One of the features of the UK credit crunch era is the way that the labour market has outperformed our measures of economic growth. If one had plugged in our weak economic growth performance to a computer back then and asked it to forecast both unemployment and employment we would be in danger of it behaving like HAL-9000 in the film 2001 A Space Odyssey when it compared forecasts with reality. There are many ways of measuring this but in the period to October-December of 2014 the situation in terms of hours worked was as follows.
Total hours worked per week were 996.2 million for October to December 2014. This was: • 8.3 million (0.8%) more than for July to September 2014, • 26.3 million (2.7%) more than a year earlier, and • 80.6 million (8.8%) more than five years previously
So we see a situation where it may be aligned with economic growth over the past year to some extent but before then it was not as highlighted by the latest economic output and growth numbers for the UK.
In Q4 2014 GDP was estimated to have been 3.4% higher than the pre-economic downturn peak of Q1 2008.
The time period are not exactly the same but this has been the message of the credit crunch era where hours worked quickly began to rise again but it was quite a lag before output did too. This led to all sorts of problems for economic models which both predicted and assumed rising labour productivity as one way of squaring this particular circle is to take the view that productivity has taken a lurch downwards in excess of 10%. Another is to take the view that somewhere in all this the numbers are misfiring and misleading us. Labour market statistics have come under fire elsewhere in the world with Canada having two episodes of big issues with them in the last twelve months.
What about wages?
However the elephant in the room is the issue of price in the labour market or wages. The measures which have performed well have been quantity measurements such as hours worked,employment and unemployment whereas wages have been much weaker. The wages issue is one which has impacted on many countries around the world with the severest effect I can think of being Greece and it is no surprise therefore to see Greece in the headlines. Sadly Greece has had dreadful quantity measures too as unemployment surged. However other countries with strong quantity measures for their labour market have seen weak wage growth too and an example of this was my subject of Monday, Japan.
Before the credit crunch era the rule of thumb for the UK economy was 4.5% wages growth combined with 2.5% inflation leading to 2% real wages growth. If we stick with the 4.5% number it is revealing that in no 3 monthly average have we achieved that since the credit crunch dip. The best is 4.3% and that sticks out like a sore thumb and there are more than a few which require a decimal point to register any growth at ll.
The future is apparently bright
According to the Bank of England anyway. From last weeks Inflation Report.
And as the labour market has tightened, growth rates of wages and unit labour costs are beginning to pick up.
The combination of rising wages and falling energy and food prices will help household finances and boost the growth of real take home pay this year to its fastest rate in a decade.
Let us hope that they are for once correct and it does already seem that lower inflation in the early part of 2015 will help real wage growth.
Andy Haldane does not seem entirely convinced.
I spotted this in a speech last night in East Anglia by Bank of England by
But what is the “neutral” level of interest rates today? Secular innovation might imply a level at or above its historical average of 2-3%, in line with historical growth rates. But secular stagnation may imply a level much lower than in the past, possibly even negative.
The hopeful promises are increasingly coming with negative warnings. I do not know if this was also Andy Haldane but today’s Bank of England minutes had this for the first time.
for one member, the next change in the stance of monetary policy was roughly as likely to be a loosening as a tightening.
Also there was a collective mention of this.
Reductions in Bank Rate to below 0.5% were therefore less likely to have undesirable effects on the supply of credit to the UK economy than previously judged by the MPC.
Regular readers will be aware that I have argued for over a year now that there is a group at the Bank of England who will press for Bank Rate cuts should the economy falter in any way.
There was something of a mini-boom in UK wages at the end of 2014.
Comparing October to December 2014 with a year earlier, pay for employees in Great Britain increased by 2.1% including bonuses and by 1.7% excluding bonuses.
If we look into the monthly data we see that average weekly earnings rose to £489 per week in December which represents a 2.4% increase on a year before. This means that real wages rose by 1.9% on a year before if you use the official CPI measure of inflation and by 0.8% if you use RPI. So the best position for a while.
Perhaps not quite so cheering is that the UK wage growth was led by the UK financial sector as the category which includes it grew by 3.6% in the year to December. Deja vu anyone?
Strong employment and unemployment figures
These too showed some good news for the UK.
There were 30.90 million people in work. This was 103,000 more than for July to September 2014 and 608,000 more than for a year earlier.
There were 1.86 million unemployed people. This was 97,000 fewer than for July to September 2014 and 486,000 fewer than for a year earlier.
Let me first open with the glass (a bit more than) half full argument for the UK economy. This is that economic growth is being accompanied by falling unemployment and rising employment and now has seen an uptick in both nominal and real wages. All of this is unambiguously good news and there are plenty of other countries who qould love to be in such a situation.
However there are flies in the ointment. Firstly the improvement in real wages is still mostly a function of the fall in the oil price and that has for now ended and bounced back. Indeed in the last two weeks UK petrol and diesel prices have risen at the pump. Only by a total of around one penny each but nonetheless a rise. Secondly actual wage growth is still a long way behind what we would expect it to be in the past if we looked at the current economic situation. Perhaps it will now catch up but it is running at around half of what we would have expected. I will leave it to readers to decide whether the fact that the financial sector is leading wage rises again is a good or bad thing or a bit of both!
Also as Chris Dillow has pointed out on twitter.
Total hours worked rose 2.7% in yr to Q4, implying zero productivity growth.
He then wonders how far real wages can rise in such a scenario.
Lastly many of the numbers produced in this area are unreliable as well as inaccurate and may not stand up to the pressure placed on them. After all the wages numbers exclude the self-employed.