The UK economy has Wages, Real Wages,Productivity and Employment in a sweet spot

The UK economy is now approaching the mature stage of its current boom. Along the way we have had quite a few things to welcome as the economic situation in terms of quantity measurements turned for the better. If we look at unemployment it rose to a peak of 8.4% in late 2011 but was we moved into 2012 began its long and welcome decline to 5.4%. It took economic growth or GDP figures around another year to move towards such a positive trend leading to debate over which indicator was the better guide. Also we need to remember that it took GDP growth per capita much longer to move into positive territory and only did so early this year.

If we look at it like that then the major gains in employment and declines in unemployment have already been seen. Hopefully we can still manage some improvements especially in the area of “underemployment” which is not well measured in the UK statistics. This months official Economic Review puts it like this.

Unemployment is close to its long-term, pre-downturn average (they define this as 5.1% in the period 2002-07)

However at this stage of the game the emphasis moves onto the price measure or wages which should now see sustained improvements. This is reinforced by the low level of inflation which depending on your measure is in a range between -0.2% and 0.8% right now which means that the Bank of England is looking directly at the wages numbers for a sign of a turn in the inflation cycle. This of course piles even more pressure on the data.

A Longer Term Perspective

In 2015 UK wages have emerged into the sunlight blinking after a long cold almost nuclear winter but Monday’s analysis of the Living Wage again reminded us of the damage it did and the emphasis is mine.

In real terms (after adjusting for inflation), the London Living Wage rose by 3% between 2008 and 2014 while median hourly pay for employees aged 18 and over in London fell by 10% in real terms.

Also in terms of the Living Wage there was a consequence from this.

Between April 2008 and April 2010, the proportion of jobs paid less than the living wage in London was stable at around 13%, but it had risen to 19% by April 2014.

The numbers so far are London centric simply because the data was collected there first so let me widen it out with what we have.

For the rest of the UK, where only 3 years of estimates are available, the proportion of employee jobs paid less than the living wage rose from 21% in April 2012 to 23% in April 2014.

You are not going to be surprised by the fact that the two sectors which most frequently crop up as payers of less than the minimum wage are care and cleaning. Regular readers will also not be surprised to see it impacting on the younger age group but they may be surprised at the size of the numbers.

In 2014, 48% of employee jobs in the 18 to 24 age group in London and 58% of jobs in this age group in the rest of the UK were paid less than the living wage.

Today’s data

Wages

Here we saw more good news on this front.

total pay for employees in Great Britain increased by 3.0%…..average total pay (including bonuses) for employees in Great Britain was £494 per week before tax and other deductions from pay.

As the official measure of inflation is so low we see that virtually all of this growth is in real terms.

total pay for employees in Great Britain increased by 2.9%

If you use the Retail Price Index then real wage growth falls to more like 2% with RPIJ being pretty much in the middle of the two headline measures.

If we move to the latest month which is August we saw total pay rise at an annual rate of 3.1% led by construction at 6.4%. For once this tallies with this morning’s report from the Bank of England Agents.

construction firms were much more likely to plan to increase pay across the board, hire foreign labour and even turn some work away, than was the average survey respondent,

This is problematic only in that the official numbers tell us that the construction sector is shrinking. I have suggested in the past that those numbers are (sadly) not worth the paper they are written on and see no reason to change my view.

Productivity

As wages have improved so has productivity as we wonder which of these is the chicken and which is the egg.

Output per hour worked grew by 0.9% in Q2 2015

Should this remain true then the UK wages/productivity situation looks as though it is in something of a sweet spot certainly when compared to recent years. Whilst I am not a fan of extrapolating pre credit crunch trends there is a nugget of truth underlying the quote below.

Had productivity continued to grow at this rate, output per hour in Q2 2015 would be almost 15 percentage points higher than the recent estimate.

Employment and Unemployment

In contrast to the fears of us approaching the definition of “full employment” provided by the ONS above we saw good numbers this morning on this front too.

The employment rate has been generally increasing since early 2012 and for the latest time period, June to August 2015, it reached a record high of 73.6%.

This has been driven by more employment for women which in terms of sexual equality is welcome although those women working on to the new later pension ages may have a different perspective on that!

As to unemployment we saw a further fall.

The unemployment rate for those aged 16 and over for June to August 2015 was 5.4%. This was:down from 5.6% for March to May 2015 and down from 6.0% for a year earlier.

However we do get a counterpoint as this is nowhere near a record.

the lowest unemployment rate recorded since comparable records began in 1971 was 3.4% in late 1973 to early 1974

Comment

It is nice to be able for once to review a UK labour market where everything seems to be going in the right direction at once. In spite of us reaching record levels for employment and approaching the 21st century definition of full employment we have seen improvements in both measures. Added to this we are seeing solid wage and thereby real wage growth numbers which so far are being backed up by productivity improvements. In Goldilocks terms the porridge is just right at the moment at least according to the official statistics. Oh and speaking of gold it has rallied up to recent highs and its 200 day moving average so let us have some John Stewart.

There’s people out there turning music into gold

We even hear the Gold Dust Woman herself on backing vocals as we hope that his friend has seen a pay rise in the meantime.

Ah, my buddy Jim Bass, he’s a-working pumping gas,
And he makes two-fifty for an hour.
He’s got rhythm in his hands as he’s tapping on the cans,
Sings rock and roll in the shower.

So if we skip the worrying hints of a downturn in the UK economy we can enjoy some late autumn sun albeit with a chilly wind. For the UK construction data series though it needs to go back to its beginning or perhaps Genesis.

Tell me why, this is a land of confusion.

Speaking of confusion it was only yesterday that we were seeing “Deflation” appear in the media again. With employment rising, unemployment falling and wages up by 3%, how does that work exactly?

Advertisements

16 thoughts on “The UK economy has Wages, Real Wages,Productivity and Employment in a sweet spot

  1. Shaun,
    I do not believe this optimistic outlook, the gerrymandering of HMG statistics continues – the proof of the pudding will be tax take early next year. I think opt in pension contributions start this month so less spare cash around for employees & employers.
    The canary in the mine is steel, baltic dry etc.

    • As you probably know Chris the Baltic is trending lower.

      If you look at the 5 year trend it is lower too but this is the “new normal”. The West becomes satiated so that leaves imports into the East where they don’t yet have the income levels to afford western products in great volumes (nor do I expect they will for years to come) although they can afford their own products and as the countries try to operate more balanced economies with a “balanced” balance of payments so the net exporters will gradually export less whilst net importers will import less but won’t start exporting because as a a general rule the net importers have lost too much manufacturing capacity and it would cost too much and take too long to rebuild it.

      I believe we are seeing a structural change here which is not necessarily “worse” (although it can be if mismanaged) but is simply “different”, whether that “different” is worse or better depends on your perspective (notwithstanding the obvious changes that could worsen life like prices increasing faster than wages and spiralling unemployment/part time employment etc) and how well the change is managed.

  2. My point echoes ChrisL’s, “If only the statistics were believable.”

    The way Annuity values have performed, plus the possibility of more QE/lower interest rates, makes opt-in tantamount to fraud.
    It’s basically privatisation of the bank bailout, as workers’ hard-earned goes up in the smoke of management fees..

    • Couldn’t agree more,, glad I’m self employed only I’d take that argument further – it’s bail out of the Government cos what are the main beneficiaries of pension contributions paid to pension funds? Why gilts of course! It’s back door QE.

  3. Hi Shaun

    You mention the increase in average pay but are there figures for the median which I would think is a far more useful statistic as the average could be skewed by a few very high bonus payments or wage awards? Would this show such a rosy result?

    Furthermore you have said that nominal wages should arguably be set against RPI which would show a much less favourable real increase.

    Also, as you have said, this probably a sweet spot and unemployment is a lagging indicator so there is no inconsistency between low unemployment and a rapidly slowing economy.

    One has to hope that the tunnel which the economy has been in for some years is coming to an end but somehow I doubt it.

    • The indicators I follow (M1 growth and the Uk housing market) show a slight pick up or levelling of growth for 2016.

      I couldn’t comment on whether the UK is coming out of it’s structural tunnel which I have felt it’s been in since the early 80’s, but then I see that most people have UPVC double glazing and central heating along with cavityy wall insulation which they didn’t 30 odd years ago and there’s the number of cars on the road nowadays (not all “progress” is good)!! so maybe I was wrong?

      On your point about median wages I would prefer the mode to see what the level is for most people.

    • Hi Bob J

      The median question is a good one which is illustrated by some of the discussions on median inflation that have happened at the Royal Statistical Society which suggest it is at the 7th decile. I would expect that sort of effect on the wages numbers but cannot answer with any great precision. Also the numbers are distorted by the fact that if I remember rightly companies with less than 2o employees are excluded (which is how the self-employed do not appear).
      There is extra analysis below but it answers different questions.

      http://www.ons.gov.uk/ons/dcp171776_417399.pdf

      Oh and sadly the more mature features of a boom do tend to coincide with it toppling over.

  4. ” It is nice to be able for once to review a UK labour market where everything seems to be going in the right direction at once …”

    LoL !! oh lordy me , Shaun , prepping for Pestons job at the Beeb ?

    I can reduce unemployment to zero over night !

    put everyone on zero hours contract and give them 1 hour a week work ( so they can “feel” employed )

    See ?

    Millions still unemployed , millions more on under-employment and/or NOT COUNTED , over 55 ? on a Social employment training or other HMG scheme ? and so on

    theres 5 million more people here since 2000 , of course the employed figure is going to be higher ! duh!

    As Chris said , tax take anyone ?

    and one last thing , if we’re doing so well after the 2008 crash and the hidden inflation, so tell me , how long will it take before I get back to the same standard of living I had then ? 33% to make up Shaun , not had anything like that pay increase

    Raising the lower tax threshold helped but cheaper petrol ( yah ,how did that work when it went up around here from 1.09 to 1.12 per ltr ? ) going to save the day?

    And we’re on emergency interest rates you know ……..

    ( Baltic Dry , hehe )

    Forbin

    • Hi Forbin

      No thanks as I would last about a day. Or the time it would take me to write a proper blog and present a televised report on UK inflation measurement and its problems!

      I like to present a balance and the UK labour market presented that according to the official figures. So I wrote a story using those figures and it looks good. Regular readers will be aware that the average earnings figures exclude the self-employed and that Jim Hacker was cracking jokes about the reliability of the unemployment numbers over 30 years ago. There have been plenty of blogs from me on such issues which are ongoing.

      Meanwhile there are developments elsewhere such as in China which are not so optimistic, there will be plenty of other days for them. On that front the Harpex shipping index is also falling quite fast…….

    • Hi benefitzg and no problem

      Whilst I write plenty of critiques of official data and numbers I accept them until proven wrong. The labour market numbers today qualify on that score and as I have replied to Forbin whilst some things are bad not everything is.

      However I am digging into the labour market numbers more and more so we will see as time passes!

  5. The first optimistic report I have ever read from you in about 3 years of reading you (and I generally agree with it as I have generally disagreed with a lot of your negative analysis in the past), well done for providing balance.

    It’s very easy to give in to despondency, concentrating on the negatives and ignoring the positives. Just for “balance” as inflationary pressure is building (services and indeed the C bankers favourite – core) I struggle to see how the UK will increase interest rates without causing a hard landing, but that’s one probably for early next year.

    • Hi Noo2 and thank you

      i did an optimistic post on Spain only a week ago although I think you decided it wasn’t! Actually I have been considering the point that replying to events which get news is downwards biased so I am responding by writing some more upbeat ones, it does not mean that there is no bad news today but as you say there should be balance.

      As to anecdotal evidence it has had a better credit crunch than many others hasn’t it?

      • “As to anecdotal evidence it has had a better credit crunch than many others hasn’t it?”
        Depends who you speak to.

  6. One other thing Shaun, I agree with the other poster’s comments here re reliability of official figures preferring to rely on anecdotal and my gut which, as it happens, agrees with the official figures this time so I’m prepared to accept them, for the moment…..

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s