Has UK employment peaked and if so why aren’t wages rising faster?

After yesterday’s generally good economic news from the UK we turn to the labour market today. This has been if we switch to a football analogy a story of two halves. The first half continues an optimistic theme as we note how the quantity numbers such as employment and unemployment have developed. Indeed it was the rally in employment that signaled the  turn in the UK economy at the opening of 2012 and set the trend some time before the output numbers caught up. If we take a broad sweep the number of people employed in the UK has risen from 29.4 million to 32.4 million. That is not a perfect guide due to problems with how the numbers are measured and the concept of underemployment, but if we switch to hours worked we see they have risen from 935 million per week to 1032 million per week over the same time period.

But the ying to that yang has come from the price of labour or wage growth which has consistently struggled. This has been associated with what has come to be called the “productivity puzzle”. These are issues which are spread far wider than the UK as for example whilst the rise in US wage growth seen on Friday was welcome the reality was that it was to 2.9%. Or to put it another way the same as the July CPI inflation number. That sets a first world context where growth is not what it used to be as I looked at only on Friday. The truth is that it was fading even before the credit crunch and it gave it a further push downwards.

Unfortunately whilst we face the reality of something of a lost decade for wage growth the establishment has not caught up. It continues to believe that a change is just around the corner. For example the Ivory Tower at the Bank of England has forecast year after year that wage growth will pick up in a rinse, fail and repeat style. This is based on the “output gap” theory that has been so regularly debunked by reality over the past decade.

The MPC continues to judge that the UK economy currently has a very limited degree of slack. ( August Minutes)

This has been its position for some years now with the original starting position being that the “slack” was of the order of 1% to 1.5%. In that world wages would be on their way to the 5 1/2% growth rate predicted by the Office for Budget Responsibility back in the summer of 2010.

Does this really matter? I think it does. This is because when an official body becomes something of a haven for fantasies it allows it to avoid facing up to reality especially if that reality is an uncomfortable one. A particular uncomfortable reality for the establishment is the fact that the decline in wage growth has accompanied the era of low and negative interest-rates and the QE era. If you try to take credit for employment growth ( I recall Governor Carney claiming that he had “saved” 250.000 jobs with his post EU leave vote actions) then you also have to face the possibility that you have helped to reduce wage growth. Propping up larger businesses and especially banks means that the “creative destruction” of capitalism barely gets a look in these days.

Today’s data

Wages

Looked at in isolation we got some better news this morning.

Between May to July 2017 and May to July 2018, in nominal terms: regular pay increased by 2.9%, higher than the growth rate between April to June 2017 and April to June 2018 (2.7%)……..total pay increased by 2.6%, higher than the growth rate between April to June 2017 and April to June 2018 (2.4%).

Should you wish to cherry pick in the manner of the Bank of England then your focus would turn to the 3% growth of private-sector regular pay and perhaps to its 3.2% growth in July alone. Indeed you could go further and emphasise the 3.5% growth in regular pay in the wholesale retail and hotel/restaurant category which was driven by 4.4% growth in July.

But the problem for the many cherry pickers comes from the widest number which cover everyone surveyed and also includes bonuses. You see it started 2018 at 2.8% as opposed to the 2.6% in the three months to July. Also if we look back we see that weekly total wages fell in July of 2017 from £509 to £504 so the 3.1% increase in July is compared to a low base. Thus even after what is six years now of employment gains we find ourselves facing this situation.

Please take their numbers as a broad brush. It is welcome that they provide historical context,  but also disappointing that they use the CPIH inflation measure which via its use of imputed or fantasy rents is an inappropriate measure for this purpose. Pretty much any other inflation measure would overall show a worse situation.

Employment

The long sequence of gains may now be fading.

Estimates from the Labour Force Survey show that, between February to April 2018 and May to July 2018, the number of people in work was little changed………..There were 32.40 million people in work, little changed compared with February to April 2018 but 261,000 more than for a year earlier.

On the surface it looks like the composition of employment at least was favourable.

Figure 4 shows that the annual increase in the number of people in employment (261,000) was entirely due to more people in full-time employment (263,000).

Due to the way full-time employment is officially counted (for newer readers rather than being defined it is a matter of choice/opinion) we need confirmation from the hours worked numbers.

Between February to April 2018 and May to July 2018, total hours worked increased (by 4.0 million) to 1.03 billion. This increase in total hours worked reflected an increase in average weekly hours worked by full-time workers, particularly women.

Work until you drop?

There has been a quite noticeable change in one section of the workforce.

The number of people aged 65 years and older who were in employment more than doubled between January 2006 and July 2018, from 607,000 to 1.26 million. The same age group had an employment rate of 6.6% in 2006 and this increased to 10.7% in the three months to July 2018.

We get some suggested reasons for why this might be so.

the improved health of the older population, which increases older workers’ desire to continue working for reasons of status, identity and economic well-being.

 

changes to the state pensionable age for both men and women.

 

changes to employment laws that prohibit discrimination based on age.

 

older people’s desire for financial independence and social interaction.

To my mind that list misses out those who continue to work because they feel they have to. Either to make ends meet or to help younger members of their family.

Comment

There is a fair bit to consider today and this time around it concerns employment itself. At some point the growth had to tail off and that has perhaps arrived and it has come with something else.

The level of inactivity in the UK went up by 108,000 to 8.76 million in the three months to July 2018, resulting in an inactivity rate of 21.2%. Inactivity increased by 16,000 on the year.

That is an odd change when the employment situation looks so strong and I will be watching it as the rest of 2018 unfolds.

Moving to wages we find ourselves yet again at the mercy of the poor quality of the data. The exclusion of the self-employed, smaller businesses and the armed forces means that they tell us a lot less than they should. Also the use of a broad average means that the numbers are affected by changes in the composition of the workforce. For example if many of the new jobs created are at lower wages which seems likely that pulls the rate of growth lower when they go into the overall number. So it would be good to know what those who have remained in work have got. Otherwise we are in danger of a two or more classes of growth and also wondering why so many in work need some form of income support.

 

 

 

 

 

 

 

 

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27 thoughts on “Has UK employment peaked and if so why aren’t wages rising faster?

    • Hi therrawbuzzin

      At the moment I think we are pretty much incapable of implementing any serious limit on immigration. We might restrict certain routes and ways in but if people really want to come here I think the border is rather porous.

      • I think a lot of the so called wage puzzle is due to immigration of people from Europe. It probably also explains why the employment ratio is so high – people who emigrate for jobs tend to be (surprise) workers. So the UK demographics have changed to have more workers relative to the none-workers. Long term this is a good thing for the UK, having a country full of people who are willing to move long distances to get work will certainly improve the genetic stock of the UK! So I would not restrict immigration. But perhaps we could do something to improve the quality of the immigrants, as Australia and Canada do. I like the idea of post Brexit UK, Canada, Australia, NZ free immigration system a lot.

      • “At the moment I think we are pretty much incapable of implementing any serious limit on immigration.”

        ___________________________________________

        Not so. The lack of will of big business to fund its own training costs, and its capture of our political system is all that stands in the way.
        We can end extra-EU immigration tomorrow if there is the political will and EU immigration can be ended with Brexit, as is the expressed wish of the people.
        Frankly, my post should have said, “there is no ECONOMIC case for immigration; I am no xenophobe and believe that a reasonable amount of exposure to other cultures broadens not just the mind, but the soul, but having our most common name for baby boys being “Mohammed” in all its various forms, is not reasonable exposure

  1. I wonder if MC will get a pay rise now he is staying on till 2020?
    Just as well he is not on performance related pay, otherwise he would be paying us!

  2. Shaun, Its good that you highlight the drudgery for the masses. I reckon it is a conscious effort by the state to insert itself as an subsidy-providing “paternalistic” agent. Industry and otber gig employers get supine workers and the state gets to apply over-bearing and invasive contol over workers lives. Its a win win for the maintenance of the status quo.

    On a related matter, the debt soaking of poor people for them to enjoy a roof over their head or indeed an education is another arm of the same control mantra.

    I watched this very interesting you tube by Lord Adair Turner.

    Formerly I had taken him as an establishment patsy due to his FSA role but some of his explanations in the lecture are honest and indeedcontroverisal. Maybe he is not all bad.

    Once you work through his arguments then the current rock and hard place for the UK economy is a lot clearer….eg. why is the BoE growing consumer debt at 9%. We are definately going to be managing some crescendo of challenge in the next couple of years….

    Keep up your insightful analysis.

    Paul C.

    • Hi Paul C

      Thanks for the link and for providing a different side to Lord Turner. I still recall a comment on here which described him as having had a “talent less ascent”! So the other side of the coin deserves an airing.

    • Paul, thank you for the link. Shaun would have a much better idea than me whether not enough attention is paid to monetary aggregates or monetary financing of fiscal deficits. I do agree with Turner it is unfortunate that the monetizing of deficits, something Friedman advocated under the right circumstances, has now got the pejorative label “helicopter money”.I didn’t particularly like Turner’s takedown of inflation targeting as failing the world at the time of the global financial crisis. A lot of countries severely affected by it, the United States, Ukraine, the Baltic countries, Montenegro, didn’t have inflation targeting central banks at the time. The Bank of England and the ECB both targeted inflation indicators that didn’t include housing prices. The Bank of Canada did, and Canada fared much better in the financial crisis than the UK or the EU. The Reserve Bank of Australia targets the Australian CPI with a net acquisitions approach to OOH, and Australia avoided a recession altogether in the financial crisis. Turner also seems to accept 2 as the magic number for the target inflation rate, and doesn’t give any thought to whether the world might not have done better if the major central banks had been targeting a lower inflation rate, say 1.0% or 1.5%, prior to the financial crisis.

  3. Another good prediction made by my eminently modest good self. Whereas Shaun’s Law states never believe anything until it is officially denied, 40Law states that any statistic that is causing concern will mysteriously move in the desired direction until people forget about it. The figure will then return to trend.

    You are right to keep a sharp eye on the inactivity rate because it indicates something isn’t right.

    • Hi bill40

      It may simply be that inactivity has not been measured correctly and therefore is like so much official data. I saw a view expressed earlier that the rise may have been as a result of changes in the criteria around the Employment and Support Allowance. So we wait to see the next few releases on this subject.

  4. So Mark Carney gets to stay on to the end of the BREXIT dance. I now fully expect reports of major disagreements between May and Barnier over some issues to be widely reported by the Fake news peddlers, followed by last minute talks that fail, followed by last last minute talks that drag on and on over days or weeks with eventually a triumphant announcement that Treason May held out and Barnier capitulated to give the UK the best deal nobody could have dreamed of.

    All the previously obstacles and sticking points will have been mysteriously swept away, concessions made or considered inconsequential, leaving the path clear for a triumphant Treason May to present the deal as better than we could ever have dreamed of, that gives us all the benefits of hard BREXIT but also allows us free access to the EU trade zone, everything is wonderful.What a brilliant way to sell the impossible to the Eurosceptic masses?

    But in reality, we will have a deal that is worse than what we have currently, having to pay billions to leave in all but name to achieve it, and as JRM has said, reduced to the level of a Vassal state with no say in anything.

    Should anything go wrong in the meantime, say a leadership challenge Carney will be on hand to cut interest rates and redeploy QE to ensure the collapse of sterling to put such enormous pressure on the rebels to the point where they quit.

    It’s all in the bag.

    • And the real issue with Ireland is emerging. Their economy relies on using the UK as a ‘land bridge’ to get their goods to the EU (never mind the huge amount of actual trade they do with the UK, not the ficticious numbers the US multinantionals pass through the place which distort the wgole economy)

      As Ireland is in such a mess any disruption could bring the whole Eurozone pack of cards down (although smaller the debit levels are up there with Greece).

      I think this has been the hidden issue all along and its why the EU has tried to use the Good Friday agreement and NI border as a cover to get the UK to play ball on this

    • To be fair to Carney if it wasn’t for his debt/housing bubble (UK one not his Canadian one) the relatively narrow victory for Leave may have gone the other way. As if the under 50s leave voters who were priced out hadn’t bothered voting or chose to keep the status quo as they wouldn’t want to risk a spike in interest rates then we may well not have had Brexit.

      So Carney may well have done something useful after all, just not by design.

      Him and Hammond are cut from the same cloth, nicest thing i could wish either is an early death.

      • Arthur, thats a complicated argument. That Carney blowing bubbles meant that younger people who could have voted and maintained the status quo were they to have been debt soaked with mortgage commitments. But since they had no stake they didnt bother voting so it was left to the mail readers to take us out.

        Is that how you meant it?

        • No i mean that if the under 50s were able to have a stake in society (house) at affordable levels they’d have voted to keep the status quo. It isnt the young 30-50 is not young imho.

      • ” nicest thing i could wish either is an early death. ”

        naw , kidney stones first then sciatica

        if you’ve ever had either ( I have , 5 stones in 2 years !! ) you would know what I mean

        ( and a paper cut to his bell …… ARGH! , crosses legs)

        Forbin

  5. Employment has just about peaked I believe.

    One has to take into account the restaurant, coffee shop as noted on BBC this evening seen quite a growth the last year or two but its now getting to saturation. Interestingly the building trade was also mentioned at the same time, lack of labour has pushed up wages.

    However those two sectors may now struggle to make any further headwind and housing looks like it may have peaked.

    All of the above suggests to me wages will decline as those two sectors slow down.

    The other problem is retail jobs are continuing to be axed, and may add to more unemployed going forward.

    But lastly technology is gaining traction, self service checkouts will become the norm, the robots are coming.

    • Hi Peter

      I find that I have come to prefer the self-service checkouts a bit like ATMs at the bank. It is not so easy to explain why as ATMs as supermarket checkout staff are not targeted to press you to buy other stuff in the way that bank cashiers are.

      As to construction wages they may already be on the way down as July showed a an actual fall in weekly wages from the £616 of June to £610 reducing the annual growth rate to 3.3%.

  6. Composition of the work force and tax credits. You’re coming around to my way of thinking. But limitless supplies of low value labour to feed a gangmaster economy is not the only issue. Globalisation itself is a key component – both in terms of wage levels through blackmail style bargaining power and actually moving work from high wage to low wage economies. Apart from productivity reflecting the composition of the workforce, I fundamentally disagree that workers receive the fruits of raising output, e.g. making 4 cars instead of 3 a day. Pay is all about power, nothing more and nothing less. It doesn’t matter whether you are an overpaid exectuive with your hands in the shareholders’ till or an ordinary worker fighting through the winds of open borders and globalisation.

    The FT love to cite automation and the sexy ‘AI’ of the future. If it were that, we wouldn’t have over a hundred thousand people working in hand car washes.I think it interesting when I’ve visited my local Morrisons supermarket and noted that the tills were dominated by humans subsidised by the miracle of Brown’s tax credits, many of them working part-time….and as soon as Osborne raised the minimum wage in a back door way of reducing the cost of so called tax credits, the number of automated scanners mushroomed. The simple technology had been there for some time, but like automatic car washes (even touchless ones!), there simply isn’t the financial incentive to adopt them and, in fact, in the latter’s case has gone backwards away from first world to third world.

    You don’t need ‘AI’ to see that an incredible number of jobs can be made more efficient with automation and capital investment. Probably 80% of university places could be done away with in favour of remote learning and study courses like the OU. Just a little thought, if one were to turn one’s mind that way. But I suspect other (political) interests intrude and stop us improving productivity.

  7. I should also add, you don’t need automation to improve productivity. Most of all, one just applies a little thought and suddenly whole swathes of pointless work magically disappear. Get rid of National Insurance and merge with income tax. Get rid of the BBC license fee and take it from central taxes (there is actually no more widely used service than TV) and stop the number one cause of Court Cases and criminalising people. Get rid of car tax and 3rd party car insurance (which many avoid anyway) and put on the price of fuel. Get rid of the pensions industry and replace with a simple, centrally organised state pension system augmented by ‘Super ISA’s’. Get rid of inheritance tax (that only the aspiring pay) and capital gains tax and stamp duty and replace with an annual wealth tax on assets.

    So, there in a paragraph I have down sized the private company and pension industry to zero, the hoardes of BBC license fee collectors and the number one use of Court time, a high % of the accounting and tax collection industries, a large part of the car insurance industry and from my earlier suggestions, a high proportion of the higher education scam to add to eradication of the hand car wash industry . Not bad for a few minutes work. Anyone from Government reading this can have it for free.

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