Today sees the opening of the World Economic Forum in Davos where the “great and the good” tell the rest of us what they think is good for us. This year the trip for attendees will be more expensive due to the surge in the Swiss Franc and of course those costs are added to a place where I suspect there is little sign of disinflation! On that subject Reuters have already offered their view.
I gave my thoughts on at least part of the inequality debate on Monday but that subject is linked to today’s subject which after a hard winter will become a good news story at least for current numbers in the UK after what has been the equivalent of a nuclear winter. That is the subject of wage growth and real wage (after allowing for inflation) growth in particular.
How real wages fell
The December Economic Review gave us an indication of the scale of the fall in the UK as shown below.
between 2008 and 2014, real weekly earnings for the average employee fell by 10.3%. This fall was larger for low-skilled occupations4 (down 13.5% over the same period) than for high-skilled occupations (11.1%). The trend towards part-time jobs making up a larger portion of total jobs has been more prevalent in low- and medium-skilled jobs than high-skilled, which may be one factor behind the relatively greater fall in real wages for the low- and medium-skilled.
So they feel that there has been both a substantial fall (10.3% on average) and also a trend towards the lower paid being the most affected in percentage terms. The way that this played out meant that there was also a divergent effect between age groups on average.
Between 2008 and 2014, real earnings fell most (by around 15%) for younger age groups, aged 29 or below (Figure 9). In contrast, real earnings for those aged over 60 fell by 7.2%.
One area where some may wish to dispute these numbers is via the inflation index used. If we use our old inflation target of RPIX (Retail Price Inflation less mortgage interest payments) then around 5% can be added to the numbers above. Another impact from the ill-fated 2002 changes to the UK’s inflation measurement system in my view.
How did I get here?
These leads me to something which many have tried to hide in the real wage experience which is the impact of inflation. A large number of economists tied themselves into a spider’s web by proclaiming the policies of the Bank of England as outright expansionary as the value of the pound fell interest-rates were cut and £375 billion of QE was added to the mix. They then overlooked the fact that the subsequent rise in consumer inflation to above 5% in 2011 saw a squeeze put on both UK workers and consumers which was contractionary for the UK economy. So they put the results of their economic models over reality one more time.
My argument has been that the real wage falls subtracted substantially from both aggregate demand and economic output in the UK and that a major player was the above target inflation the Bank of England choose to overlook.
If we come to the current improvement in real wages then much of it is a saga of inflation again. This time we are getting a beneficial effect from the falls in UK consumer inflation which were kicked off by the rise in the value of the UK Pound £ which began in March 2013 and has been turbo-charged by the fall in both oil and commodity prices which gathered pace in the summer of 2014. Let us remind ourselves of where the official measure of UK inflation now is.
The Consumer Prices Index (CPI) grew by 0.5% in the year to December 2014, down from 1.0% in November.
So less than a tenth of what it surged too back in the dark days of the autumn of 2011.
These opened with some good news on wage growth.
Comparing September to November 2014 with a year earlier, pay for employees in Great Britain increased by 1.7% including bonuses and by 1.8% excluding bonuses.
If we look at total wages then we have been seeing an improving trend since the nadir of June when the three-monthly annual rate dipped to a chilly -0.1%. The rate nudged back into the positive and has then advanced.
The only fly in the ointment is that compared to the past if we put the UK’s current economic situation into context we would be expecting a number more than double this.
What about real wages?
We do get a wage growth number for November which was that they were growing at an annual rate of 1.8%. So as CPI inflation was 1% in that month we can conclude that we saw real wage growth of 0.8%. A bit thin in some ways but by far the best we have seen for some time.
The position does not look quite so good however if we use the Retail Price Index which rose at an annual rate of 1.4% in November meaning that real wage growth was a much more measly 0.4%.
However let me welcome the real wage growth with the words of the Carpenters.
We’ve only just begun to live,
White lace and promises
A kiss for luck and we’re on our way.
We’ve just begun.
Before the rising sun we fly,
So many roads to choose
We start out walking and learn to run.
And yes, We’ve just begun.
Employment and Unemployment
There was good news on these fronts too in today’s dataset.
Comparing September to November 2014 with a year earlier, there were 512,000 more people in work.
There were 1.91 million unemployed people. This was 58,000 fewer than for June to August 2014, the smallest quarterly fall since July to September 2013. Comparing September to November 2014 with a year earlier, there were 418,000 fewer unemployed people.
The unemployment rate was 5.8%, lower than for June to August 2014 (6.0%) and lower than for a year earlier (7.1%).
Thus the welcome news is that employment continues to rise and unemployment continues to fall. The only weakness is that the rate of change of both has dipped recently.
I wanted to highlight today’s numbers as they show that there is going to be a period where the numbers for real wages improve. Whilst nominal wage growth remains weak in historical terms all measures of consumer inflation are being pushed lower by the large oil price fall. Why even domestic fuel bills are edging lower albeit by measly amounts from grudging suppliers. Thus real wage growth will occur for a time anyway so let us raise a cheer for it. However we have a long mountain to climb and some of the changes may not be permanent but at least we have a hint of spring-like conditions Indeed if the Bank of England agents are correct maybe some springtime sun is on its way.
though there were signs of increasing wage pressures
in some subsectors with skills shortages.
Finally how that in the credit crunch era is good news where preceding it then it was bad news isn’t it? How times change! One continuing piece of good news is that the quantity numbers for the UK labour market remain good as we only have to look across the channel to the Euro area to see 11.5% unemployment. Although the numbers are not on exactly the same basis there is a message there.
The Nazgul are back to full strength!
The Bank of England is back to nine again as the latest Minutes show.
Regarding Bank Rate, the Committee voted unanimously in favour of the proposition.
Regarding the stock of purchased assets, the Committee voted unanimously in favour of the
Or as Tolkein put it
Nine he gave to Mortal Men, proud and great, and so ensnared them. Long ago they fell under the domination of the One, and they became Ringwraiths, shadows under his great Shadow, his most terrible servants.
Two of them are of course now women.
Thank you all for yesterday’s kind words which were appreciated. I will also be on the Investment Perpsectives show with Ed Mitchell on Share Radio today after the 1pm news.