The UK should welcome rising wages,employment and productivity as well as falling unemployment

Today is the day of the month when we find out if the unreliable boyfriend Mark Carney is about to undergo another U-Turn as we receive the latest unemployment and wage growth data. Whilst theoretically he is targeting an annual rate of inflation of 2% per annum we know that the major number right now is wage growth, or to be more specific wage growth minus productivity growth. There will be an opportunity for him to do so at 5 pm should he feel it necessary when he speaks at the Open Markets Forum at the Bank of England. This is an interesting move which overall I welcome and is being presented as in increase in transparency although care is needed as the reduction in MPC (Monetary Policy Committee) meetings from 12 to 8 comes under the same banner. That reminds me of the brilliant coverage of the campaign for more freedom of information on Yes Minister all those years ago.

Sir Humphrey: How are things at the Campaign for the Freedom of Information, by the way?

Sir Arnold: Sorry, I can’t talk about that.

The Vampire Squid

Yesterday this announcement from the Minneapolis Federal Reserve.

The Federal Reserve Bank of Minneapolis announced today that Neel Kashkari has been appointed its 13th president and chief executive officer, effective Jan. 1, 2016.

Apart from the fact that he ended up running the TARP program this was of note.

Before joining the Treasury Department, Kashkari was a vice president at Goldman Sachs in San Francisco.

That now makes 4 Goldman Sachs alumni on the US Federal Reserve board which reminded me of the famous quote by Matt Taibi in Rolling Stone magazine.

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

I pointed out this in the subject on Twitter yesterday.

When there are 9 Goldman Sachs alumni at the US Federal Reserve that will be like the Nazgul in Lord of the Rings!

Perhaps in the name of transparency Mario Draghi (ex-Goldman Sachs) will tell us more about this in his 12pm Open Market Forum speech or perhaps he will leave it to Mark Carney (ex-Goldman Sachs) in either of his two speeches. Although Mark Carney has already said something to warm the cockles of his old employers heart, if it has one.

They are essential not least because the size of the UK-based market-based financial system could increase from six to nearly 15 times UK GDP by 2050.

The UK house price boom

Sir Jon Cunliffe who may be the person at the MPC least heard of gave a speech yesterday which was on macroprudential policy. Readers will know I am not a fan and it was interesting to note that Sir Jon defined it thus.

I do not think that the role of the macroprudential authority should be to control asset prices including house prices.

But tucked away in the speech it was kind of Sir Jon to implicitly confirm one of my themes.

But over the past three years, as banks’ funding costs have reduced and as competition in the mortgage market has intensified, on average mortgage interest rates have fallen by 2 percentage points.

Regular readers will be well aware that this fits nicely with the beginning of the Funding for (Mortgage) Lending Scheme which began in July 2012. It is odd that Sir Jon fails to point this out as he appears to remember it later.

Indeed, the lift off of the economy around the middle of 2013 was, I think, due in part to the easing of credit conditions as a result of the Funding for Lending Scheme.

Ah sorry it is only for mentioning where he can take some credit, go it! Meanwhile as our valiant macroprudential knight heads off to battle something (we are not quite sure what) on our behalf, he did hint at another problem on his watch.

The stock of mortgage lending for buy to let has increased from £65bn to £200bn over the last decade.  And it is growing quickly now, by around 9% a year.  Buy to let now represents 16% of the overall mortgage stock and accounted for 80% of net lending over the past year.

The UK labour market

There was a slew of good news this morning so let us enjoy it.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 73.7%, the highest since comparable records began in 1971.

Nice start but let’s confirm it.

There were 22.80 million people working full-time, 273,000 more than for a year earlier. There were 8.42 million people working part-time, 146,000 more than for a year earlier.

Okay good and now unemployment?

The unemployment rate fell to 5.3%, lower than for April to June 2015 (5.6%) and for a year earlier (6.0%). It has not been lower since March to May 2008. The unemployment rate is the proportion of the labour force (those in work plus those unemployed) who were unemployed……There were 1.75 million unemployed people (people not in work but seeking and available to work), 103,000 fewer than for April to June 2015 and 210,000 fewer than for a year earlier.

So as we have seen for a while now there is progress on the quantity numbers which is welcome. Also there is a number for the September unemployment rate and it was 5.2% which provides a hopeful hint for future numbers.

What about wages?

Here we continue to see the new welcome trend of growth.

Comparing July to September 2015 with a year earlier, pay for employees in Great Britain increased by 3.0% including bonuses and by 2.5% excluding bonuses.

So good news which flows directly into the real wage numbers for those who believe the official CPI inflation numbers. Even for those of us who retain a liking for higher measures of inflation such as the various Retail Price Index numbers have real wage growth of 2% or more in the case of RPIJ.

This may even be affordable because there was a strong hint of productivity improvement as we know that output was up and hours worked down.

In Quarter 3 (July to September) 2015, GDP grew by 0.5%. …….. Total weekly hours worked fell 0.1% in Quarter 3 (July to September) compared with Quarter 2 (April to June)

If you look at an annual comparison then there is a hint of a productivity increase of 1.6% which would cover much of the real wages increase and look like something out of Goldilocks with the porridge being just right.


The unreliable boyfriend Mark Carney faces an issue of labour market numbers that could allow him to return to promising a UK Bank Rate rise “sooner rather than later” or “around the turn of the year”. Having U-Turned on the subject less than a week ago even he may think that it is too soon although (h/t @moved_average ) the idea may have wheels.

If we wish to be not quite so upbeat there were some issues with today’s labour market report. If we look at wages then growth fell to 2% in September alone which has its worries although it is out of line with other estimates. There are also the perennial issues of the self-employed being excluded and perhaps why more people are working fewer hours which is the flip-side of better productivity.

Also next time the Bank of England tells us that interest-rates are not a weapon for dealing with the housing market (Nemat Shafik for example) please remember the Cunliffe speech as apparently falling mortgage rates boosted it. Is that a one way street?


20 thoughts on “The UK should welcome rising wages,employment and productivity as well as falling unemployment

  1. It’s good news to see real wages moving up,however,let’s look underneath the surface a little and consider some of the reasons above and beyond the manipulated stat that is CPI.

    1) Fiscal deficit-no doubt a source of employment to many
    2) ZIRP,HTB1/2,FLS+ various other banking subsidies-no doubt a major source of employment/wage growth.Public sector wage growth has been somewhat restrained by comparison.

    I keep getting told that things are getting better.Outside of London/SE,I’m just not seeing it.

    • Hi Dutch and hi Shaun.

      I wish I could share your enthusiasm, Shaun but I can’t shake off the feeling that the relatively low unemployment figure of 1.75 million is acting as cover for a deeper problem. The current ONS figures for economically-inactive men and women aged 16-64 are 3.40 million and 5.57 million respectively.

      Of course, the low baseline figure is politically expedient in much the same way as judging our economic status in terms of a simple and most likely inaccurate GDP figure.

        • One of the problems Jim is that we don’t actively record underemployment in the way the BLS does in the USA wqith their U6 figure.(Not that the BLS figures are anything to crow about if you read Mish Shedlock).

          Another problem is that people out of work but with a partner in work,earning above the threshold,are not incentivized to sign on JSA as they’ll receive nothing after their first 6 month.

          I think participation ratios as you allude,offer a better but still incomplete, picture.

          Didn’t the unreliable boyfriend have an unemployment figure that would trigger a rate rise once upon a time?

          • Hi Dutch

            I did make that point earlier on Twitter in the hope that it might be raised at today’s Bank of England Open Forum.

            “Dear Mark Carney How does an unemployment rate of 5.3% go with your original Forward Guidance threshold of 7% please?”

            But as far as I know it was not asked.

  2. Interesting piece from Moneyweek re tax credits and employment.
    ‘A family, again with one parent working for 24 hours a week on £7 an hour, and the other parent not working at all, would earn the following:
    With two kids: Pay is £8,700 (take-home pay is £8,623 after NI). Total tax credits £9,114.06. Council tax help £432.91. Housing benefit £6,472.35. Child benefit £1,788.80. So total benefits (£17,813.12 per year/ £342.52 a week) plus actual earned money comes to a net £26,436.12. If earned by a single earner, non-benefit recipient, this would equate to a pre-tax income of about £34,500.

    Let’s take a different scenario. A two-parent family, with each working 35 hours a week, on £7 an hour.
    With two kids: Joint gross pay is £25,382, which gives net take-home pay of £23,434. Total tax credits £3,023.82. No council tax help but housing benefit is £795.98. Child benefit £1,788.80. So total benefits (£5,608.60 per year/ £107.86 a week) plus actual earned money comes to net pay of £29,042.60. This equates to a pre-tax household income of around £33,600, assuming that each partner gets paid the same (roughly £16,800 each).’

  3. Hi Shaun, on the issue of interest rates not being increased to control house prices, you and I discussed back on the 7th, As I said then:

    “….people could borrow as much as the banks would lend them resulting in loans of 5x and 6x earnings in some cases and leaving such mortgagees very vulnerable to the slightest increase in interest rates. This is why the BOE hesitates to increase rate ”
    Nothing to do with lack of effectiveness on house price manipulation, rather, far too effective for those mortgaged to the hilt with a risk of default in the event of relatively small rate increases, followed by repossession, followed by housing market crash, followed by economic crash, followed by soaring fiscal deficits as unemployment surges and those made homeless are rehoused at the Government’s expense. Unless the government decides to stop paying social security, Oh, but then that would amount to a money supply shrinkage/velocity fall and then the UK could become Greece#2.

    • ah Noo2

      banks are in trouble still !

      raise the rates and they are more bust than usual

      Mortgages tank and that drags them under

      and rest of the economy !!


    • Hi Noo2. Down here in NZ if the average kiwi wants to buy an average house in Auckland then a loan of around 9 or 10 times their income will be needed- assuming they can find the required deposit. The RBNZ attempts bubble control using loan-to-value ratios (typically 80%). Scary eh!

      • Hi Eric – yes it is!! Are the loan to value ratios calculated on buildings only or buildings and land?

        In the UK that makes a BIG difference as the land usually comprises 20% – 25% of the price. If buildings only was the amount loaned against that would leave the purchaser looking for other ways to stump up the extra 20% which would no doubt penalise those without rich parents to provide cash handouts.

        Are they doing anything about the other half of MacroPru which is limiting loan to income ratios? Unfortunately, this would again penalise those without rich parents but I can’t think of another way to control house prices outside of direct state intervention on a rationing basis which I would prefer to avoid given that the UK establishment’s record on anything it touches is less than very poor.

    • Hi Noo2

      Ah I understand you more clearly now. Actually that was to some extent true before the credit crunch as there were more than a few people overleveraged back then. I am not sure he meant it to be used in this way but Jon Cunliffe referred to it in his speech yesterday.

      “The long build-up of credit in the UK economy between 2000-2007 – from 125% to 170% of GDP – does not seem to have much affected economic growth which was little more than its long-run average.”

      We are in a type of trap now and a version of a liquidity trap which was not in the literature. Before the now (in)famous lines from Hotel California there is this bit.

      “I had to find the passage back
      To the place I was before”

      After 8 years we can say that it has proved by no means easy….

  4. Hello Shaun

    I give a tacit welcome to good news – but i worry that , you know , how long has it been? This emergency ?

    Still aint over ’till the fat lady sings

    seems she’s still in the snug drinking beer !


    ( hic!!)

    • Hi Forbin

      I take your point as this is not “normal” as after all we would be running a budget surplus if it was! More seriously we have plenty of problems but today I just wanted to highlight that we are in one of the better phases of the credit crunch. If only I thought that we have reached “escape velocity”. Actually Mark Carney has been a bit quiet on that front too hasn’t he?

      Meanwhile Brent Crude has been slip sliding away recently and is below US $46 tonight, so when it inevitably gets colder the snug might be able to heat itself cheaply

  5. I hope, Shaun, that in the interests of productivity and cost control the emoluments of the members of the MPC have been reduced by at least one third – if not more – after the one third reduction in their work-load?

    • Good idea Peter, but I wouldn’t hold your breath.I
      think they should be paid on a performance related
      basis with a statutory long weekend anywhere in

    • Hi Peter

      For the internal members of the MPC then remuneration last year varied between £201k for Shafik and £344k for Cunliffe. Oddly Andy Haldane is missing and for the others.

      “the rate for the MPC external members was £135,751p.a. “

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