We have a serious problem with real wages

One of the features of the early days of this website was the fact that there were regular replies/comments suggesting that wages and earnings would continue to be a problem for some time. I doff my cap to those who first suggested it as it has become a theme of the credit crunch era. This means that your unofficial Forward Guidance was vastly more accurate and useful than those paid to do it. Here is an example from back then (Summer 2010) from the grandly named Office for Budget Responsibility or OBR.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

That to borrow from Star Wars seems like something from “A long time ago in a galaxy far, far away….”. It is even worse if we look at the situation in terms of real wages as the OBR forecast that it would be on target, so we see that real wage growth would be 3% per annum. Happy days indeed! But it was just an illusion.

The scale of that illusion was illustrated by this from Geoff Tily of the Trade Union Congress or TUC earlier this week.

So in the decade before the first TUC meeting in 1868, real wages had fallen by 0.1%. Since then, only the decade to 2018 has seen a worse performance, with real wages down by a whopping 4.4%.

So rather than the sunlit uplands suggested by the OBR we have seen a much more grim reality. As an aside this brings us back to the problem of “experts”. In my opinion you deserve that label if you get things right, for example aircraft designers as air travel is very safe. Whereas official economics bodies are regularly wrong and therefore in spite of the lauding they get from the media do not deserve such a label. I also note that those who debate that issue with me and claim that it does not matter the forecasts are wrong (!) are often from the group that have hopes of gaining employment in this area.

Discovering Japan

This morning has brought more news on wage growth in Japan but before we get to it we need to set the scene. This is because the land of the rising sun has been anything but in terms of wage growth. Or as Japan Macro Advisers put it.

Wages in Japan has been steadily falling in Japan since 1998. Between 1997 and 2012, wages have declined by 12.5%, or by 0.9% per year on average.

Japan has been the leader of the pack in a race nobody wants to win. It also provided a warning which has come in two guises. Firstly the concept of real wages falling in a first world industrialised country and secondly the very long period for which this has been sustained. This is one of the major players in the concept of the lost decade for Japan which in this regard has now lasted for two of them.

This was a driver between the original claims for Abenomics where ending the deflationary mindset was supposed involve higher wage growth. In reality the performance is shown by the official real wage index which was set at 100 in 2015 and was 100.5 last year. So very little growth and in fact a reduction on the 101 of 2014. But hope springs eternal and we know that May and especially June were much better so here is Reuters on this morning’s release of the July data.

Separate data showed Japanese workers’ inflation-adjusted real wages rose 0.4 percent in July from a year earlier, marking a third consecutive month of gains.

What this tells us is that as the bonus season is passing the better phase was for bonuses and nor regular wages or salaries. So whilst the news is welcome it is not the new dawn that some have tried to present it as. Indeed tucked away in the Reuters report is a major issue in this area.

 firms remain wary of raising wages, despite reaping record profits.

The link between companies doing well and wages rising in response has been broken for a while now. Earlier this week Japan Press Weekly was on the case.

Finance Ministry statistics released on September 3 show that in 2017, large corporations with more than one billion yen in capital increased their internal reserves by 22.4 trillion yen to a record 425.8 trillion yen.

Compared with the previous year, big businesses’ current profit was inflated by 4.8 trillion yen to 57.6 trillion yen, 2.3 times larger than that in 2012 when Prime Minister Abe made his comeback. The remuneration for each board member was 19.3 million yen a year, up 600,000 yen from a year earlier. Meanwhile, workers’ annual income stood at 5.75 million yen on average, down 54,000 yen from the previous year.

The section about the rise in profits for big businesses under Abenomics resonates because the critique of his first term was exactly that. He benefited Japan Inc and big business.

The United States

Later today we get the non farm payrolls release from the US telling us more about wage growth. But as we stand in spite of the fact the US economy has had a good 2018 so far the state of play is a familiar one.

Real average hourly earnings decreased 0.2 percent, seasonally adjusted, from July 2017 to July 2018.
Combining the change in real average hourly earnings with the 0.3-percent increase in the average
workweek resulted in a 0.1-percent increase in real average weekly earnings over this period.

Indeed if we look back as Pew Research has done we see that real wage growth has been absent for some time.

A similar measure – the “usual weekly earnings” of employed, full-time wage and salary workers – tells much the same story, albeit over a shorter time period. In seasonally adjusted current dollars, median usual weekly earnings rose from $232 in the first quarter of 1979 (when the data series began) to $879 in the second quarter of this year, which might sound like a lot. But in real, inflation-adjusted terms, the median has barely budged over that period: That $232 in 1979 had the same purchasing power as $840 in today’s dollars.

There have been gains in benefits but not wages over these times.

The Euro area

The Czech National Bank has looked at this and we see an ever more familiar drumbeat.

 In the euro area, nominal wage growth was 1.7% in 2017 Q4, while real wages were broadly flat.

This comes with factors you might expect ( Italy) but also I note Spain which is doing well.

In Italy, by contrast, hourly wages dropped both in nominal terms and in real terms (i.e. adjusted for consumer price inflation). Spain and Austria also recorded wage decreases in real terms.

Also they are not particularly optimistic looking forwards.

However, the wage growth outlooks available for the euro area and especially for Germany do not see wages accelerating significantly any time soon.

We could apply that much wider.


The message today was explained by Bob Dylan many years ago.

There’s a battle outside
And it is ragin’
It’ll soon shake your windows
And rattle your walls
For the times they are a-changin’

The truth is that the economics profession has been slow to realise that not only would the credit crunch reduce wage growth, but that it was already troubled. Only last night in a reply to a comment I referred to Deputy Governor Wilkins of the Bank of Canada spinning the same old song.

Yet, wages were rising less quickly than we would expect in an economy that is near capacity.

The same old “output gap” mantra when in fact the reality is of inflation at 3% and wages growth at 2.5%.

To be fair some places do seem to be adjusting as the Czech National Bank faces up to an issue that the UK economics establishment continually assures us is not true.

Migration from Eastern Europe, Italy and Spain,3 which has increased mainly because of the financial and debt crisis, is playing a major role. Workers from these countries are increasing the labour supply and perhaps exerting less upward pressure on wages than incumbents. ( They are referring to German wage growth).

Some however seem to inhabit an entirely different universe as this op-ed from November last year in The Japan Times shows.

Thinning labor puts upward pressure on wages, increasing living standards……


Let me leave you with an optimistic thought. As I watched the AI documentaries on BBC Four this week I wondered if rather than fearing it we should have hopes for it. Maybe the rise of the machines will be fairer than our current overlords.



26 thoughts on “We have a serious problem with real wages

  1. Hi Shaun,

    Justin Welby also highlighted this the other day and stated the “Britain’s economic model broken” corporations growth in profits rather than wages. The Guardian done a number of articles the last year one of the latest here:


    Another interesting article from the IPPR


    This isn’t just large corporations, as you all know large builders have been making circa profits of 25% the last year I don’t doubt for one minute the workers not seen a 25% increase in their own labour costs!

    The large builders been building as they sell rather than building en masse they know there is a demand for property so if they limit supply it helps them increase the cost of sale.

      • Hi Peter

        The large builders have been able to make what in economics is called excess profits because of Help To Buy and the credit easing of the Bank of England. It is very wrong in my opinion but is one of the clearest establishment policies.

        As to non farm payrolls in the US i too was watching it and whilst as you say wages growth improved as I saw the 2.9% number I was reminded of this also from the Bureau of Labor Statistics.

        “In July, the Consumer Price Index for All Urban Consumers increased 0.2 percent seasonally adjusted; rising 2.9 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy rose 0.2 percent in July (SA); up 2.4 percent over the year (NSA).”

        There is the caveat that we do not know the August number yet for an exact comparison but unless you can survive without food and energy wage growth is still flatlining.

  2. So in the US we have falling real wages even after the Trump tax cuts which were supposed to help boost wages, instead they have further boosted share prices and funded share buybacks which have further boosted directors share options and bonuses.
    Falling real wages in Japan despite Abenomics massive stimulus and makework projects.
    Falling real wages in the UK despite huge labour shortages and skill shortages, ZIRP and QE.
    During all this I have also noted the narrowing of the pay gap for “professions” or qualified people(curiously those in the buildings trades have not been affected) over the last thirty or forty years.

    All the above and the increasing control the state has over more and more aspects of our lives and the economy(central banks interventions anyone?) points to the return to communism by the back door(all wages were the same under soviet control) I believe this is so slowly and cleverly being done that most people cannot recognise it for what it is.
    Today’s economy and financial markets are totally centrally planned, there are increasingly draconian laws and regulations over what can be said in public and the social media, state surveilllance of the individual via the internet, mobile phones, street cameras, need I go on?
    Wasn’t this what Soviet Russia looked and sounded like in the 1950’s??? And now we have it here and no one thinks it is abnormal.

  3. Hi Shaun, You hit on the truism of our times. Citizen’s disposable incomes have been continually hit, each time the state ratchets-up indirect taxation it is another nail in the coffin for the average joe.

    I personally have gone to extreme lengths to preserve my spending power but what I do is infeasible for most citizens. Hence the ballooning debt as folk try to preserve living standards in the face of out of control cost increases. These costs never stop rising and govt only makes them worse.

    City car parking £2-3 per hour and rising, unavoidable for families with prams- I bicycle
    Energy Bills – YoY rises with Energy companies made to pay for insulation which puts all the bills up. – I wear a jumper
    Fuel Taxation – Rammed up to max and although not increasing recently it is the ultimate regressive tax -I cycle or free-wheel in my car downhill
    Garage Costs- £60 per hour due to rentier business unit costs, health & safety and inspection costs – I do my own spanner work
    Hair Dressing – £15-30 due to rentier business unit costs, health & safety and inspection costs. I shave my own headwith an Aldi shaver (£14).

    When I step back and look at my responses in aggregate you would think we live in a totalitarian dictatorship. I wear jumpers, shave my head, travel by bicycle and crawl about under my banger…

    I don’t think my responses are good for the economy but to me they make economic sense to me when faced with stagnating income.


    • indeed you are a poor example of what HMG wants , ehehehehe.

      and do you pay by cash too?

      MC has labeled all cash usage as “criminal” …….

      I just criminally paid for my Mucky D’s today……

      on a more serious side , you can only cut back so far . The UN adopted the “Factfullness” definition of the world economic incomes instead of the “them and us” 1960’s viewpoint .

      I’d say we’re well on the way from level 4 to level 3 or 2
      ( I see that level 5 , soopa yacht level , is not mentioned !! )

      Debt is not wealth and it doesn’t make me rich if my house is xxxx pounds if the only way to get the money is to borrow or downsize – doesn’t that make me then poorer by default ?


    • Paul £50 for a garage though high is still cheap than from a main dealership some charge double that and the rest.

      This appears to be the state of play world wide the rich get riche the poor get poorer.

      If food and energy go up sharply the poor feel it more than the rich.

      When it really gets out of hand you get riots on the street when we did after the poll tax.

  4. I would say that we have at least three completely separate earnings patterns in this country:
    1. People at the top who carry on getting above inflation rises every year and whose salaries are now disconnected to everyone else. For example, the average partner at Deloitte has earned £10.2 million over the last ten years, for what exactly?
    2. Those who have somehow managed to get an index-linked pension based on final salary.
    3. Everyone else, getting slightly poorer each year.
    On top of all this, you need to save millions to have a decent pension based on current annuity rates.
    I would not like to be starting my career now.

    • Personally I think it explains the productivity paradox (to a large degree there are other factors such as investment levels too).

      The upper echelons of business and the public sector simply do not realise the effect it has on ordinary people of the excessive rewards they receive, all the while harranging people ‘for not working hard enough’.

      If the rewards did come with the consummate risks then I think people would be more accepting but witness the recently departed TSB CEO. Presided over a catastrophe which could have easily got out of hand, has caused untold frauds, etc and what’s he get? £1.7m pay-off.

      There is literally no fair justice anymore (one rule for the elite and another for the rest of us). I can feel a 1789 moment brewing as we speak.

      • That is why I chose Deloitte partners as my example – what exactly is the risk? These are capital sums being made by people who have:
        1. Not contributed to the economy
        2. Not invested their own money in a new business
        3. Created nothing
        4. Earned large salaries all the way up from qualification onwards
        5. Not had to mortgage houses etc to get going
        6. Very low risk of losing their job
        These types of people should get paid fairly, but not millions IMHO.

        • And a good chunk has come from advisory fees to the banks who have benefitted from cheap money or actual bail-out funds (which ultimately ordinary people have the paid the price for in lost returns and sky-high property prices leading to debt)

  5. I’m sure you’re aware of an approach to economics that emphasises energy and brings forwards concepts such as ECoE (energy cost of energy) as critical economic factors – see Tim Morgan “Life After Growth” and his blog: surplusenergyeconomics.wordpress.com.

    In addition this approach develops the notion of “prosperity” which is pay after the deduction of essentials. Now “essentials” is not synonymous with all the items included in CPI or RPI and it is also not real wages but it gives an idea of the discretionary cash available to people. The inflation rate of essentials which embody a strongly increasing ECoE has gone up markedly for some years

    Calculations have shown that “prosperity” has been in steady decline since the turn of the century. Furthermore, with a steadily worsening ERoEI (energy return on energy invested) this will only get worse.

    If you accept this analysis this, in conjunction with markedly increasing indebtedness, does not reveal a pretty picture now or well into the future. The depression in real wages is not a temporary issue and it is not one that is solely endogenous within the supply/demand characteristics of the labour market.

    • Hi Bob J

      As we go forwards the cost of domestic energy seems set to go through the roof at least if Hinkley Point C is any guide. It is not all one-way as the new LED light bulbs are expensive but do at least provide a decent light which the CFLs rarely did in my experience. But our energy policy is a shambles and the back up to your point in my opinion are the smart meters. They are plainly intended to raise the price at certain times as frankly what other benefits do they provide? So in terms of buying energy we are slipping backwards I agree and unless “something wonderful” like in 2001 A Space Odyssey turns up it looks set to continue.

      • Agree 100% on smart meters, I have pointed this out to people, the old style meters purely measured what you used (and apart from cutting you off there is no means to restrict your power supply).

        A smart meter however, gives the power co and govt the means to ‘manage’ i.e. ration usage. at the moment they are doing the softly softly approach but I can see them being mandated soon.

        I’ll hold out as long as I can

    • Well , The Mogg hath spoken !

      re: Carney, previously described as “the high priest of Project Fear” by Mr Rees-Mogg, has offered to stay on “to promote a smooth Brexit and an effective transition”

      er, no , he is staying on so he can effect the transition back to the EU ……
      ( with punitive terms being described as ” thorough, fair and the best deal since sliced bread ” )


      • Bang on Forbin. Trouble is there are too many traitors and naieve idiots in the House of Commons to defeat any efforts by JRM and Co.

  6. Hi Shaun
    Like you I was intrigued by the AI on the Beeb.
    Fear of technological advances of the past had quite a long
    time to argue their views before anything actually happened,using the
    transition from the horse to the tractor for example, but look
    how fast the iphone has changed the world. To me it seems the AI
    advances of the near future will happen relatively in the blink of an
    eye and unknown unknowns could overtake the powers of TPTB
    without them even realising it. I hope that medical and power source
    technologies prevail and to answer your question, I think and hope
    that many more jobs will be created.

    • Hi JRH

      I have enjoyed the Jim Al-Khalili documentaries on BBC Four ( The Atom, The Elements etc) so was waiting to see what came up on AI. There were some great snippets as in the way AI has dealt with junk and spam email and the way it so quickly mastered the ancient Chinese game Go and beat a human champion.

      But the piece de resistance was the revelation that once the first AI programme is built that is better than the human brain then that is the end of us developing anything. Whilst worrying in some ways it is also true that the mess we make in some areas it may be far from a bad development. I am a fan of the Foundation series and there the robots got tired of us making a mess and retreated into the background whilst doing their best to help us. Sounds better than TPTB…

  7. When people do not share in economic growth, it means little to them: Brexit voters, for example stating that there were more important considerations than just the economic.
    When you have a stated agenda for the redistribution of wealth from developed to developing countries, (UN Agenda 21) it can only be done in two ways:
    1) by taxation, i.e. the rich pay a large proportion of that redistribution, and we cannot have that.
    2) By curbing wage growth, which actually increases the wealth of the rich, and increasing the cost of essentials (food/shelter/fuel) without showing them in inflation figures.

    F*** the rest.

  8. Great blog as usual, Shaun.
    Rob Silver, the husband of PM Justin Trudeau’s chief of staff, Katie Telford, was on the CBC-TV news program Power and Politics on August 21, where he is a regular guest, claiming that under Justin Trudeau there has been “real wage growth for the first time in a generation”. It seemed strange that such a patently false claim wasn’t immediately swatted down. AWE in constant dollars based on the Survey of Employment, Payroll and Hours (SEPH) data have declined at an annualized rate of 0.05% per annum on his watch, while under Harper they increased at an annualized rate of 0.07% per annum. (For Trudeau this is based on data to June 2018, and for both regimes the seasonally adjusted CPI was used to deflate nominal AWE.) I sent CBC Politics an e-mail about it, but a correction was never issued, at least to my knowledge. The poor real wage growth performance under Trudeau is consistent with lackluster increases in labour productivity, averaging 0.56% on an annualized basis from 2015Q3 to 2018Q2. Harper’s record was very slightly better, with an average 0.63% growth rate on an annualized basis from 2005Q4 to 2015Q3.
    On Friday, the August LFS update for Canada came out. Although the LFS AHE estimates are arguably less reliable than the SEPH AWE estimates, they are more timely. The update shows a 0.0% increase in AHE in constant dollars from July to August, based on a naïve forecast for the seasonally adjusted CPI inflation rate. The annual growth rate for K$ AHE was 0.1% in August, down from 0.5% in July, and 1.1% in June. The annual growth rate for K$ AHE from the LFS in June is way stronger than the 0.3% growth rate for the same month for K$ AWE from the SEPH, which is more trustworthy.

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