UK real wage growth continues to disappoint

Today brings us back to the domestic beat and in fact the heartbeat of the UK economy which is its labour market. This has in recent years seen two main developments. The first is a welcome rise in employment which has seen the unemployment rate plunge. But the second has been that wage growth has decoupled from this leaving the Ivory Towers of the establishment building what might be called castles in the sky.  In that fantasy world wage growth would now be around 5% except it is not and in fact it is nowhere near it.

Oh tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high? ( Ian Van Dahl)

Or if we look at the Bank of England Inflation Report from earlier this month.

A tightening labour market and lower unemployment is typically associated with higher pay growth  as it becomes more difficult for firms to recruit and retain staff.

This is another way of expressing the “output gap” theory which keeps needing revision as it keeps being wrong. As this from Geoff Tily shows that has been a consistent feature of Governor Carney’s term at the Bank of England.

In 2014, Bank of England Governor Mark Carney told the TUC Congress that wages should start rising in real terms “around the middle of next year” and “accelerate” afterwards” .

They did rise in the first half of 2015, but then decelerated afterwards.

Actually the Inflation Report does address the issue but only with what George Benson described as “hindsight is 20/20 vision”.

During the financial crisis, output fell and unemployment rose, as companies reduced hiring and increased redundancies. The number of additional hours people wanted to work also rose, perhaps in response to a squeeze in their real incomes. Taken together, these factors led to a substantial degree of spare capacity opening up in the labour market over this period. This, in turn, was a significant factor behind subdued wage growth during 2009–15.

It is a shame they did not figure that out at the time and looking forwards seems to be stuck on repeat.

Pay growth has risen over the past year  and tightness in the labour market is expected to push up pay growth slightly further in coming years.

At least there has been a slight winding back here but something rather familiar in concept pops up albeit that the specific number keeps changing.

This was broadly in line with the MPC’s judgement of the equilibrium rate of unemployment of 4¼%, suggesting little scope for unemployment to fall further without generating excess wage pressure.

The problem here is that an unemployment rate of 7% was supposed to be significant when Forward Guidance began although it went wrong so quickly that we then had a 6.5% equilibrium rate then 5.5% then 4.5%. The February Inflation Report gave us  “a statistical filtering model” which seems to have simply chased the actual unemployment rate lower. Along the way I spotted this.

The relationship between wage growth and
unemployment is assumed to be linear

You basically need to have lived the last decade under a stone to think that! Or of course be in an Ivory Tower.

Today’s data

This brought some excellent news so let’s get straight to it.

The unemployment rate (the number of unemployed people as a proportion of all employed and unemployed people) was 4.0%; it has not been lower since December 1974 to February 1975.

This of course has an implication for the Bank of England which has signaled an equilibrium rate of 4.25% as discussed above. Thus we can move on knowing that its improved models ( we know they are improved because they keep telling us so) will be predicting increased wage growth.

Returning to the quantity or employment situation we see that it looks good.

There were 32.39 million people in work, 42,000 more than for January to March 2018 and 313,000 more than for a year earlier.The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.6%, unchanged compared with January to March 2018 but higher than for a year earlier (75.1%).

This is good news but needs to come with some caveats. The first is that the rate of improvement looks to be slowing which is maybe not a surprise at these levels. The next issue is more theoretical which is the issue of how we record employment and the concept of underemployment where people have work but less than they want. We do get some flashes of this and this morning’s release did give a hint of some better news.

There were 780,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 104,000 fewer than for a year earlier.

But if we switch back to the unemployment rate we know from looking at Japan that it can drop to 2.2% which means that we cannot rule out that ours will go lower and maybe a fair bit lower. So there could be a fair bit of underemployment out there still which is backed up by the attempts to measure it.

By this measurement, the number of underemployed people in the three months to June 2018 stood at 2.39 million, down 121,000 when compared with the previous quarter.

This compares to under 2 million pre credit crunch although I am not clear why these numbers consider the working week to be 48 hours?

Wages

This should be a case of “the only way is up” if we look at the Bank of England analysis.

regular pay increased by 2.7%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.8%)……total pay increased by 2.4%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.5%)

There is an initial feeling of deja vu as we were told this last month so the past has seen an upwards revision but there is little or no sign of the “output gap” pulling it higher. In fact bonuses fell by 6.6% on a year ago in June meaning that total pay growth fell to 2.1%. This means that in the first half of 2018 the rate of total pay growth has gone from 2.8% to 2.1% via 2.6% (twice) and 2.5% (twice). Unless you live in an Ivory Tower that is lower and not higher.

The Bank of England response mirrors their response when inflation was a particular problem for them which is to keep breaking the numbers down until you find one that does work. In this instance it takes two steps moving first to the private-sector to eliminate the public-sector pay caps and then to regular pay eliminating the bonus weakness. On that road you can point out a 2.9% increase although attempts to say it is rising have the issue of it being 3% in February and 3.2% in March. If they want more they could point us to regular pay in construction which is rising at an annual rate of 5.6% ( which of course begs a question about the official output statistics there).

Comment

The credit crunch era has been one where we have found ourselves ripping whole chapters out of economics 101 textbooks. By contrast both the establishment and the Ivory Towers have clung  to them like a life raft in spite of the evidence to the contrary. Of course one day their persistent lottery ticker buying will likely bear fruit but there is little sign of it so far. Instead they have the Average White Band on repeat.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

For the rest of us we see that there is more work but that wage growth seems to get stuck in the 2% zone. Even at the extraordinary low-level of unemployment seen in Japan the wage position remains Definitely Maybe after plenty of real wage falls. I am not sure that the productivity data helps as much as it used to as we have switched towards services where it is much harder to measure and somewhere along the way capital productivity got abandoned and now it is just labour. Of course all of this simply ignores the self-employed as they are not in the earnings figures and nor are smaller businesses.

 

 

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32 thoughts on “UK real wage growth continues to disappoint

  1. well Shaun , now in my second month of JSA after being laid off from a major IT company in Reading ( due to moving my department to Romania ) I can say that although the IT job market looks healthy it is apparently not ( in my opinion) , not for want of looking or applying. I see the same jobs being advertised again and again, so are there any real jobs ??

    This puts me in mind of what a friend said – these companies have just lost Fred to a competitor and now need to replace him , they won’t think of training anyone as that costs but want the exact same guy as Fred but preferably at 10% less salary ….

    ( he also said you need to be in a job to get a job – redundancy is a real killer for careers )

    I guess I can become a Deliveroo driver 😉

    thus a well paid job turns into a poverty wage one – no wonder wage increases are stagnant !

    that 48 hour thing – isn’t that the European time directive limit ? why use that when a standard week would be 37.5/40 hours I don’t know .

    Forbin,

    PS: I believe I am not counted on the unemployment list until 6 months goes by ….. HMG is great at fiddling the figures isn’t it?, shame we have no Shadow Stats for the UK

    • Sorry to hear that Forbin. Good luck in your job hunt but, selfishly, I hope your have more time to post enjoyable comments on here.

    • It’s a great shame that companies no longer have management training programmes ( or much in the way of internal training at all!) as it can produce the next generation of a company’s leaders without having to go elsewhere. I was fortunate to be one of three identified for just such a programme and all three of us went on to much greater things. One chap who worked as a clerk in purchasing eventually ended up as the deputy chief exec of a major multinational. Unfortunately bottom line pressure killed off internal development and as you say, they now want an identical replacement for lower cost. The other major change is that companies want cogs to fit the machine and anyone who is at all ‘different’ will not get the job. In todays world. The purchasing clerk would have remained in purchasing. It took an enlightened HR manager to spot the latent talent, groom it and he went on to enjoy quite an illustrious career. Whilst I did not rise to quite such dizzy heights I nevertheless had a career that would not happen today.

      Hope you find new employment soon – let us know how you get on.

    • forbin,
      “hus a well paid job turns into a poverty wage one – no wonder wage increases are stagnant !”

      Precisely. I wonder what all the managers of Poundworld now doing after administration, less paid jobs? Presumably a manager was a higher paid employee than a shelf stacker.

    • Sorry to hear of your JSA woes Forbin, it is something that fills everyone in work with dread. The whizz kid managers of today not only want someone else to suffer the cost of training someone for a position but also they then only will employ them at a lower wage than his predecessor, Henry Ford was savvy enough to realise if you don’t pay workers enough they then cannot consume. In todays UK economy we are running out of “someone elses” to train and pay higher wages as most companies are now following the same race to the bottom.

  2. As long as they maintain QE, the housing bubble and ZIRP and uncontrolled mass immigration we will continue to have almost zero wage growth.

    Since the banks’ models do not contain any of those factors in their equations, models or forecasting mechanisms, they will contnue along the road Japan has followed: decade after decade after decade of stagflation, falling real wages and living standards, failing public services, soaring deficits and a zombie economy full of zombie companies that should have gone bust years ago and housebuyers whose houses should have been reposessed and sold off at real prices if rates had been allowed to normalise.

    First decade almost over, only two more to go. Japan is 28 years into their own self imposed nightmare, but they at least have a massive export driven economy and a strong currency that they always keep trying to weaken, we are a banana republic(without the bananas)with a tiny manufacturing sector that struggles to export even with the tailwind of a falling currency – a currency that is perpetually being devalued in order to hide the structural weaknesses of our economy and to maintain an illusion of wealth to its citizens by continually inflating a grotesque housing bubble.

    I’m just glad I won’t be around in thirty odd years time to see what this dystopian nightmare will be like.

  3. In this globalised world of untrammelled unbalanced trade, free capital flows and open borders, any investment in capital would automatically push down on wages rather than allow labour to be paid more. When labour had more power in its tussles with capital, it could secure some more of the growing cake. Not so now. Then there is the feedback mechanism of labour being so cheap that many low value businesses do not see the need to invest in capital formation. They are today, two sides of the same coin it seems.

    • Hi Hotairmail

      Back in the early days of this website JW ( who posts under a different name now) used to regularly point out that he thought that what is called globalisation would cap wages. In essence it has as the direct effect on jobs that are internationally competitive seems to have also impacted on those which are not.

      Yet we keep getting told output gap theories heading in the opposite direction…..

  4. Low unemployment can be caused by two possible things, firstly a booming economy dragging people into work by offering higher wages or the other way is for people to reduce their wage demands to price themselves into a job. After-all there is always work out there if you are prepared to work for nothing. Clearly the second effect is what is happening in the UK over the last few years. How to change to the first type of growth? Step on the monetary gas, we don’t have too much QE we don’t have enough,

    • Yes and low unemployment can be as a consequence of many becoming self employed, some working for a pittance. This can increase competition and keep wage growth lower!

  5. Hello Shaun,

    the output gap is not affecting anything because in reality there isn’t one ! *

    the figures are fiddled , they are of no use except to blind the general public .

    the politicians are delusional – see that wonk on the BBC this morning blathering on about how the government has helps buyers ( shared ownership, help to buy , etc , etc ) , not once was he challenged ! those things push up prices , not supply ! duh!!

    Forbin

    * in any other science if the theory does not predict the real world accurately then the theory is junked and re-written , only in economics does reality get “rewritten” …… and you wonder why we’re in trouble?

    **https://www.sciencedirect.com/science/article/pii/001002777390005X
    (replace reductionism with ideology , ermmm)

    or

    http://www.tigerlilyproductions.com/theresafaultinreality/

    • Good news that there are less people stupid enough to buy into this ponzi scheme and be saddled with eye watering amounts of debt.

  6. Good luck Forbin wondering how much longer I have to work myself due to illness. As to the unemployment figures I’ll sing the same old song and tell everyone who will listen they’re wrong and deliberately fiddled downwards.

    I once again note that two measures zero hours and underemployment once highlighted mysteriously move in the desired direction. I also note a rise in economically inactive. These figures aren’t worth the paper they’re written on.

    • Hi bill40

      First of all best of luck with the illness problem. As to the numbers we regularly find that they are more like a Swiss cheese with all its holes than a solid cheddar. Yet I remember being at a Royal Statistical Society meeting when Jonathan Portes ( who was running the NIESR back then) said how good they are. So sometimes I seem to find myself in an alternative universe……..

  7. “I am not clear why these numbers consider the working week to be 48 hours?”

    It’s for the definition of the underemployed; under the Working Time Directive you can’t work more than 48 hours a week on average. So an underemployed person is anyone working less than this amount who could legally work more.

    I have seen you refer to the following a couple of times now, I was hoping you could direct me to a post where you may have explained them:

    a) Why you deride the ‘output gap’ analysis and what you provide instead;
    b) Why the UK unemployment rate can go below 4% just because Japan can. Intuitively different labour market structures should have different NAIRUs.

    Best,

  8. I think the term “unemployed” leaves a lot to be desired!
    Using ONS latest stats:
    16-64 age group.
    53m people (100%)
    5.9m “Economically Inactive” (11%) [Excluding 2.4m students (4.5%)]
    1.5m “Officially counted as Unemployed” (3%) [includes 0.9m on Job Seekers (2%)]

    So in real terms there are actually 7.4m (14%) people “not working”
    I also note that there are 6.8m (13%) people claiming the various state benefits

    Summary:
    53m people
    ONS stated accuracy +/- 3% [ie +/- 1,5m people]
    33m “Working” (62%)
    7.4m “Not working” (13%)
    2.4m Students.(4.5%)
    10m just plain off the radar! (18%)

    So the 33m (62%) who are “working” are supporting the 20m (37%) who apparently, aren’t.
    And a good number of the working 33m (62%) are also among the 6.8m (13%) claiming the various state benefits (income and help to work support etc),
    So our total of “working” and “positive contributing” people (ie net payers of taxes!) are probably only in the high 20 millions (@50%) of are available workforce.

    But let’s stick to “4¼%” it looks much less scary than 50%! 😉

    • Hi Colin

      One of the features of breaking down these numbers is that suddenly one becomes much less sure of anything. I remember the Yes Prime Minister episode where we were told that the raising of the school leaving age had much more to do with reducing unemployment than improving education. Some 3 decades later we see similar factors at work.

      The issue of benefits for those in work has turned out to be full of unintended consequences,

  9. It is an strange thing to read the headlines: Business Insider says “The Office for National Statistics on Tuesday said that there were 86,000 fewer EU nationals in jobs in the UK than at the same time last year.” with the biggest outflow being people from the 2004 Accession countries (A8) creating what the Guardian called a “supply shock”. Yet the FT says: “Employers resist wage increases despite shortages of staff” on the basis of the CIPD report, attributing “employers’ reluctance to raise pay more broadly to the workforce’s poor productivity record, which he said affected “employers’ ability to increase wages (while) the BoE … believed that the shortage of staff is beginning to force employers to invest in machines instead, which would ultimately be good for economic productivity.”

    What we are really starting to see is the usual boom/bust cycle effects played out in a cheap money world. Usually there is a boom bringing lots of jobs on rising pay and benefits, up goes the interest rate, the bust follows, jobs go and productivity improves as staff work harder to keep their jobs or there is capital investment as rates then fall. In the cheap money environment, the rise in asset prices has floored consumption (which most private sector jobs ultimately depend on) and that has really held down wages, albeit at the bottom, free movement has also depressed pay. Cheap labour has not only stopped capital investment, but it has also caused bad management, especially where there is high staff turnover anyway. Now that the indigenous workforce is declining and EU youngsters are not coming, it is causing supply bottlenecks. The knee-jerk reaction is to think about raising pay – the problem is that there is no rising consumption (the FCA is about to investigate the falling savings level, which is a clue to how people are actually financing themselves alongside unsecured debt). So, just as the public sector has been told that [pay rises must come from the existing budget (aside from p***ing money up the wall on the inefficient NHS), the private sector has no greater income budget. Consequently, pay rises are going to mean job cuts in a few months, especially if more investment in machinery is going to happen. The bust is going to play out, but in a different way, especially when Hammond raises tax – because that will fall on consumption (not least given Boris’s comments about stamp duty). There is no improved productivity to fund real pay increases, while the actual cost of living is always higher anyway.

    The key problem has been bad management, which indulges in all these fads to try to raise productivity, especially where it is hard in the service sector. When i finished my MBA, I had studied it by distance-learning, so i didn’t bother going to graduation as it would be just like your first day at university! Various people remarked about the “recognition” I would be missing out on – to be honest, it has never had any impact on me as I am achievement-orientated. However, at the time, “recognition” was all the rage and I remember my first post-MBA job being in an office with a whole wall dedicated to recognition activities – it ended for me in that car crash at Barclaycard, where the floor manager (whom I only saw twice in 6 1/2 weeks!) handing out “recognition certificates” to people deemed by their team leader to have gone above and beyond. It had started a few months earlier and I noticed on the lists that it was pretty much the same people every month, so it had about as much impact as school prize-giving. It is funny that you do not hear about recognition at all these days. The recent fad is of course diversity, where your physical make-up and which side you play for is supposed to improve teamwork and decision-making, but it hasn’t, so now it is either diversity based on your background (Standard Life asset managers – share price down 30% since January) – or mental health (Lloyds – down 10% since January). Diversity has led to bad managers being overpromoted, so that at Lloyds, I sat through a huddle, where the team leader just moaned about the lack of productivity with no plans to improve it. All this and the lack of incentives to improve productivity – my Lloyds desk calendar for February said they wanted people to query processes to improve them, but if you did, the response was just to conform to the existing process and not think about why the outcome was actually probably going to be inefficient. Companies have been able to do this, because borrowing costs have been low and wages suppressed, the conformity then leading to the problems of Groupthink and a culture at Lloyds of “that will do”. productivity in terms of making things is not just about reducing the unit cost of production. but also about improving the product quality (for which you can increase the price), but in the service sector, the latter has been forgotten with a complete focus on the former by a targets regime, which has been badly managed and so actually diminished the quality of output (not least because no-one thinks about process improvement).

    This has exacerbated a generational issue. Every generation seems to lose contact with basic technology – in poor countries like Cuba, everyone can keep 1950s cars going; here the slightest issue and it is down the garage. As we already have a focus on fad management, there is no thought given to investment. At Barclaycard, I sat through another huddle where the team leader (another useless woman with comedy qualifications – there for “diversity”) was moaning about productivity. It was a contract job doing PPI processing, which works essentially by paying out once a customer falls outside the criteria – we had been trained on a series of Yes/No decisions. then you calculate the amount and send out the letter(s). I learned the 2nd generation computer language, COBOL, in 1984 and these days we are on to the 4th generation, while youngsters can do all sorts of whizz-bangery with CGI and apps etc. I thought that I and a couple of youngsters could probably write and test a program to process these claims in about 2 weeks and probably raise productivity by 5+ times. In all the time this scandal has run, nobody has thought to do this with the banks paying out millions in “cheap” labour costs – because that money is essentially free and none of the management has a grasp of basic computing.

    All these factors seem to have crushed the life out of normal productivity improvement, but if wages rise, there will then have to be job cuts for instant improvement (ie: everyone left will do more work, which will mean longer hours for no pay). I wrote about German and British attitudes to training and skills in 1979 and economist Ruth Lea admitted on Question Time some years ago “The Germans and Dutch educate their workforces – we have to work longer hours to compete”. Unlike education, however, longer hours soon bring in diminishing returns (and perhaps those mental health issues in the latest fad?). I don’t think the complacent economists, mangers and Nigel Farage (currently praising rising pay due allegedly to reduced EU immigration) realise how hard reality is going to hit when it comes. It is already in the High Street, where lots of jobs are going – simply because people buy online to get things cheaper, but that does not improve productivity beyond labour prices. I hate Amascum with a passion and will not buy from them. I used to write small military history books as a little sideline – it didn’t really pay much, but it covered the occasional jolly to do research in foreign archives. Many people told me how they liked my books as they were new in material and analysis. Now, it is not worth doing the work, so output in this sector essentially consists of flogging the same old subjects to death with little new work. So, quality that some buyers will pay extra for has gone, while EU immigrants were bussed 20 miles at Xmas to work at Amascum’s Peterborough depot for low pay and long hours.

    There is one other factor at work, which recently appeared in (of all places) Digital Spy’s Politics forum. They were discussing the latest pay news and an HR person popped up. He declared that 75% of the applications he received were from candidates, who did not have the “right experience”. Aside from Doug Rader’s famous response: “If experience really mattered, Man would never have walked on the Moon”, the logic behind what these people are doing makes them no better than estate agents – they are just taking someone from another company in a game of musical chairs. They are usually 25 year old bimbos with comedy degrees or 35 year olds, who used to work in retail. They agree a spec with the employer and take those within it to move assets around. Nobody gains and anyone with other skills (or experience!) is ignored, if they do not meet the spec. Thus anyone, who might need a month’s training to be more effective after 3 months is turned in favour of someone, who has sat on their bum following the standard processes for the requisite period. they fulfil the basic spec, but will never advance from it.

    After finishing my MBA, I also took the basic CISI investment qualifications – about 40 hours each on three units just learning by rote. Every one of a dozen conversations I had with these clowns in 2007 went “Hello, I am x from y agency. You have the IAQ” – no mention of my MBA or MS office qualifications at all. Of course, the experienced people didn’t see what happened a few months later! .

    • Hi David

      Some years back I did some work for the small business division of Lloyds Bank which was an eye opener. But apposite to your computer point there was a new system put in which we were told cost £12 million. For that they provided something which probably cost that sum in wasted time as all work had to be saved very quickly or it would lose it. The management spin was that it would only take 5 minutes out of our time which was probably true for them as they didn’t use it! But sooner or later you would complete a wedge of work and be distracted by something else and guess what? I figured that a couple of genuine computer experts for £50k each would have been happy to set something up that was reliable and worked.

      Yet £12 million of investment would be recorded…….

      • If you apply to RBS, they use these video interviews at one stage. They are prefaced by some, well quite a lot of, this trendy Wendy diversity nonsense. I see they have today been voted the bank that customers would least recommend. More faddy management floating on govt schemes and free BoE money, instead of getting on with the job.

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