Of weak wage growth and bond markets

Today I am going to look at some clear changes in the credit crunch era and the way that they link together. Let us start with a clear theme of these days about which there has been news this morning from the land of the rising sun. From Japan Macro Advisers.

The demand/supply condition in the labor market seems as tight as it could be. In May 2017, Japan’s job offers to applicant ratio soared to a 43-year high of 1.49. The increase in the job-offers-applicant ratio marks the third consecutive monthly rise. The current print exceeds the July 1990 levels (1.46) when the Japan economy was enjoying a bubble economy.

It makes you think that the labour market is on this measure stronger than it was than when Japan’s economy was at its peak albeit an unsustainable one. Actually on another measure the situation is so tight they need to look even further back.

New job offers to applicant ratio also show that there is simply not enough supply of labor in Japan. The new job offers to applicant ratio rose to 2.31 in May from 2.13 in the previous month. This marks the highest level of this ratio since November 1973.

As you can see by these measures the labour market is very tight in Japan and is reinforced by these ones reported by Market Insider.

The number of employed persons in May was 65.47 million, an increase of 760,000 or 1.2 percent on year.

The number of unemployed persons in May was 2.10 million, a decrease of 70,000 or 3.2 percent on year.

On the month ( May ) the unemployment rate did rise to 3.1% but as you can see the overall trend seems to be lower in spite of the fact that it is extraordinarily low. Indeed as we have discussed before theories such as the “natural rate of unemployment” or “full employment” are pretty much torpedoed by it as we mull how employment can be more than full?

But if we move to wage growth which according to econ 101 should be soaring we instead see this. From Japan Macro Advisers.

In April 2017, basic and overtime wages, otherwise known as regular wages, rose by 0.4% year on year (YoY), recovering from a decline of 0.1% YoY in March. While an increase in wages is a better news than a decline, the magnitude of the rise continues to be underwhelming.

Quite. As to the real wage growth promised by Abenomics and  reported by the financial  media?

The real wage growth, after offsetting for the inflation in consumer prices, was 0.0% YoY,

So Japan should be seeing wage growth but instead it is flat lining. If we are “Turning Japanese”  then the next bit of news is even worse you see that current wage index for full-time workers is 101 giving an initial though that there has not been much growth since it was based at 100 in 2015. But if you look back the peak in the series was 104.4 in January 2001 and no that is not a misprint.

A possible cause of this is highlighted below and it does provide food for thought as of course Japan is leading the way on a road that many others will be travelling.

The working age population in Japan, defined as the population of the age between 15 and 64, has been shrinking rapidly. In 2016, the work age population in Japan fell by 0.7 million people. Accordingly, job applicants have been declining by 5% per year in the last few years.

Moving On

If we look wider afield we see that wages are struggling beyond the shores of Japan as this from Reuters reminds us.

Wage growth across the developed world is weak. It’s only 2.5 percent in the United States and 2.1 percent in Britain.

It is interesting to note that the have real average hourly earnings falling at an annual rate of 1.3% in the US. The chart below shows that this particular dog is not barking.

Even the figures for Germany are no great shakes when we note this from this morning’s release on the labour market.

In May 2017, roughly 44.1 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). This was a record high since German reunification.

In the UK we have seen quite a change as fears of robots taking everyone’s jobs have been replaced by fears of a former Chancellor of the Exchequer doing so.

George Osborne, the editor of the Evening Standard and former chancellor of the exchequer, has added a sixth job to his portfolio – that of honorary professor of economics at the University of Manchester.

For some Friday humour here are some suggestions for George from the past.

Bond Markets

This week has seen bond markets fall as they try to adjust to a barrage of rhetoric and open mouth operations from central bankers. Those who immediately hid behind a sofa when Janet Yellen told us there would not be another financial crisis in our lifetimes will have missed U-Turns by the ECB and the Bank of England. Also there has been a rather bizarre PR campaign conducted by Bank of England Chief Economist Andy Haldane puffing him up to be the next Governor of the Bank of England on the grounds that he keeps forecasting wages incorrectly. Do I have that right?

We see that the ten-year yield in Germany has risen to 0.47% at one point this morning. If we stay with that whilst it is up that only takes it to around where it was in some of both February and March and indeed May. So not quite as being reported in many places. If we look at the UK the ten-year Gilt yield nudged 1.29% this morning. But if we step back these are very minor moves for markets that really believe what the central bankers are saying which is of course yet another failure for Forward Guidance.


I wanted to like these two factors ( wage growth and bond yields) because they provide a link to what has happened in 2017. I thought and wrote that it would be a rough year for bond markets based on rising consumer inflation whereas they appear to have looked at low rates of wage growth instead. Of course there have been all the central banking QE purchases but they were a known factor.

As to wages growth itself regular readers will be aware that I fear it is in fact worse than we are told due to the exclusion of the self-employed from the numbers. But also employment figures do not tell the whole story as this from Mario Draghi in Sintra tells us.

Another reason why there is some uncertainty over slack is the correct notion of unemployment – that is, there may be residual slack in the labour market that is not being fully captured in the headline unemployment measures. Unemployment in the euro area has risen during the crisis, but so too has the number of workers who are underemployed (meaning that they would like to work more hours) or who have temporary jobs and want permanent ones…….If one uses a broader measure of labour market slack including the unemployed, underemployed and those marginally attached to the labour force – the so-called “U6” – that measure currently covers 18% of the euro area labour force.

Maybe the weak wage growth is much less of a surprise than we are often told. Especially as it comes with an implied kicker that everything is okay due to this. From Reuters.

In the United States, household net wealth has soared by $40 trillion since the beginning of the expansion in 2009 to $95 trillion from $55 trillion. It is up $11 trillion in just the last two years.

Well that’s okay then is the message, except it isn’t or we would not be where we are.




16 thoughts on “Of weak wage growth and bond markets

  1. The notion of more than full employment isn’t that hard to explain, it’s what we call labour mismatching. A job for a computer programmer in Basingstoke is of no use to an unemployed cleaner in Durham.

    We need the Job Guarantee to place a floor under wages, make lifetime learning an affordable reality and keep the economy at full potential. As an added bonus we’ll be able to measure things like inflation properly again.

  2. The figure that really hits you in the face in your blog is the 18% of the workforce that has less work than it would like. All these other figures are probably dominated by that single number.
    I would take a bet that this is even (much) higher among those at the bottom of the ladder (unskilled/young workers), which would explain the weakness in wages during apparently low unemployment as defined.

    • Hi James

      I suspect that you are right about that. Also it is worth noting the large difference between the Euro area and the US in this respect. The latter saw U-6 Underemployment peak just over 17% and it is now 8.4% so a world apart. It would be nice to have some UK data to compare with the two…

  3. Shaun,
    Japan leading the way on the effects of a decreasing population with little immigration and expertise in robots & AI?
    I understand that the cohort of 24 to 65 yr olds in the BRICS are at the peak so decreasing population not just a Japanese problem.
    Unsurprising people delaying families in current economic climate?

    • Hi Chris

      I have been watching the Japan season on BBC 4 and as far as I can tell little has changed so that means no to higher immigration. Or to be more specific saying yes too fool us gaijin and then doing nothing. Oh and if anyone has time to look them up on i-player the Handmade in Japan series was fascinating.

      The demographic problem is also a European one with Germany ( which explains the immigration enthusiasm), Italy and the Iberian peninsular in the frame if I recall correctly.

  4. ‘In the United States, household net wealth has soared by $40 trillion since the beginning of the expansion in 2009 to $95 trillion from $55 trillion. It is up $11 trillion in just the last two years.’

    Which is all fine until shares halve in value.

    • Hi Dutch

      I love the way that the media repeat these numbers as if they mean something. There are all sorts of flaws in them. If we just stay with the central banks look at all the QE and indeed outright share buying of the Swiss National Bank and the Bank of Japan. What happens when/if they stop?

      Also just try switching it all into cash 🙂

    • Hi Eric

      Pretty much everyone is unhappy with productivity, surely we all can’t be bottom of the pile? Still at least I learnt that there is more than one subject in the NZ press! You may note that player ratings and that sort of thing have been getting an airing up here.

      As to today as it is there I am not especially optimistic but hope springs eternal. Oh and your players have my full permission to be much less productive for a couple of hours or so….

      • Well there you go Shaun. Well Done the B&IL. Now the NZ press will be full of it. SBW is the first AB to be sent off for 50 years. You cant contribute if you’re not at work. What a productivity hit.

        • Thank you, as you can imagine I loved it! However I did note that even with 14 men the All Blacks controlled the game and led pretty much all through it. So you are still favourites by a fair bit for next week but we have some hope up here and as I think they say in the film Shawshank Redemption hope is the best of things..

  5. Great blog as always, Shaun.
    Here in Canada, the world-wide trend you note to weak or negative real wage growth will be affected somewhat by the government of the largest province, Ontario, raising the minimum wage to CAN$15 (about ₤8.90) an hour.
    I’m not a labour economist, so I don’t know whether this is good or bad policy. Angella MacEwen, the chief economist of the Canadian Labour Congress, who was the discussant at Antigonish, Nova Scotia, for John Astin and Jill Leyland’s paper with me on “What an Inflation Index Should Be Measuring”, is a strong advocate of higher minimum wages, which she argues gives employers more incentive to train their employees.
    Happy Canada Day from Kraljevo, Serbia!

    • Hi Andrew

      Thank you and Happy Canada Day to you. I do not know if you are aware but there is something going on here to mark it. From the Guardian.

      “A Canadian soldier has become the first female infantry officer to command troops guarding the Queen at Buckingham Palace….
      Capt Megan Couto led about 40 Canadian soldiers through the changing of the guard ceremony at the palace on Monday morning, watched by the usual throng of tourists who saw history being made.”

      I passed one of the places they are guarding earlier but didn’t think of it.

      As to the national minimum wage so far as a concept it does not seem to have affected employment. Moving onto music here is a cover version f one of my favourite songs which is really rather good. Sometimes You Tube suggests something good…

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