The UK has falling real wages and oil prices but a rising price of football

Over the past week or so the pace of action in financial markets has really picked up. It was only yesterday that I was discussing disinflationary trends and this morning I note that the price of a barrel of Brent Crude Oil has fallen below US $84 per barrel. Since the peak of US $115.71 on June 19th it has fallen by some 27% and the pace has accelerated over the past 24 hours. The report from the International Energy Agency reducing oil demand forecasts for this year and next and telling us that supply exceeds demand right now certainly put the skids under the oil price! We are now back to levels last seen in the latter part of 2010 so some care should be taken as we have fallen very far very fast and must be vulnerable to a short-covering rally.

Also I would like readers to take a step back from the media coverage which will involve panic over disinflation and deflation in some confused combination. Whilst a falling oil price does signal issues with the current state of the world economy it is also a strong reflationary influence and so many economies will get a much needed boost from it. Indeed it will be oil importers who most benefit and there is a long list of them. For once there is some good news for the Euro area although it comes with a problem for the European Central Bank which will get lower inflation before the growth boost. Imagine the panic if Euro area consumer inflation should have a print below zero. Let me wish Mario Draghi good luck in explaining that one.

However we are seeing consequences of this oil price fall in more and more places with China adding itself to the list today. From the National Bureau of Statistics via Google Translate.

2014 years 9 months, the national consumer price index rose 1.6%

So the disinflationary trend is clearly in evidence (it was 3.1% this time last year) there with some already wondering if we will see before long a number less than 1%. With the producer price numbers negative that may yet happen. Of course Chinese consumers and workers will welcome the reduction in inflation and may choose to avoid reading the experts who will tell them it is bad for them.

The UK

As we switch to the UK we see that it will be receiving a boost from the falling oil price and maybe even a small one to the trade figures as it is now a net importer. Adding to this is the recent fall in the value of the UK Pound which has dipped below US $1.59 today. Whilst this will offset some of the oil price fall it should in theory give the economy a boost although the lesson of the 2007/08 depreciation was to weaken expectations for such effects.

We are seeing lower fuel prices at the pump at least. According to the official data petrol prices are some 5.2 pence per litre cheaper and diesel some 8.1 pence cheaper. As I driver of a diesel may I add a little hurrah to the narrowing of the gap? It used to be cheaper but that was before many of us in the UK were persuaded to switch fuel type. Let us hope that more price falls are on their way.

What about today?

Employment has continued its recent growth phase.

There were 30.76 million people in work. This was 46,000 more than for March to May 2014………The proportion of people aged from 16 to 64 in work (the employment rate), was 73.0%,

So our quantity measure has performed extraordinarily well considering the economic distress that we have seen in the UK. However as it approaches all-time highs in terms of the ratio (73.2%) we do have a problem for projecting that forwards. Is this a type of (near) full employment? Personally I think that there is still room for reductions in the under employed sector but any such thoughts about nearing a maximum poses obvious issues.

The improvement in employment has followed through to the unemployment numbers.

There were 1.97 million unemployed people, 154,000 fewer than for March to May 2014 and 538,000 fewer than a year earlier. This is the largest annual fall in unemployment on record. Records for annual changes in unemployment begin in 1972.

The unemployment rate continued to fall, reaching 6.0% for June to August 2014, the lowest since late 2008.

Again these are very welcome figures and we should perhaps take a moment to let them percolate.

The hours worked numbers did show a clearer change of trend as they had been growing but now did this.

Total hours worked per week were 987.3 million for June to August 2014. This was:
• little changed on March to May 2014,
• up 24.5 million (2.5%) on a year earlier,

If we continue with our glass half full view there is a glimmer of a possible improvement in productivity there as our economy was growing then (h/t Chris Dillow).

What about real wages?

This remains a problematic area to say the least.

For June to August 2014, regular pay for employees in Great Britain was 0.9% higher than a year
earlier and total pay for employees in Great Britain was 0.7% higher than a year earlier.
Between August 2013 and August 2014, the Consumer Prices Index increased by 1.5%.

As you can see wages continue to be growing more slowly than the rate of inflation. The number for total pay growth in August alone was marginally better at 0.8% but the theme remains broadly the same. If you want an even grimmer measure then take a look at the Retail Price Index which was rising at an annual rate of 2.4% in August. So real wages were falling at an annual rate of 0.7% or 1.6% in August.

Breaking the numbers down

The detail of the average earnings numbers is not what you might expect. You might be surprised to learn that public-sector pay (excluding RBS etc..) was up by 1.6% in the year to August. Not quite the impression we are given is it? Pay in manufacturing was a bright spot but as the last three months have gone 2.2%,1.9% and now 1.3% that looks as though it is fading. My commiserations go to those who work in the retail hotel and restaurant sector as annual pay growth was negative in both July (-0.9%) and August (-1.1%). As it is a low paid sector this looks particularly grim and oddly considering our economic position it is reversing a better effort up to this spring.

If we put 3% economic growth into a computer model I would suggest it would react in the manner of HAL-9000 in the film 2001 A Space Odyssey if we put in overall current wage growth let alone the falls in some areas.


I wanted to widen the perspective today beyond the boundaries of the UK because that is the environment we need to judge our labour market statistics from. We should welcome the fact that the quantity measures are as strong as they are but also be troubled by the continued failure of wages to even keep up with inflation. How can this be with economic growth of 3%? Apparently in the new era quite easily.

I also welcome the fall in the oil price as it should give a boost and of course help the consumer. But it is not the only international trend right now as I observe that the government bond market of Germany has gone to further new highs today with its ten-year bond yield falling to 0.823%. I do not know about you but this makes asset prices (equities and houses) look very vulnerable to me right now. And yet we know that the establishment of political leaders and central bankers will do everything they can to stop any sustained falls. It could yet get very messy.

Of course there are places which could be forgiven for thinking that the credit crunch never existed. From the BBC.

Price of Football: Ticket increases outstrip cost of living

Market Update at 4:10 pm UK Time

It has been rather an extraordinary day with the US Dow Jones index falling some 350 points soon after opening and then swinging wildly. However the real moves -if you will forgive an old bond trader- have been found in the government bond markets. German 10 year bonds now yield a measly 0.77% which does not project much of an optimistic future does it? Also France saw Fitch move its outlook to negative last night and the response? Its government bonds have blasted higher too with the ten-year yield now 1.14%. Even children are old enough to remember days when adverse ratings moves led to upwards panic in bond yields not downwards ones!

Even the 10 year UK Gilt now yields less than 2%.


19 thoughts on “The UK has falling real wages and oil prices but a rising price of football

  1. There are some glaring holes in this story if we take a wider view.

    As you point out,wages are hardly rising and for many,they’re dropping-hardly consistent with a squeezed labour market.

    Alos,the maount of people on minimum wage has doubled over fifteen years.If this is recovery,the depression is going to be rotten.

    • Hi Dutch

      That is something that has troubled me throughout the credit crunch as if monetary policy has the taps open into the next downturn where does it have left to go? If you look at the bond yields in my update to today’s post what is the point of ECB #QE in France for example?

  2. Shaun,
    RPI of 2.4% accounting for 3% growth ? Real growth 0.6%?
    Productivity gains not feeding through to the workers – so why bother? Hence low productivity per worker – lower energy costs propping up low efficiency enterprises so no need for any reinvestment just stockpile cash for bonuses etc!
    UK Premiership football now divorced from UK supporters – TV rights mean crowds only for atmosphere/sound effects!

    • Hi Chris

      On the football front I watched some of Barnsley versus Bradford City at the weekend. Two clubs who have relatively recently been in the English Premiership and a Yorkshire derby to boot. Yet the crowd looked a bit thin to me especially if we allow for the fact that they are usually seated “favourably” for the cameras.

  3. Hi Shaun,

    not being a football fan I can’t give legitimate feeback but I’ve had concerns for years as the sport has moved away from local team-work and supporters towards multi-national corporates and stardom/individual celebrity. I for one have never paid anything into Sky or ticket receipts to stoke this explotative machine.

    Regarding your final comment on protecting asset prices, I think that will be telling. The Political and Economic focus has been to protect the elite throughout the recession and the proletariat are just beginning to notice things are getting worse instead of better.

    Will the big guns get pointed at protecting the assets or dealing with the minions?

    Paul C.

  4. Shaun, why would the Chinese Govt. with a huge cash surplus, tell workers that disinflation. which makes that surplus worth more, is bad?

  5. I watched the Newsnight piece on Secular Stagnation with interest last night. It seems the thoughts I have had about low growth/low interest rates becoming entrenched are high on economists minds right now.

    One effect that low interest rates low inflation and corresponding low wage growth have is to keep the level of an individual’s mortgage debt high in real terms for longer, which makes buying a house at these over-inflated prices an even riskier proposition, In the past, your mortgage burden didn’t just decrease because of repayments, but inflation would take care of it over time as well.

    If you are buying now with the current scenario, you just can’t afford for anything to go wrong in the foreseeable future. For new entrants it’s surely just too much of a millstone around thier necks even if they can make the payments today.

    • That’s the point I made on one of Shaun’s MM blogs; the banks are inveigling the population on their absolute need for ZIRP.

    • yup, governance of the people by the Banks for the Banks

      but don’t worry ! the British public will riot for nothing less than a new Iphone or Ipad or a new pair of sneakers

      Seems the top 1% have won

      Dune here we come….


  6. Hello Shaun,

    I loved the way the current ship of fools bleated on about how wonderful it was to be in work and how great the unemployment figures are now below 2 million

    in a way we have now wage serfdom ,

    many under employed – no chance of them measuring that is there?

    then the embarrassment of the tax figures being poor … DUH!

    I wonder when they will take on my idea of zero unemployment – just make everyone take on zero contract hours jobs and then all we need to pay for is support bennies …. instant full employment !! Hurrah!! ( cough cough ) …..

    That the oil and commodities are falling in price is to be welcome but is that because we found copious quantities of both ? nope , didnt think so . the IEA/EIA reported 10 years ago we’d have 120mboe by now – we dont and the reason its falling is either manipulation to goad Russia or because , just like the 1930’s we are going down again…….

    Ah interesting times !


    • Hi Forbin

      One of the debates for these times is what is represented by work. Although to be fair George Orwell was on this particular case some time ago.

      ““This work was strictly voluntary, but any animal who absented himself from it would have his rations reduced by half”

      As to financial markets well it has been quite a day and there is still a fair bit to go…..

    • I read a report yesterday that the Saudis are apparently happy for the price of oil to fall to around $74. The reason being US shale oil becomes unprofitable at the price.
      One way to get rid of the competition I suppose.

  7. Hi Shaun,
    ” I do not know about you but this makes asset prices (equities and houses) look very vulnerable to me right now” If by “right now” you mean that literally then yes but as you say there is a potential future economic boost looming next year if this oil price crash continues/flatlines, so I’m considering adding to my holdings at the moment…… .

  8. Shaun, one of my issues with the reported wage growth (decline!) figures is that they aren’t like for like, in the sense that they neither quite show the change in wages actually experienced by a “typical” worker, nor the change in wages for a given role. Instead they are affected by the pay and hence demographic structure across the whole economy.

    Let me give a toy model to explain what I mean. Suppose careers last three time periods (“years”) and that there are three types of job in the economy, types A, B and C in increasing order of skill. Let’s say their pay is initially 100, 110 and 121 units (“pounds”) per year respectively and that individuals entering the workforce in a given year start out in Job A, are promoted to Job B the next year, then Job C the year after that, and then retire.

    For simplicity assume in year two that pay stays fixed for each role. Then one like-for-like measure of improving pay would be to compare for each worker their pay from year one to year two, which only makes sense for those who worked both years. Since they’ve all been promoted either from A to B or from B to C, then their pay went up by 10%. Of course this isn’t a good measure of the economy because it’s just capturing people’s upwards pay trajectory as they work through their career – the economy isn’t growing at 10% a year! But it’s a good measure of the “lived experience” from year to year. If instead we compare “people doing job A now vs people doing job A then”, and repeating across job types, we find pay has stayed the same. That makes sense as a measure of the whole economy, but the lived experience doesn’t actually feel like a wage freeze at all. (I recall Steph Flanders blogging for the BBC about how surveys of the early 90s recession showed a surprisingly high proportion of people recalled it as a period where despite general gloom, their personal financial situation improved. For the majority of people fortunate enough not to involuntarily lose their jobs, this sort of effect is presumably the reason.)

    If instead pay in each role rose 5% the first measure would show a typical worker enjoys a 15.5% rise from year to year (if my mental arithmetic is correct for 1.05 x 1.1) while the second measure would only record the 5%. (An aside – chuck in inflation at 7% and you find that people in work are still getting better off from year to year, but each generation is poorer than the last. I wonder if what’s going on in the real figures is more like this scenario, than the “we’re all getting poorer” summary in the media.)

    Now consider a third measure, comparing the average wage in year 1 of all workers in that year, to the average wage in year 2 of all workers in that year. It’s comparing different groups of workers, since the human composition of the labour force has changed even if its structure hasn’t, and isn’t comparing like job with like job. However, if the demographic structure is such that the number of people in each year group is constant, the third measure would agree with the second measure in both the pay freeze and 5% rise scenarios previously detailed.

    What if there is a single year “baby boom” cohort? The year they enter the labour force and take up the Type A jobs they drag the third measure down because a greater proportion of people are now doing low paid work. As they transition to Type B and then to Type C, they drag the third measure up higher. That’s because the measure is partly capturing the higher-weighted generation’s pay progression (ie what the first measure was following) in addition to any increase across the job types (the second measure). Note that the first and second measures would have been unchanged themselves. Similar effects occur if instead of altering the raw numbers in each generation, you incorporate effects like unemployment and let them vary across age cohorts.

    In the real world, when we see small pay rises, an average that is weighed down by the creation of a large number of low-pay, entry-level jobs, what is that really telling us? The “lived experience” may not be quite so gloomy – admittedly a lot of people are suffering from pay restraint, but on average the situation for existing workers won’t be as bad as the figures make it look because (a) even if salaries for the same role are improving only slowly, people moving along their career trajectory are entering new and higher paid roles, and (b) even in the same role wage growth may be better than the figures make it look, because of the downwards influence on the statistics of new workers entering the work force on low pay (analogous to the baby boom scenario in the toy model). It has to be good news that youth unemployment is dropping but it is coming down from a high, and is inevitably filling lower level roles, so a negative influence on the pay statistics has to be stomached to some extent. I note that older unemployed people with more skills who did not want to accept those kind of positions, may well have withdrawn from the labour market permanently – a great loss.

    When looking at the pay statistics, to what extent can we disentangle those different effects? The whole story seems to be much more complicated than just a headline figure.

  9. Regards how people feel about their wages and buying power/standard of living, I believe Shaun included some stats on public perception of inflation vs the actual rate on one of his MM blogs and they were pretty gloomy. On anecdotal evidence I’d say most people feel their money doesn’t go as far as it did but they’re still enjoying much the same lifestyle as a few years back, albeit with more prudence/awareness of their regular spending on energy, groceries etc. But, I’m conscious that people in low-paid work – which seems to be the driver of the UK’s employment surge – use rising costs as a sound argument for wage increases, for example, a cleaner might reasonably ask for more cash per hour if petrol prices are rising. I see no impetus for wage increases for most services employees without this inflation driver, and I suspect many people think the 1% rises being offered to public sector workers – police staff being balloted for strikes only today – are fair, given the Blitz-spirit, world-at-constant-war emergency propaganda of TPTB. The disconnect with reality is housing/asset prices which have their own rules and protections. And while the cleaner’s car ride might get cheaper as the supermarkets snip their pump prices, their hourly wage is effectively frozen and the housing they could have rightly expected to afford only a generation earlier is yanked further out of reach.

  10. Shaun,

    I read Robert Peston’s BBC post on the latest ONS employment statistics today. It was a fairly glowing report but I could see some poor takaways if you looked a bit deeper.

    We are all heartened that the UK has put on 1.8 or even 2.0m new private sector jobs since 2010. But we should remember that we have shed 600,000 public sector jobs in that period. So 2m becomes 1.4m new jobs.

    If we delve a little further 233k of the 538k new jobs went to guest worker (41.5%) whilst in the last budget George Osbourne stated that 80% were British and not 58.5% and they were also mostly full-time.

    But of the 315,000 new British jobs, 280,000 are self-employed. We wish all the new business start-ups the very best but we also know that 80% of start-ups fail. Therefore the 280,000 will fall to 56,000. We also know that these new self-employed have been coerced into self-employment to get them off the unemployment register.

    I don’t like giving duff informtion. But didn’t we offer £3,000 (I’m asking for corroboration here) to get off JSA and start your own business. 280,000 new start-ups looks good today but not so good if it falls to 56,000 in one years time. And, as for reducing the benefits bill and contributing to tax revenues, most will still be on WTC and other benefits.

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