Blogs | February 18, 2014

How do economists calculate the costs of strikes, wars and weather events?

Damian asks: How do economists and others calculate the costs of strikes, wars and weather events? There always seems to a number (or two) used in media reports but I wonder how it is calculated.

Ian answers: Headlines about the London Underground strike in February 2014 told how business leaders warned of a £50 million a day cost to the London economy. In the United States, which at the time was suffering through a harsh winter, the New York Times reported Federal Reserve chair Janet Yellen telling Congress that “weather might have been a factor" in the weak jobs reports in December 2013 and January 2014, but warned the public not to jump to conclusions. And let’s not forget the Icelandic ash cloud of April 2010, which, writes the Organisation for Economic Co-operation and Development (OECD), cost five billion euros.

A strike, eruption or bizarre weather will likely have some sort of implication for the economy, especially if capital stock (such as roads, bridges or flight paths) have been damaged and need to be repaired or rerouted. But these costs are typically more complex than a headline number suggests – and the cynic in me thinks the methodology of many of these types of estimates are often questionable and, in some cases, can be designed to create hype.

Calculations on the day
Take a London Underground strike. A consultancy might get an idea of how many people won’t be able to get to work, multiply that by wages and then have an additional multiplier to account for a "second round" effect, such as people not buying their lunch at the local sandwich shop. That multiplier could be a guess or based on studies of inter-industry connections using devices such as input-output tables.

Of course, a more detailed calculation would then need to add back the extra fares paid to private bus and taxi companies for people who changed their normal travel patterns – not to mention those workers who still bought lunch but did it close to home (instead of close to the office). Is there lost productivity from someone missing a day in the office? It will depend on their job but for a proportion at least the “work that couldn’t be done because of the tube strike” will probably get done later.

Calculations over the long-term
The real costs to be considered are those with long-term effects. Are there any in the case of a London Underground strike? I think probably not.

Consider the following questions. Will companies not relocate to London because of a tube strike? I don’t think so. But this may depend on the number of days lost to strikes generally. Will people decide not to work in London because of a tube strike? It may be the tipping point for some but internal migration data for the UK suggests people are still relocating to London from elsewhere.

Has the infrastructure of the tube system been damaged? If the tracks, trains and signals are still there, I even wonder if a strike might mean maintenance people get a chance to do more work to improve the quality of the infrastructure. Will tube staff go back to work or be so demotivated by the way management have approached industrial relations that they transfer their skills elsewhere? It’s hard to say. Some argue that drivers (at least) are well paid – but large-scale strikes suggest a level of dissatisfaction.

Boost for bike retailers?
And that £50 million-a-day figure was apparently based on a 2007 survey by a business lobby group, according to the Huffington Post quoting University of Surrey industrial relations expert Alf Crossman. But in a small team, strike disruption can be minimal. I ride a bike to work and strikes have convinced at least one other to join the two-wheel set.

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Ian Bright
Ian Bright

Senior economist at ING
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