but the sources agree on the deepening slump in self-employment (a 12-month drop of 12.5% in employment and 11.2% in workforce jobs).    
Few economists appear alert to structural issues. I am grateful to Brian Pellegrini for sharing his US observations on the problems of structural mis-match and supply chain dislocation: “Even a sudden reopening of every business affected by Covid and a return of every displaced worker to the labour force would not suddenly return the world to “normal”. First, the Covid crisis caused such a disruption that the matching efficiency of the labour market has deteriorated significantly and will need resources to repair. Second, the supply chain needed to sustain the productive potential of all those workers is no longer available because it was thrown out of equilibrium.”

Moreover, dislocation triggers regime change. This could mean earlier retirement than planned, loss of accreditation to perform certain roles, the opportunity for corporate restructuring that enables mass redundancies to be blamed on Covid, a redistribution of market share away from small independent providers to market leaders etc.
As a personal observation, debt-fuelled elongated economic cycles keep older workers in the game for longer than they had anticipated. But when the cycle is abruptly curtailed, this becomes their natural jumping off point.  And those workaholics who could never imagine life outside work have been forced to slow down, and even stop. Who knows, after a few months of being sidelined by Covid, they may have broken their addiction!

Until the UK furlough scheme is wound down at the end of September and the corporate insolvency machine is up and running again, we can only speculate how deep and painful this season of structural change will be. We may applaud the cull of the dinosaurs, but they will leave behind some large empty footprints.   

Figure 1


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