It is all about the wages stupid! Especially for the UK

One of the features of the credit crunch era has been the decline in the rate of wage growth which has led on to a decline in real wages, or wages adjusted for inflation.  This has been a particular issue in the UK where depending on the consumer inflation measure you use (CPI or RPI) real wages have fallen by around 10% which is quite a bite out of people’s real incomes. This is one of the reasons why the individual experience of the credit crunch feels grimmer than the official collective one where economic output as defined by Gross Domestic Product is some 3.7% higher than the post credit crunch peak.

This morning has seen the International Labour Organisation join the fray as it has published its latest Global Wage Report. It does not make for pretty reading.

In developed economies, wages generally remained stagnant in 2012 and 2013, and in a number of countries wages remained below their 2007 level. These trends are a matter of concern.

This is an interesting issue to raise on a day which will see the labour market report or what is commonly called non-farm payrolls in the United States. Last month we were told this by the Bureau of Labor Statistics.

Real average hourly earnings increased 0.4 percent, seasonally adjusted, from October 2013 to October 2014.

Not much is it especially for a labour market which is supposed to be thriving!? I do hope the wages growth was not driven by oil fracking workers.

If we continue with analysing the report we see that half the real wage growth reported in 2012 and 13 was China and that if we just look at the developed economies we see what the ILO calls “Flat wages in developed economies”.

In the group of developed economies, real wages were flat in 2012 and 2013, growing by 0.1 per cent and 0.2 per cent, respectively. In some cases – including Greece, Ireland, Italy, Japan, Spain and the United Kingdom – average real wages in 2013 were below their 2007 level.

So the real wage growth is well within the margin for error. Also whilst the problem has grown in size in the credit crunch era it was present before hand.

Overall, in the group of developed economies, real wage growth lagged behind labour productivity growth over the period 1999 to 2013. This was the case before the crisis in 2007 and – after a brief narrowing of the gap during the depth of the crisis labour productivity has continued to outstrip real wage growth since 2009.

The longer-term trend is something we have discussed and analysed frequently on this blog and the ILO puts it thus.

Average wages in emerging and developing economies are slowly converging towards average wages in developed economies

It is a chilling thought for those in developed economies that on average their wages are still treble those in emerging and developing economies. Some of the gap will be closed by wage growth in the latter but less than all of it.

What about the UK?

Tucked in the data was that the UK has done better than many other developed countries in the pre credit crunch period which makes me wonder if our recent weaker performance is a type of catch-up. With thanks to Stephen Boyd who has better skills in extracting graphs from reports than me the more recent situation is shown below.

So the UK was the worst performer in the G-20 over this period which of course is exactly the sort of catch-up we did not want! It should not be a surprise that the commodity and resource economies of Australia and Canada are top of the list although as the data catches up with the new reality of lower commodity and oil prices there is likely to be a shift there too.

If we look to bring the UK data more up to date then in spite of our recent boomlet it does not appear that matters have improved much and if fact may have behaved contracyclically and got worse.

In April 2014 median gross weekly earnings for full-time employees were £518, up 0.1% from £517 in 2013. This is the smallest annual growth since 1997…….Adjusted for inflation, weekly earnings decreased by 1.6% compared to 2013.

Since then we have seen in the UK a gentle nudge higher in wage growth and also a fall in consumer inflation so if we project the two trends forwards we should see some real wage growth as 2014 moves into 2015. This will be enhanced by the impact of the impact of falling oil and commodity prices on the official consumer inflation measure (CPI) which could easily see Bank of England Governor Mark Carney reaching for his fountain pen to explain a sub 1% annual rate of inflation this month.

Next time somebody tells you that low inflation is a bad thing (this is being trumpeted by central banks and their acolytes right now…) please remind them of its effect on real wages.

What about the Retail Price Index (RPI)?

The UK’s real wage performance is even worse if our old measure of consumer inflation is used. Up until recently the difference between it and the CPI measure has been cut by the slashing of mortgage rates which it include, but in October the rate of RPI inflation was 2.3% meaning that we still have negative real wage growth using this measure.

The Bank of England’s own inflation questionnaire reinforces this

This morning the latest Bank of England inflations expectations data has been released.

Asked to give the current rate of inflation, respondents gave a median answer of 2.8%, compared with 3.4% in August.

This does show a fall but also continues to show that the public feel that UK inflation remains above its official target. Of course establishment economists know better just like they did before the credit crunch, or they did with the CPIH debacle…..Oh hang on.

More institutionalised inflation in the UK

This morning has seen a confirmation of the rise in UK rail fares for January. From the BBC.

Average rail fares will rise by 2.2% from 2 January, the rail industry has said, marking the lowest rise for five years.

As you can see it came with an element of propaganda. So let me present an alternative view. By then it will be likely to be more than double the rate of officially measured (CPI) inflation.

I raised the issue of rail fare increases being fixed to the (higher) RPI and not what we are told is the official measure of inflation at the Royal Statistical Society a while back. It ended up with the UK Statistician writing to HM Treasury.

http://www.statsusernet.org.uk/communities/alldiscussions1/viewthread/?GroupId=85&MID=2747

Comment

The issue of wages in the credit crunch era especially in the UK reminds me of the bit in the Lord of the Rings where King Theoden says “and so it begins..”. For us there was a substantial lurch downwards and in the latest annual survey there was also an insight into something which the ILO also reports on today which is increasing inequality. For 70% of the UK workforce wages are rising at 4% or what used to be considered normal, which means that the other 30% saw cuts which if you do the mathematics need to average around 9%. Welcome to the UK in 2014.

There is another feature of those numbers which is quite stark. The rule of thumb is that a recession has am 80/20 feature where 80% of the people barely notice it and 20% are hurt. You may note that one difference in the numbers above is a markedly worse 70/30. For such a situation there is of course AC/DC.

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell
(highway to hell) I’m on the highway to hell
(highway to hell) highway to hell
(highway to hell) highway to hell
(highway to hell)
And I’m goin’ down
All the way
I’m on the highway to hell

Mario Draghi

Yesterday at the European Central Bank conference he looked uncomfortable to me and there was certainly inflation in the use of “QE” and mandate! I think Coldplay sum up his current predicament well.

Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,

And I never meant to cause you trouble,
And I never meant to do you wrong,
And I, well, if I ever caused you trouble,
Oh no, I never meant to do you harm.

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33 thoughts on “It is all about the wages stupid! Especially for the UK

  1. The 80/20 is the Tories preferred mode of attack; has been since the thatcher years.

    Sod the bottom 20% and the top 80% will either be relieved it’s not them, and keep their mouths shut, or actually praise them.

    Scum.

    • The currency crisis’s created by incompetent and profligate UK labour politicians are also very damaging. They need to learn the 1990s lesson from the Canadian Liberals – protecting the welfare state requires balanced, sustainable budgets.

      I’d accuse both labour and the tories of supporting and sustaining a system that promotes rent seeking parasites profiteering from substandard residential accommodation.

        • Tax should be used wisely because it is the product of workers labour. Those who view unemployment benefit as a lifestyle option are abusing the system and stealing from ordinary hard working taxpayers.

          I find your hostility to the very generous Tories laughable. The Tories have made no effort to tackle the workshy who have never worked and do not intend to. By comparison the American Democrats are often feted, despite the Democrats sustaining and supporting the 2 year time limit on employment benefits for previously employed workers only.

          For the top 10% of productive individuals (not necessarily the richest) mobility is easy. We already see Brit doctors off to Australia and Brit IT jobs going overseas.

          I don’t mind paying taxes to help the unfortunate but I do object to funding the deliberately lazy. I’ve also voted with my feet, employment tax is 10% here and I’m better off using purchasing power metrics.

        • Those who abuse, or advocate abuse, of the labour market by using unemployment as an economic tool, are also those quickest to label the unemployed as unworthy of their meagre benefits.

          Furthermore, 60% of those on benefits are in work.

          Your right-wing nonsense is offensive to those who care for their fellow human beings.

          http://www.bbc.co.uk/news/uk-30366020

          PEOPLE HAVE TO GO HUNGRY IN ORDER TO GET TO WORK IN THIS SHITTY LITTLE DEVIL-TAKE-THE-HINDMOST COUNTRY.

  2. Hello Shaun,

    politically speaking the current administration has put forward the idea that the unemployed would be better off in a job , any job ,any job at all

    so low paid jobs it is then, along with zero contract hours and self employment in poor or no pay jobs

    no job that they themselves would do of course ….

    And the addition of hookers and drugs into the GDP and I think we can see were thats leading to ! ( job center : – come on luv/laddie , all day to yourself then a few hour on yer back ! what more could you ask for ? 🙂 )

    It has been certainly reported , all though not so much in MSM, that the recession affected the middle and lower classes with only the top 1 % actually getting better off !

    This is not a good thing for ‘ mocracy or economic health of the nation . Or to balance the books – lower tax returns are inevitable . borrow more? well the Banks are reportetly now conned the pollies into garanteeing pension funds to bail them out next time

    well there is going to be a next time because they are still bust – not that emptying eveyone elses pension funds will be enough to solve that one .

    Yes Shaun , I think Dune does beckon !

    Forbin

    • Hi Forbin

      The ILO numbers had a section on growing inequality. In the UK the ASHE survey told us this as we saw 70% going on as was normal in wage growth terms whilst 30% are heavily disadvantaged. I think that everyone reading this can take a stab at who the 30% were/are.

      For the 1% or perhaps I should say the 0.1% then we need to move to asset values to see their gains. Many equity markets at all time highs and bond markets too mean that they may “have never had it so good” Wasn’t that Prime Minister Macmillan’s phrase?

    • Hi therigel

      Back in September 2010 I went to a meeting of one of the political think-tanks. I forget its name but I remember that 2 Guardian writers including the economics editor Larry Ellison were there and that the discussion was left-leaning.

      They kept going on about the 1980s and Thatcher. I said to them that they should be more afraid of the 1930s and that there were 2 key issues on their way.

      1. The trend towards negative interest-rates

      2. There were increasing problems with the balance sheet of the ECB

      Both were true then and are also true now.

      Quite a few people present came up to me afterwards and thanked me and asked to know more. I never heard a word from any of them again…

      Oh and there is no political significance in it being left-leaning I would have gone to a centre or right-wing one too. The opportunity came and I took it.

      A plague on all their houses….

  3. Hi Shaun

    None of this takes into account housing costs. I’d also say that in the current framework wage rises will make no difference. If wages go up we can pay more to buy or rent (as housing is priced by “affordability” not the cost to build).
    Land prices will always soak up all wage rises unless we have a way of keeping speculators out such as Land Value Tax.
    Until this is addressed the UK and other Western nations with a similar setup are indeed on the highway to hell.

    • Hi Benfitzg

      I agree completely that it looks as though rental costs rise with wages. This may be the reason behind the fact that rents have lagged way behind house prices through the recent boom as wages have been weak. However we have seen a weaker link between wages and house prices overall. Maybe we need to look at the 70% who according to the ASHE 2013/14 survey are on what was previously regarded as normal wage growth of 4%.

      With volumes/transactions still relatively low perhaps they are enough….

        • I disagree. Rental costs can be manipulated to milk ever more housing benefit from the taxpayer

        • Not correct.+
          There is a maximum level payable by every council, and there are a finite number of housing benefit claimants.

      • “However we have seen a weaker link between wages and house prices overall”

        That’s because of the falling price of money both in terms of nominal and inflation adjusted interest rates, compounded by increasing mortgage terms, I’ve heard of 40 year mortgages being offered!!

  4. Excellent post – spot on about some developing countries wages converging. But inequity is often greater, where highly skilled workers are doing very well & unskilled workers gaining relatively little. Corrupt bureaucrats live like kings. I’d stress the point of using purchasing power parity -> which makes the UK look very bad due to it’s astronomical housing costs.

    I’d also point out another disturbing trend in many developed countries. The percentage of GDP consumed by pensioners is excessive and very unfair to younger generations who will be paying off the baby boomers debts long after the baby boomers are dead. I’d also note massive inequity in pension distribution, where some have gold plated schemes and others do not. Mervyn King’s pension seems excessive in an age of austerity.

    • You’re joking!
      New pensioners are getting half of what they were encouraged to expect, and that’s only those who have not seen their final salary schemes closed.
      Most baby-boomers have no debts!

      • Pensions generally have promised lots of payouts, but questions could be asked how those payouts would be funded. A scheme that needs new member contributions to pay existing liabilities is called a PONZI scheme. Why is our pension system not properly funded ? And have the parties responsible been held accountable ?

        Tax as a percentage of GDP is very high, yet the Brit politicians still are borrowing. The Laffer curve shows that over 50%, increased taxes start bringing smaller revenues -> as Monsieur Hollande is proving yet again. Musical ref : Beatles “taxman”

        National debts are not harmless to ordinary citizens, financial crisis & currency crisis hit the poor hardest. Thatcher’s cuts in the 80s were a walk in the park compared to Bulgaria’s Socialist created 1997 crisis which decimated savings and pensions. That is a scary reminder from history ….. and I’d hope the musical reference can be Split Enz’s “history never repeats”

        • Sorry, but the Laffer Curve is as much neo-liberal nonsense as drip down.

          Successive pinko govts. have deliberately left gaping loopholes in tax laws with the deliberate aim of announcing politically beneficial tax regimes without ever having the intention of collecting, since they too are part of the establishment.

          Closing these loopholes is a matter of will, and doing so would show the lie that is the Laffer Curve.

          The idea that a rich person would live somewhere other than his first choice because of an extra 5% tax, is extraordinary, if not laughable.

        • In regards to facts on the Laffer curve, the last time Britain experimented with high tax rates in the 1970s, it ended badly – sterling crisis, IMF rescue and so on.

          Secondly, France, if the 75% tax brings a balanced budget and expanding economy -> then we’ll have a scientific counter-example. Until such time, your postulates on the laffer curve are not credible

        • I found the rawbuzzin’s chart to be food for thought. Moreover, I’m one of those who pay lots of tax and have no intention of leaving to go to a tax haven where my tax saving is swallowed by higher prices on everything leaving me no better off, unless I go to the US but it’s about your total life experience – not just money in your pocket.

        • …. and I thought the 1970’s debacle was a lot more to do with ridiculous economic policies from the 1960’s which I haven’t the time to go into, allied to the 1967 devaluation, all creating a medium term perfect storm for whichever Government was in “power” by the 70’s, as the truth was there was little the Government (of any persuasion) could do to overcome previous bad policy decisions from the 60’s resonating through almost a decade later. Tax,low or high, was neither here nor there.

  5. Hi Shaun,

    I am heartened that at least the issue of wages and inequality are getting plenty of daily coverage in the media. As I have discussed on here before, the squeeze on wages seems to be a continuation of a general trend and you have confirmed my suspicions that this is global issue, and is a logical outcome of globalisation. Goodness knows where wages will head if we enter another recession.

    • Hi Zummerzetman

      Here is the full section summary from the ILO report and it provides plenty of food for thought.

      “Average wages in emerging and developing economies are slowly converging
      towards average wages in developed economies. Average wages are still considerably lower in emerging and developing economies than they are in most developed economies. When measured in purchasing power parity (PPP), the average monthly wage in the United States, for example, is more than triple that in China. While definitional and methodological differences make precise comparison of wage levels across countries difficult, the average wage in developed economies is estimated at approximately US$ (PPP) 3,000, as compared to an average wage in emerging and developing economies of about US$ (PPP) 1,000. The estimated world average monthly wage is about US$ (PPP) 1,600. However, the gap in real wages between developed and emerging economies has narrowed between 2000 and 2012, based on strong wage growth in the latter, while in many developed countries wages stagnated or contracted.”

      So we could easily see the converging trends continue….

    • I think it was Dave S who commented several weeks ago about globalisation being a lie. He said (if my memory serves) we were supposed to have exported all our low paid jobs to the Far East and that we should now have a highly educated and highly paid workforce working in all sorts of service and consultancy jobs.

      Of course it hasn’t happened. A balance between capital and labour no longer exists. The scales have been tipped heavily towards capital. I don’t see labour gaining weight for years; decades even!

  6. Hi Shaun
    Just caught up with another excellent weekly set of blogs, was moving house from Haute-Savoie to Tarn.
    Stephen Boyd ( if he is who I think he is) is an excellent analytical economist.
    You are correct in emphasising the fact that there is still a large differential in wages paid for similar , transferable jobs between ‘western’ and ‘developing nations. It won’t close completely but will continue to narrow, a continuing inexorable downward pressure on western ‘middle-class’ living standards.
    I think you will notice some desperate ‘sellers’ around Battersea?

    • Hi JW

      Thank you and I hope that you move went well. As to Battersea the boom ended a few months ago and the market turned down. I think that it has been complicated by the new developments at Battersea Power Station which is likely to have diverted some buyers. Also it feels like every scrap of spare land in Battersea is being built on and I am told that there is so much building going on in Nine Elms that it feels dark!

      So I guess all that supply was always going to affect prices..

      On a more mudane level the past building has affected traffic levels and at times the area now edges towards gridlock.

  7. Shaun,
    Total lack of media comment on UK wages on ILO graph being lowest – even than Italy & Spain (bigger black economies?).
    UK zero hours contracts (akin to mini jobs in Germany, temp contracts in France?) being widely adopted as competitors gain advantage of lower Employer NI charges (Sports Direct etc).
    My thoughts on remedies include forcing companies to declare employee numbers on zero contracts -allowing customer reaction. If Employer NI contribution based on min 25hrs for zero contracts would this lead to switch to self employment with all its current problems yet to surface?

  8. My concern is pension auto-enrolment is gathering pace and has a very high take-up due to the obligation being to the employee to actively opt out. By 2018 all employers employment costs will have risen by 3%, and employees will see their net wages reduced by 5% (their contribution). The resulting diversion of 8% of total wages into a pension product investing in the financial markets until at least age 55 is going to negate any improvement in the economy. More likely the employees 5% will be absorbed as an (inflationary) employment cost by the employer, baking in an 8% increase in labour costs with no commensurate increase in employees disposable income.
    Perhaps we will see the dividends paid out reduce by 8% of the very quoted companies in which the UK plc employees pensions have been invested!

    • There is an alternative view that the employees will be left to fund the 5% from their own pay with no compensatory pay rise from the employer (very likely in my view), whilst the steadily increasing pension contributions flowing into financial assets begin inflating said assets even higher, thereby creating a bubble with dividends failing to keep pace with the capital appreciation caused by such monetary flows and P/E ratios guidelines are re-written.

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