Employment growth has come at the expense of wages growth

It is the time of the month for the most important economic series these days which is the wage growth numbers or as it is expressed in the UK the monthly average earnings series. This time around we arrive here with two rather depressing trends on our minds. Firstly we have seen a fading and then a flatlining of quarterly growth in 2016 as the numbers including bonuses have gone 2%,1.9%,2.1% and then 1.8% in April. That is a far cry from the heady days of last summer when the recent peak of 3.3% was reported. Also we have the associated issue that the UK economy has been slowing with the official number of 0.4% quarterly growth being added to by this from the NIESR ( National Institute for Economic and Social Research).

Our monthly estimates of GDP suggest that output grew by 0.3 per cent in the three months ending in April 2016.

Indeed the business surveys from Markit suggest a further fading to 0.1% quarterly growth.

Adding to the downbeat mood music was this from the last set of data.

There were 1.70 million unemployed people (people not in work but seeking and available to work), 21,000 more than for September to November 2015.

We had got used to three years of better numbers on this front as we hope that this is a blip like the one seen in 2015. However the rate of decline in the unemployment numbers had been fading. So sadly as the news is not good all of our numbers seem to be saying the same thing at once.

The Bank of England

We know that official forecasts in this area have a shocking track record mostly because they have clung to output gap theory like a man clinging to a raft going over a waterfall. For example the OBR (Office for Budget Responsibility) expected UK wage growth to be heading for 5% right now and I am being kind as if they had know how much employment would growth the number would likely have been higher. Only last May in its Inflation Report the Bank of England told us this.

Wage growth and unit labour cost growth are therefore expected to rise……wage growth is assumed to rise, averaging 4% from mid-2016.

Oh dear at least the OBR has the excuse it was looking 5/6 years ahead but the evidence so far is that the Bank of England was completely wrong only 12 months ago as wonder yet again what use its forecasts are?! Please do not misunderstand me arguing over small amounts is silly but yet again we see a fundamental issue where up is confused with down.

The CIPD

The Chartered Institute for Personnel Development or CIPD weighed in on this issue on Monday.

The latest report shows that basic pay expectations remain subdued with no sign of any wage growth. The median basic pay award expected from March 2016 to March 2017 is an increase of 1.7%, slightly below the median award of 2% made in the previous 12 months.

Their language is a bit misleading as we have wage growth but there is no sign in their view of any acceleration in it. We are also seeing some unintended consequences of the National Living Wage.

Just over a fifth of employers who won’t be able to award a pay increase of 2% or more say this is due to the introduction of the National Living Wage (NLW).

So as wells as having a 1970s style effect of pay differentials in some places it has cut wage awards elsewhere. How very credit crunch era. Oh and just in case we missed the message the CIPD has another go.

Overall, the results suggest that there is little sign of wages picking up in the near term

Today’s Data

Let me open with the good news.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.2%, the highest since comparable records began in 1971.

Something has changed for the better here although we are likely to see the price of that in a moment. But it did mean that unemployment was ” little changed” this time around.

The news then is not quite so good.

Total hours worked per week were 1.02 billion for January to March 2016. This was slightly lower (0.4 million) than for October to December 2015.

Also the wage growth pattern remained pretty similar to what we had seen previously in 2016.

Between January to March 2015 and January to March 2016, in nominal terms, total pay increased by 2.0%

So we have a “same as it ever was” theme at play here which is good ( we have some growth) and bad ( one would have hoped it would be higher at this part of the economic cycle.

Let me throw something in here. Rather than higher employment leading to higher rates of growth in wages we seem to be seeing higher employment capping wage growth. Thus conventional economic theory (Output Gap) is not only wrong it is pointing in the wrong direction like a weather vane pointing North when it should be South. If we wait a little while no doubt the various Ivory Towers will be telling us that North is indeed South. But for me this section of Economics 101 should be singing along to Ellie Golding.

You know this is your biggest mistake
What a waste, what a waste, what a waste

Real Wages

These followed the same trend.

Comparing the 3 months to March 2016 with the same period in 2015, real AWE (total pay) grew by 1.7 per cent, the same value as seen in the 3 months to February.

So it is good that we are in a better phase for them but the truth is that this is much more due to low inflation than better wage growth. Also we see yet another embarrassment for the Bank of England and the UK economics establishment as if they got the 2% inflation rate they want real wage growth would be negative unless of course the wages fairy turns up in real life like he/she does in their Ivory Tower models.

Of course as we stand the real wage growth thins out a fair bit if we use the RPI (Retail Price Index) measure of inflation which has been around 1% higher than the official measure.

Comment

There is much to consider here and it highlights how the credit crunch marked an economic change.

During the 2008 to 2009 economic downturn, Gross Domestic Product (GDP) fell by 6.1% and did not return to its pre-downturn levels until mid-2013. The number of people employed also fell following the downturn but to a lesser extent, by just 2.3%.

Quite a difference which shrinks if we use hours worked but remains as we mull how this also has changed the relationship between not only employment and wage growth but also economic growth and wage growth. A new era of relatively slow wage growth has emerged and it is probably also interrelated with the net migration of people to the UK. As labour became more plentiful it offset the higher demand and the price (wages) was not influenced as much as in the past.

Also we are far from alone in this as @fwred of Bank Pictet points out and by EA he means Euro Area.

Dovish alert! EA negotiated wages slowed to a record low of 1.40% in Q1 (ECB series). 2nd round effects?

That of course coincides with the best set of GDP figures the Euro area has seen in a while with 0.5% quarterly growth recorded. Also should you wish to go travelling in a land down under well things are not so hot in the South China Territories either.

The seasonally adjusted Wage Price Index (WPI) rose 0.4 per cent in the March quarter 2016, according to figures released today by the Australian Bureau of Statistics (ABS).

Through the year to March quarter 2016 the WPI rose 2.1 per cent, the lowest rate since the series started in September quarter 1998.

Have our attempts to solve the employment problem created a wages one?

 

 

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15 thoughts on “Employment growth has come at the expense of wages growth

  1. Hello Sahun

    “The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.2%”

    frankly thats cobblers if you are , and we are , expected to work until 67/68/69 or even 70

    is it still the case that over 55 are not counted as on benefits ?

    Forbin

    • Hi Forbin

      You ask a good question there as the rule of counting until state retirement at 65 is less appropriate than it was. The over 65s count in the hours worked numbers and total employment but not in the employment rate. That needs to be rethought.

      By not being counted as unemployed do you mean those over the state retirement age of 65 ?

  2. oh and no mention of exchanging well paid jobs for part time low payed ones

    sure more people have jobs – crap ones

    might reveal why theres a productivity gap

    Still if they manage to save anything thats being toasted as well

    question : considering how much housing has gone up – how many part time low paid jobs do I need to do to get a house ?

    Forbin

    • From what I’ve seen
      1) people losing well paid jobs and getting a crap one.Tick
      2) public sector workers getting 1% pay rise over 5 years.Tick
      3) people not entitled to JSA after 6 months dropping off the figures.Tick.
      4) Some workers willing to work more for less,thereby driving down wages.Tick

      • “Some workers willing to work more for less,thereby driving down wages.Tick” – welcome to de-unionisation, the British electorate demanded it in 1979 and they got it and now they are having to live with the effects of their own mistakes – no sympathy in this corner.

  3. If my spouse and I were both working full time (35 hours per week) @ “Living Wage” levels, we’d each make £242 per week before deductions, ~ £1050 pcm each, for ease £25k, total per year.
    I’m in NW England and here a two-bed terraced is four times that at least, and there are limited numbers of them available.

  4. I am no economist, so stand to be corrected, but I would have thought that (and I am NOT trying to make a political point) immigration may be partly to blame for this weird combination of stratospheric house prices and no wage growth, as:
    1. Immigrants work in many cases for very low wages against their peer group in the UK; and
    2. Immigrants need somewhere to live, so push up house prices, if only by renting places that then encourages buy-to-let landlords to acquire more property.

    • I posit that just like the middle ages plagues help with wages then ( less supply of labour ) for the wokring class as the top 1% had to pay more to retain “staff” .

      Not that I advocate mass deaths by plagues or any other means , just observation on the laws of supply and demand .

      of course if we adopt the entire Indain sub continant as “British” our GDP figures would soar !!

      but you see thant isnt the point is it? GNP is better for us – the top guys dont like that

      so as the Greatest Economic Disaster to be inflicted on this country once said ” immigration? shes just a racist!” ( and that from the party that supposed to be for the workers ) and the conversation closes.

      forbin

      PS: its BTL and the banks , if we had house prices at 3x wages the Banks would be bust , well more bust than they are now !

      and how else can we boost GDP ?, make stuff? hah make me laff

    • ‘immigration may be partly to blame for this weird combination of stratospheric house prices and no wage growth’

      You’ll never get a job at the BoE James.

  5. I find it bizarre that such strong employment growth has resulted in such little wage growth.

    And I have to genuinely question the figures you’re quoting Shaun.I really don’t know many people getting 1.7%.

    I also wonder whether they’re including all the people who work on forecourts washing cars?I doubt it.I also doubt they’re including the barbers around me who are doing haircuts for £5,less than I was paying in the 90’s.

    There are all sorts of games they’re playing,not least with the million plus on tax credits,DLA, etc etc.

    After learning on here about how the inflation figures and GDP figures are reached,I think I’ve every right to be sceptical about how my reality doesn’t match their textbooks.

    • Hi Dutch

      Virtually all the surveys be they private or public-sector seem to be arriving at wage growth of around 2% at the moment. The Bank of England Agents were slightly more bullish earlier as their past 2% was replaced by this.

      “Labour cost growth per employee had edged higher following
      the introduction of the National Living Wage. ”

      So if they are wrong then so is everyone although of course there is the blind eye turned to the self-employed which may explain what you are looking at/for.

      As to carwashes I entirely agree and was only discussing the way that automatic ones have been in decline vis a vis manned ones even in London where space is so expensive. It can only be that the labour is cheap.

  6. How do they work out that 1.02 billion hours had been worked in that quarter – they never asked me? And down by 0.4 million from previous quarter, that’s 400,000,so these figures are accurate to 4 decimal places – brilliant!

  7. Total wage growth paints with a broad brush. A few large bonuses might hide the lack of wage growth for the masses.

    I’d find it interesting to compare UK’s employment picture vs other EU states. Immigration is a two way process and many Brits have left for other European countries. Yes there are language and cultural challenges but they aren’t insurmountable. Bulgaria had unemployment drop 1.4% year ending April 2016 (says Novinite) While many of these are low wage (retail, hotel & catering & manufacturing) the skilled workers are seeing upward pressure on wages – this is a counterpoint to UK wage downward pressure.

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