A far from BAEsic problem

stephen clarke, 26 September 2011

Tomorrow will see BAE Systems disclose how many jobs the company will cut. Expectations are that around 3,000 jobs will be lost across 3 sites in Yorkshire and Lancashire. Unions and opposition politicians have called on the Government to take action, but is there anything useful the Government can do?

According to BAE the job cuts are necessary because of a fall in demand for the Eurofighter Typhoon combat jet. BAE, which relies on large orders by governments, is suffering from a reduction in defence spending in the UK and abroad. The British Government thus faces a dilemma; it is keen to support British industry and recognises the wider benefits a company like BAE brings to the economy. On the other hand it has little choice but to cut defence spending and would face criticism if it was seen to be inefficiently subsidising a favoured firm.

In light of these constraints there are still some options the Government could consider.

The Government could implement a ‘short-work’ plan similar to that in Germany. The Kurzarbeit plan allows companies to put workers on shorter working hours and just pay them for their hours worked. The German Government then subsidises up to 67 per cent of the workers remaining wages. The benefit of this for firms is that they can retain capacity for when demand picks up. This could be useful for BAE systems as it expands into other markets, something the Prime Minister has been keen to help with on recent trade missions.

Another option, again aped from Germany, could be to encourage BAE to set up a ‘work-time’ account with its workers. Again this allows firms to reduce employee working hours when demand falls. The company agrees to minimise lay-offs and in return the workers agree to work overtime hours for normal pay when demand picks up again. Obviously such an agreement involves the engagement and approval of the unions, something the Government could help broker. Once again this proposal has obvious benefits if demand is expected to pick up, however if the Government feels that demand in the defence market will be permanently subdued, this option may not be suitable.

One final option would be to create a subsidised hiring scheme. Such schemes are widespread in Spain, where the Spanish Government has used them to help industries or firms in decline. In Spain the schemes, present in the furniture, toy-making, and footwear industries, offer firms subsidises to hire workers that have been made redundant by other businesses in their industry. Such a scheme could be replicated in the UK with an important modification: instead of encouraging other defence firms, other firms in similar industries, such as civil aerospace or automotive manufacturing, could be encouraged to hire ex-BAE workers.

No one scheme provides a panacea to the problem. Even Germany, which has seen its unemployment rate fall during the recent recession, could suffer in the future if demand permanently falls in some industries and workers cannot be laid-off. Nevertheless the schemes proposed should be considered because they could be effective and are relatively cheap to implement. The financial burden of all three schemes is spread across workers, employers and the government. Furthermore there is a real need to ensure that during this period of economic malaise the British economy does not lose capacity in key areas. Advanced engineering and manufacturing is one such area, and limited public investment in the present could be a small price to pay for future economic success.