What do we learn about the UK economy by comparing GDP and real wages?

Today sees the publication of the economic output and growth figures for the UK for the second quarter of 2016 and thus will let us know how we did in the first quarter of 2016. We may even get a brief glimpse of post Brexit referendum UK but it will be barely a glimpse because a lot of the data for the third month in the GDP (Gross Domestic Product) preliminary report is estimated. That is a function of the UK being relatively quick in its production of GDP numbers and no doubt many of you will be thinking that especially this time around it might have been wise to take a little longer for a more complete picture.

Real Wages in the UK

One of the main themes of my work has received some new data and something of an airing in the media this morning. For newer readers it is that real wages in the UK have fallen considerably in the credit crunch era and this followed a period of slowing growth for them. This contrasted to strong growth in the past. These ch-ch-changes were of course missed by the economic models up in their Ivory Towers who continued to forecast real wage growth of around 2% per annum which may have been true for their writers and authors but not for the rest of the economy. If you want to know why they (Bank of England, OBR etc ) have been so consistently wrong that is perhaps the best place to start.

The Trades Union Congress or TUC has looked at OECD ( Organisation for Economic Cooperation and Development) data and concluded this.

The decline in UK real wages since the pre-crisis peak is the most severe in the OECD, equal only to Greece. Both countries saw declines of 10.4% per cent between 2007 Q4 and 2015 Q4. Apart from Portugal, all other OECD countries saw real wage increases, albeit mostly modest ones.

There is an interesting counterpoint to this which makes one think of old theories about a Phillips Curve style relationship between (real) wages and employment.

At the time their UK release contrasted a strong employment performance with weak earnings growth. The employment rate is at a record level, some 5 percentage points above the OECD average. On the other hand real wages “fell by more than 10% after 2007”

Sarah O’Connor in the Financial Times puts it another way.

The figures expose another side of Britain’s so-called “jobs miracle”its record employment rate of 74.4 per cent has come at the cost of lower real pay.

Productivity problems

If you look at the OECD report on the UK it tells us this.

The disappointing growth in real wages partly reflects weak labour productivity growth of only 2% from 2010 to 2015, the smallest increase in the OECD after Hungary, Italy and Greece.

Also they give a potential reason.

This may be linked to the growth in jobs with low-hours and intermittent work.

Analysis

The UK real wages data presented by the OECD is different to the official data which the FT has kindly reproduced for us.

the UK’s real-wage data; the latter suggest wages fell by a more modest 4.5 per cent between 2007 and 2015.

Okay and the differences between the calculations are? From the TUC.

Note that the OECD derive real wages from national accounts information, dividing total wages by hours worked and putting into real terms with the household consumption deflator. These can differ from those based on average weekly earnings and CPI inflation that tend to be used in the UK.

Well not can as they have differed here by quite a bit.

If we look at the overall picture I would take a lot of convincing that UK real wages have fallen by the same amount as in Greece as when I recall looking at the latter they had fallen by around a quarter. But we have been reminded that rather than a miracle the UK seems to have traded real wage growth for jobs growth. If we look back this is something economists wanted but of course they will have all forgotten/redacted that now.

As to the jobs created then there has been an element of them being lower skilled ones which has likely also affected productivity growth as well.  This leads to a very awkward question which is the jobs growth has probably driven the measures of real wages and productivity lower. So as well as averages we need to see how different groups have done/performed. Otherwise we would be in danger of saying that we did not want the new jobs. That of course may be true in a few cases but would we rather have much higher unemployment.

Also we may have got a glimpse into the state of play in self-employment pay from the OECD numbers although the thorny question of calculating hours worked is likely to still be a problem.

Today’s UK GDP report

This was welcome news and to give them credit bang in line with the monthly report from the NIESR.

Change in gross domestic product (GDP) is the main indicator of economic growth. GDP was estimated to have increased by 0.6% in Quarter 2 (Apr to June) 2016 compared with growth of 0.4% in Quarter 1 (Jan to Mar) 2016.

There was something both welcome and sadly rare in recent times in the numbers.

Growth in the production industries in Quarter 2 2016 increased by 2.1%, contributing 0.30 percentage points to quarterly GDP growth….

Indeed it was back by this which from memory saw a boost from the pharmaceutical industry.

manufacturing increasing by 1.8% in Quarter 2 2016 following a decrease of 0.2% in Quarter 1 2016

I have nothing against the UK service-sector but it is nice for once for it not to be the main player as our economy was getting ever more unbalanced.

Let us also look for some perspective as to where we stand.

GDP was 2.2% higher in Quarter 2 2016 compared with the same quarter a year ago……In Quarter 2 2016, GDP was estimated to have been 7.7% higher than the pre-economic downturn peak of Quarter 1 2008.

Of course the performance in GDP per capita has been nothing like as rosy and only recently struggled into positive territory. We learned little on that today as that comes in the later reports.

Whilst it is the main area which may have been genuinely affected by the wet weather this was not so good.

agriculture decreased by 1.0%.

Comment

There is a fair bit to consider here. If we start with the GDP numbers then we saw a welcome boost to production a fair bit of which was due to manufacturing especially of pharmaceuticals in the spring. Rather than an accelerating picture for 2016 so far it seems likely to turn out that we saw sustained consistent growth I think. Of course we all want to know what happens next!

We however get a somewhat different picture from the data for real wages for the UK. Inflation measurement matters a lot here and whilst I think that the position is worse than the official UK data mostly because they use CPI which under reports inflation via the way it ignores owner occupied housing costs. If we go back to the UK GDP post credit crunch growth figure of 7.7% well real wages have fallen by a similar amount which as ever leaves us singing along with Johnny Nash.

There are more questions than answers
Pictures in my mind that will not show
There are more questions than answers
And the more I find out the less I know
Yeah, the more I find out the less I know

Also today has seen examples of L.I.F.E.G.O.E.S.O.N from City-AM.

London City Airport, probably my favourite airport, is expanding in a £344m investment deal…….GSK invests £275m in three UK manufacturing sites

 

 

 

 

 

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30 thoughts on “What do we learn about the UK economy by comparing GDP and real wages?

  1. It s useful to break down the gross immigration figures into two groups; highly skilled, well paid temporary secondees to the financial sector and manufacturing; and relatively low skilled immigration for settlement. The financial aggregation of these two groups produces the frequently quoted “gain” that we make from immigration. Immigration for settlement is by far the higher number of individuals and results in increased employment in sectors providing education, health, and social services; downward pay pressure on unskilled and low skilled employment; and, of course, mathematically a downward effect on average national productivity. No surprises here then.

  2. Hi Shaun
    With all its faults at least the TUC report starts to highlight the ‘cost’ of high employment numbers, ie the ‘self employed, part employed’ millions on low low wages.
    The link below is a report on the US pharma numbers in its GDP ‘growth’ numbers. I would be very surprised if the same situation isn’t present in the UK, its ‘price’ increases not volume growth that drives the numbers, and guess who gets to pay for this through the NHS?
    http://wolfstreet.com/2016/07/15/big-pharma-sales-boom-on-drug-price-increases/

    • Hi JW

      I agree about the OECD/TUC report although it is shame that more work is not done. As to the US it does have a problem with this sort of thing more generally which I will highlight by quoting from the latest US Retail Sales report.

      “The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation
      and holiday and trading-day differences, but not for price changes, were $457.0 billion, an increase of 0.6 percent (±0.5%) from the previous
      month, and 2.7 percent (±0.7%) above June 2015.”

      So they do not allow for price changes and thus do not have volume figures. They do have seasonal adjustment if you read down the report but do not do volume.

      Thus along the lines of Wolf’s article we have the issue of if they do not know the volumes who can claim that they do?

    • The main usefulness of the US pharma industry is as a predictor tool for American GDP because of it’s cyclical sensitivity. When pharma can increase prices and keep them there it’s an indication of improving consumer and corporate finances and my isn’t it doing well! GO AMERICA!!

  3. hello Shaun

    Real wages have been stagnating for too long whilst the 1% have been over paid for little effort or effect .

    And GDP is a fiction now – who really knows its real level ( ok it was always a guess – but at one time it was best efforts ….)

    And of course we all know the establishments love of CPI for expenses ( ie DHSS ) but how their wages and pensions ( and taxes – theres the real indicator! ) is set on RPI

    so since 2008 what the cumaltive difference between RPI and CPI , then compare RPI to median wages .

    then RPI to top 5% income .

    then you’ll see who’s got the better deal

    Forbin

  4. Hi Shaun,

    It comes as no surprise that the weak data and a muddled methodology should produce results that are open to a wide range of opinions.

    On the one hand in the article linked to I find Martin Beck feeling gloomy about things and on the other I find our new Chancellor (who we all trust much more than the last one, don’t we boys and girls?) to be much chirpier and pronouncing that
    “It is clear we enter our negotiations to leave the EU from a position of economic strength,”

    I guess that puts me in the camp of those wishing that we would take a little more time and actually come up with some useful data.

    The data showed the economy was performing better in the earlier part of the second quarter than the latter part. At the time of the first estimate of gross domestic product, the ONS has less than half the data content that it will ultimately rely on for the final estimate. As a result, the numbers it gives for June are a forecast and subject to revision.

    https://www.theguardian.com/business/2016/jul/27/uk-economy-grew-before-brexit-vote-second-quarter-gdp-philip-hammond

    I do wish I could stop saying “Bah Humbug” but … but I can’t!

    • ‘I guess that puts me in the camp of those wishing that we would take a little more time and actually come up with some useful data’

      You and me both Jim…..

  5. Hello Shaun,

    Interest rates :-

    In general, the lower the interest rate, the cheaper it is to buy cars, homes, mall tat and other landfill on credit.

    Thus, the amount of debt can be expected to rise as politicians lower interest rates.

    This is restricted by two things

    i, the point of maxmum utility – those that can buy have already done so.*

    ii, the point of diminishing or null returns **

    * with houses before the 2008 bust the wizard wheeze was to increase the core base of buyers by lowering the
    risk requirement – liar loans was one popular term. We all know what road that lead to.

    ** the common agreed figure was Base Rate of 2% , this appears to be the case as money supply increases via QE ( and other
    cunning plans ) that are in use . ***

    *** there is the untried and potentially catastrophic conseqences of reaching the other bound of -2% Base Rate.

    My assumption is that the effect of even -0.5% BR will cause a “bank run” if it reached the high street banks
    ( Natwest is trying the waters here, being mostly government owned, it has tax payers support (!!) )

    Wages of non-elite workers.

    Non-elite workers play a dual role:

    (a) they are the primary creators of the goods and services.

    and

    (b) they are the primary buyers of the goods and services.

    Thus, their wages tend to determine whether the economy can grow. In general, we would expect wages of workers to rise
    if they are more productive. *

    * much of the productivity has been upshifted to the owners or top 1% for little gain in growth of the economy – whats the
    point of “trickle down” if large demand is needed? or to put it another way trying to feed the sparrows at the rear end
    of the horse when stuffing it with more oats .

    If the workers wages fall behind, we would expect the economy to slow and prices to fall, with the caveat that to some extent,
    rising debt (through manipulation of interest rates, or through government spending in excess of tax revenue) can be used
    to supplement their wages.**

    ** wage subsidies play there part here as well, self employed on bennies an indicator. minimium wage rates & raising the tax
    allowance

    Thus increase in assets prices, such as houses, can be seen as a way to allow the economy to continue to grow ( housing as a ATM machine
    , even if wages are stagnating.

    ( again there is the point of maxmium utility, the higher prices eventually strangle demand, NOTE: London was helped by extra demand from abroad
    thus raising SE prices in general, Northen Ireland had no such luck )

    so we are left with what can be done to raise the wages for millions ?
    every action so far has been to squeeze the middle classes , the poor by definition can’t pay and the rich won’t pay.

    serfs and nobles in a modern world, Dune?

    Forbin

    • ‘or to put it another way trying to feed the sparrows at the rear end
      of the horse when stuffing it with more oats .’

      Super analogy Forbin.I shall steal that and use it myself if you don’t mind.

      And to the nub of the issue
      ‘so we are left with what can be done to raise the wages for millions ?
      every action so far has been to squeeze the middle classes , the poor by definition can’t pay and the rich won’t pay.’

      Quite,I couldn’t agree with you more.Rescuing the 1% from having to downsize their holiday villas has achieved very little.

      • feel free but its my re-take of economist John Kenneth Galbraith on “trickle-down economics”

        the horse-and-sparrow theory: ‘If you feed the horse enough oats, some will pass through to the road for the sparrows.'”

        sorry about that ,

        Forbin

  6. There are a couple of interesting background issues here: 1) management by fad and 2) how stats are viewed.

    The usual pattern with recessions, especially the 1992 recession, which derived from a credit bubble, is that businesses are allowed to go under and unemployment rises – the weak go to the wall to clear the ground and capital for new productive business. However, from about 1995, a lot of companies found they were having to rehire former staff on contracts as the work picked up and the surviving workforce (including newer staff) could not cope. The cost of reemploying former staff (made much worse by those clowns in the recruitment agencies) was a key factor in the attempts to maintain employment after 2007. That “fad” however meant that the less effective staff were not weeded out and there was no pressure to improve productivity – at a cost of suppressed wages, which sucked demand out of the economy. The signals given out by cutting rates meant that capital has been misinvested and so we finished up with this in 2013 http://www.telegraph.co.uk/finance/jobs/10301646/Estate-agent-hiring-boom-helps-drive-jobs-growth.html Likewise, much of the employment has been at places like Sports Direct, where it has simply been a requirement for low-skilled bodies or in cases like the banks handling PPI, contract jobs rather than investment in computer programming. The end result is there is little innovation and an attitude of ‘never mind the quality, feel the width’ and costs like PPI are dismissed as one-off. No real surprise that the Brexiters’ regular and disheartening demand was effectively for more low-skill jobs for Brits and the need to import labour only for high-skill work. There is no attempt to train and invest, largely because of the magnified usual UK attitude of “we can some more from somewhere”. Similarly, in both bank lending and taxation, we have made effort more costly and rewarded the holding of assets. As a result, tax receipts have hardly moved as pay has stagnated, while the welfare budget has expanded thanks in part to significantly increased in-work benefits. Low pay and bad management has merely damaged morale and with it, productivity has fallen. Thus 8 years on from Lehmans, we should look like 2000 compared with 1992, when in reality we are around 1995. For all this talk of growing GDP, it was against record high net immigration and with rising housing costs, this is the reality with consumption https://twitter.com/AlpeshPaleja/status/758249545725779968 Worst of all are the incessant demands to p155 money up the wall on public sector pay without expecting any increase in productivity – a sector where they seem rather too concerned with “diversity” and “feedback” than doing a proper job. It probably sums everything up that today’s figures have been accompanied by an announcement of 5,000 more McJobs, so “would you like fries with that?”

    This latest set of figures is quite revealing in how we look at stats – the rise is actually in April, the May figure is a fall and June is largely a projection, which is probably why @georgeosborne is claiming it is a justification for his policies. However, all economists know to look at the margin to see what is really going on, so the downward path has in fact already started and that surprise jump of 2.1% in production is counter-trend (and thus likely to be revised). On the general level, it illustrates this recession issue again – small shifts do not make news, but imbue a sense of business as usual, so everything must be okay; big shifts produce effects, which can affect how subsequent events are seen. When in fact, the small shifts are telling us something is wrong with productivity in particular, while the big shifts post-92 “mustn’t be repeated”, then we finish up with a situation, where it is a “stimulus” to move rates by 0.25% – and where the failure to change any trend is viewed as good reasoning to do the same thing.

    Until the correct economic risk/reward signals are given out and we get over the politicians’/CBs’ fad that no-one should have to face reality, we will stay with rising McEmployment, falling productivity and retail sales, but a rising house market – until the day comes when the pretence cannot put off reality any longer.

  7. As I’ve said before, “If you want to know the true story with wages, remember that 40 years ago one adult’s wage was enough to feed, clothe, house (rental or ownership) and generally keep a family.”

    • Absolutely RB,I was making that point to someone the other day.When I was a kid-70’s-most kids Mum’s could afford to stay at home if they wanted to.

    • True, but many houses lacked heating, holidays to Spain were for wealthy only. No dishwashers or automatic washing machines. World population growth has put pressure on food costs. GDP does not accurately reflect these demographic changes. Germany has retained the 1 income can support a family model. This is largely due to laws that keep rents affordable.

      • Yes Expat I’ve often thought about the house I grew up in – no central heating, no double glazing, no cavity wall insulation, no washing machine (went to the launderette weekly) no dishwasher, no computer, no car, the list is endless.

        People take what they have now for granted assuming we always had these things and our standard of living has always been equivalent to today when we (or certainly I) did not.

  8. Shaun,

    Thanks for asking the questions that so many economic commentators refuse to ask.

    My main issue with this GDP print echoes Jim’s further up and that is that we cannot trust these figures at all,for as you point out,there’s no real attempt to calculate population.

    Furthermore,I have to be cheeky and ask if you can tell us the uplift in imputed rents to save me going through it with my untrained eye.

    Any system of wealth measurement built upon an accounting fiction isn’t really an effective way to measure it.

    Ignore house prices in inflation figures and then include fictional rental figures in GDP……then levitate a massive debt on the fiction.

    Madness.

    • Hi Dutch and my pleasure

      We have to wait for the imputed rent data and it is a wait as we only get it in the third and final estimate. Whilst you might reasonably think they could impute what they like (sorry…) they come from the income GDP series which we do not get for a while.

  9. You mention the weather as a cause in the drop of agricultural production. It was also given recently as a cause of the drop in retail sales particularly fashion items. But the latest gdp figures will result in push back against a rate rise at the next mpc meeting.

  10. Shaun, read section 80 of the House of Lords recent housing report. The government’s housing ambitions are set out clearly…

    http://www.publications.parliament.uk/pa/ld201617/ldselect/ldeconaf/20/2007.htm

    “The Minister for Housing admitted that “an awful lot of existing home owners will be very pleased” that prices will continue to rise and thought that was “an entirely human approach to take”. The Government’s aim is not to stop house prices rising, rather their priority is to encourage home ownership without cost to existing owners”

    Pity the press constantly fail to realise this.

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