Are the principles of the Elephant Curve affecting UK wage growth?

We advance today on a new set of labour market data for the UK which will inform us more about the state of the post EU leave vote economy. However the last few days have seen the beginnings of a shift in the labour market landscape. It was only on the 8th of this month I looked at the numbers for Zero Hours Contracts but since then we have seen signs of ch-ch-changes. From the Trades Union Congress or TUC.

The TUC has welcomed the decision of pub chain JD Wetherspoon to become the latest major UK employer to offer permanent hours to staff on zero-hours contracts.

The details are below.

Founder and chairman of JD Wetherspoon, Tim Martin, said a trial earlier this year to offer guaranteed hours have proved so successful, it was being rolled out UK wide.

Mr Martin said: “We’ve already offered guaranteed hour contracts to a percentage of our workforce and they’ll all be offered one in the next three months.”

This is significant as Weatherspoons is/was a large user of ZHCs.

The pub chain employs 24,000 people on zero-hour contracts.

This is I believe more than Sports Direct. This means that we may be seeing something of a trend.

Wetherspoon joins Sport Direct and McDonald’s in offering staff on casual contracts the opportunity to become permanent employees.

In general I think that this is a good thing. However care is needed because back in the day when I was an impecunious student I worked in a pub a couple of evenings a week to earn some money and whilst the work was regular there was no permanent contract in fact only a verbal one.

Some Perspective on Wages

The UK ONS published some research in its monthly review which showed that the UK labour market is very tight.

As discussed in a previous edition of the Economic Review, there is evidence to suggest the UK may have experienced a significant tightening of labour market conditions in recent years.

Why do they think this?

In mid-2015, the unemployment-to-vacancy ratio dipped below its 2002 to 2007 average in mid-2015 for the first time since mid-2008, reflecting both falling unemployment numbers and rising vacancies for several years. It has more recently reached 2.2 in the 3 months to June 2016 – its lowest level since November to January 2005.

This matters as they consider the 2002 to 07 period to be stable on this front and of course it was the boom time. Just to give an idea of the credit crunch impact it rose to 5.7.

The ONS lose the plot a little here so let me help out by borrowing a chart used by Graeme Wearden of the Guardian.

If you look at the period since last summer you see that the rate of wage growth has been falling. It peaked back then at 3.1% on a rolling 3 month basis or 3.4% on a monthly basis yet in a tighter labour market we now have this.

Between May to July 2015 and May to July 2016, in nominal terms, regular pay increased by 2.1%, lower than the growth rate between April to June 2015 and April to June 2016 (2.3%).

Wage growth has slowed as another Ivory Tower leans like it is in Pisa and then falls. Indeed if we look back to what now seems like a golden period which is 2002 to 2007 then let me tell you what wage growth was then. It opened at 3.8% dipped for a while but saw peaks of 5.3% in February 2005, 5.5% in April 2006 and then the peak of 6.6% in February 2007. Actually on a single month basis February 2007 reached 7.6%. Could it be much more different?

This is one of the reasons that places like the Bank of England and the Office for Budget Responsibility have got the credit crunch so wrong and produced economic forecasts which would be laughable if the subject matter was not so serious. They assumed the wages world described above would return whereas it has not.

Why might this be?

There has been a lot of debate over the “Elephant Curve” of Lakner and Milanovic. Or more formally the Lakner-Milanovic global growth incidence curve


Now this has been argued to show that the poorest are locked out of economic growth then that the middle classes in places like China are booming. Next though we get the crux of the matter for us in the UK and indeed west because it shows a poor run and indeed some decline in parts for the bit covering the developed world’s middle-class. Then, surprise surprise, a booming global elite!

Now this is contentious to say the least as it is too easy to blame globalisation for everything and this from Torsten Bell of the Resolution Foundation is true as well.

To fetishise globalisation as the cause of all our ills is to let too many domestic policy makers off the hook for decisions they make, for problems they leave unaddressed and for the lower incomes working people experience as a result.

If we move away from the exact numbers as there are issues around compositional changes over time for example and move to the principle I think that the Elephant Curve is definitely onto something. Maybe not everything but something….

Today’s data

The UK employment situation remains pretty stunning in the circumstances.

There were 31.77 million people in work, 174,000 more than for February to April 2016 and 559,000 more than for a year earlier.

It gave the UK another joint highest employment rate and led to this as well.

There were 1.63 million unemployed people (people not in work but seeking and available to work), 39,000 fewer than for February to April 2016, 190,000 fewer than for a year earlier and the lowest since March to May 2008.

So far so good then although there was a rise in the claimant count.

For August 2016 there were 771,000 people claiming unemployment related benefits. This was:2,400 more than for July 2016 and 21,300 fewer than for a year earlier.

So a rise although care is needed as this is an experimental statistic because of the shambles over Universal Credit or as it is officially put.

estimates are still being developed by the Department for Work and Pensions.

For further perspective this is the series critiqued back in 1983 in Yes Minister by Jim Hacker.

Real Wages

There is good news that these continue to rise.

Between May to July 2015 and May to July 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.7% and total pay increased by 1.9%.

However the picture is by no means as happy if we use the Retail Price Index measure of inflation which is now just under 2% in its main variants. As we expect it to rise we are likely to soon see an end to real wage growth using it unless we can manage an increase in wages. Using the official measure will take longer because it is invariably lower but in time that seems on the cards as well. That is sad because as the Resolution Foundation point out we have yet to get back to the previous peak.

Wkly earnings unchanged between Jun-July, suggests no imm. referendum effect. They remain £21 below pre-crisis peak


We have seen today that the UK labour market continues to look very strong on a quantity level albeit with a rise in the ( unreliable) claimant count. As we look to other measures we get a more worrying picture as wages are the dog that has not barked. The economic future will be grim if real wages do turn lower without reaching their previous peak. I think that the Elephant Curve has flaws but also has a point as we have to face up to the fact that the economic world has clearly changed and that maybe we should be pleased to have wage growth both real and nominal at all. If we lost it would that provide another verse for the song Turning Japanese?



15 thoughts on “Are the principles of the Elephant Curve affecting UK wage growth?

  1. “Torsten Bell of the Resolution Foundation ”

    really ? believe him that Globelization isnt the problem ?

    oh, its out local Gov fault is it ? prob because of Brexit 🙂

    except its not – it is in a way , our elected leaders fault – no safe guards put in and a blind faith in markets ……….. erm, Bank bailouts anyone?



    • Our leaders who did the bailouts should be jailed for fraud and misspending public money. It stinks that both Tony and Gordon have highly paid bank jobs whilst the taxpayers lavish subsidy on failed banks.

      There is no blind faith in markets. The markets said RBS, AIB etc were broke and should be liquidated …

  2. Hello Shaun,


    “Now this has been argued to show that the poorest are locked out of economic growth then that the middle classes in places like China are booming. Next though we get the crux of the matter for us in the UK and indeed west because it shows a poor run and indeed some decline in parts for the bit covering the developed world’s middle-class. Then, surprise surprise, a booming global elite!”

    indeed but who do I vote for to get change ? Trump again ? well he isnt here ……

    Economically speaking how do we redress this issue ? sugar tax ? ( har har )

    any ideas from the audience ?


    • Hi Forbin

      Some of this is simply the changing economic landscape and is outside the control of politicians as what could ours do about China or India for example? However the way that virtually every policy benefits the global elite is something that is within our politicians ( and indeed central bankers) power.

  3. Hello Shaun ,

    talking of elephants……

    The Capital Markets Union (CMU) is a plan of the European Commission to mobilise capital in Europe. It will channel it to all companies, including SMEs, and infrastructure projects that need it to expand and create jobs. By linking savings with growth, it will offer new opportunities for savers and investors.

    Deeper and more integrated capital markets will lower the cost of funding and make the financial system more resilient.

    Holy cow , batman!


    PS: I have a few gallons of white paint handy …..

    • Hi Forbin

      Don’t forget there was also a doubling of the Juncker Plan announced today by guess who? But even Capital Economics do not seem especially keen..

      “The “Juncker plan” has done little to boost investment. Accordingly, an extension of the scheme, proposed by President Juncker this morning, is unlikely to raise the euro-zone’s growth prospects…”

  4. Great blog, Shaun, as always.
    Branko Milanović kindly signed a copy of his book “Global Inequality“ for me when he spoke in Ottawa in April. He’s a wonderful speaker and a charming man. The Elephant Curve that you show in your blog played a prominent role in his lecture and appears as Fig. 1.1 in his book. His own summary of it is very interesting (p.20): “the great winners [of the globalization process] have been the Asian poor and middle classes; the great losers, the lower middle classes of the rich world.” He points out that in the 1960s, before the globalization process had advanced very far, no-one seemed to see this coming. Swedish economist Gunnar Myrdal, in his 1968 book “Asian Drama” saw the Asian masses stuck in perpetual poverty, and his American counterparts were no better. It seems this was one more case where the so-called experts didn’t have a clue what was coming.

  5. Labour is reported to be a lagging indicator of recession. However I noticed at least one in the guardian live link speaking critically of the July surveys saying the employment figures don’t match up with the July surveys including in vacancies which were suppose to have collapsed in July but didn’t according to the ONS. Still if the July surveys were wrong let’s hope the August surveys which reported increased hiring for that month are correct.
    I suppose as more data comes out it is possible the growth for q3 2016 can be more than q2 2016. The FT nowcast has it sitting at 0.35 for Q3 with plenty more data to be input to finish the quarter.

  6. On an international scale, UK wages are high. But the problem is that housing costs are way too high. And to foist UK policy makers on their own ( or maybe Gordon’s) petard they ignored and misreported house price inflation using CPI for the last 2 decades.

    There is an easy solution – apartment cooperatives. Germany has schemes whereby land for residential infrastructure is affordable. UK residential housing suffers monopolisation of building land by a cartel of big developers. So the UK politicians wouls need to cross swords with the developers cartel, and the big lease holders ( the crown and the church ). However, if many residential cooperatives could apartments build at cost for 100+ owner occupiers (assuming tower blocks) then the monopoly could be smashed and residential costs brought back to normality. Go up and spacious apartments are possible. Behavioural covenants with teeth would be useful to prevent an anti-social minority blighting the blocks like what happened to council owned blocks.

    • Hi ExpatInBG

      There is no doubt that housing costs are far too high in much of the UK. I am intrigued by the cooperative system in Germany, how much of the housing sector does it represent?

      The catch of course would be breaking up the cartel of developers in the UK…

      • I am not aware of building cooperatives in Germany, it is something I believe would provide affordable apartments in London etc without taxpayer subsidy.

        A friend in Germany bought a 900 square meter building plot for 17,000 euro (roughly 12 years ago). I guess that was at cost. ( Agricultural land for 50 plots plus electric, water, sewerage and road infrastructure) The town gained ratepayers.

        Germans also have powerful tenants associations, who have the power to set rent and to reduce rent and I believe to backdate it to start of the tenancy. Germans regard residential accomodation as infrastructure – not as monopoly (Parker Bros) items to speculate with.

        Anyway, the economic results are – better quality rental property at affordable rents. Much better standard of living and higher purchasing power parity.

  7. test
    sometimes a comment seems to post successfully but does not appear. I posted one under this yesterday but it vanished. On another site I contact the owner who gets it out of a bin and posts it up. Although his is not wordpress. But I don’t use twitter and can’t see on this link a contact detail for you to do the same as the other site.

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