Will real wage growth ever go back to “normal”?

A constant theme of the credit crunch era is the unwillingness of the establishment to accept that past economic theories need to be put as a minimum on the back burner. Two examples of that are the concepts of full employment and the related one of the output gap. If we start with the former that does not mean that everyone is employed as the “man from Mars” from Blondie’s song rapture might think. It involves allowing for what is not entirely pleasantly called frictional unemployment, for example of individuals temporarily between jobs. There is an obvious problem with measuring that but as we discover so often the Ivory Towers are seldom troubled by issues like that.

The output gap was something of a simple concept around comparing actual output with potential. However supporters were invariably in the group who argued there was a large amount of lost output from the credit crunch and this end gamed themselves as we are still well below that and may always be. The Bank of England Ivory Tower dropped that and instead kept telling us we had an output gap of circa 1.25% of GDP. In the end they decided to drop as it was always 1.25% or so and switched to employment as a measure. Why? Well in the UK like more than a few other places it boomed so they could shoehorn their theory into a different version of reality. Sadly for them they have made fools of themselves as their estimates began at 7% unemployment went very quickly to 6,5% and are now at 4.25%. Or if you prefer silly,sillier and so far at least silliest.

Reality

The problem for all of the above has been shown in Nihon or the land of the rising sun. There the unemployment rate has fallen as low as 2.2% this year and in August was 2.4% How can it be half the natural/full rate? Please address that question to Threadneedle Street. Whilst there are suspicions about the accuracy of unemployment rates there are also other signals of what in the past would have been called an overheating jobs market. From the Japan Times last week.

The percentage of working-age women with jobs in Japan reached a record high of 70 percent in August, government data showed Friday………The figure for women in work between ages 15 and 64 is at the highest level since comparable data became available in 1968 and compares with 83.9 percent for working-age men,

Other measures such as the job offers to applicant ratio going comfortably above 2 signal a very strong labour market and yet this morning we have seen this. From Reuters.

 Japanese workers’ inflation-adjusted real wages fell in August for the first time in four months……..The 0.6 percent decline in real wages in August from a year earlier followed a revised 0.5 percent annual increase in July, labor ministry data showed on Friday.

This is a rather awkward reality for those who have trumpeted a change in Japan in line with the two economic theories described above, and I note a lack of mentions on social media. If we look into the detail we see this.

Nominal cash earnings rose 0.9 percent year-on-year in August, slower than a revised 1.6 percent annual increase in July.

The average level of monthly earnings is 276,266 Yen or a bit under £1900. The highest paid industry was the utility sector at 438,025 Yen and the worst-paid was the hotel and restaurant sector at 123,405 Yen. The fall can be looked at  from two perspectives of which the first is a fall in bonuses of 7.4% and the next is that the numbers were pulled down by falls in the care sector (3.8%) and education (3.6%).

As to the surge ( real wages rose at an annual rate of 2.5% in June) it was as we believed.

Major Japanese firms typically pay bonuses twice a year, once during the summer and once near year’s end…….Summer bonuses boosted real wages in June.

This morning has also brought a confirmation of why this is good.

Japanese households increased their spending at the fastest rate in three years in August as consumers made more costly purchases, government data showed Friday.

Spending by households with two or more people rose 2.8 percent from a year earlier, after adjusting for inflation, to ¥292,481, the largest increase since August 2015, the Internal Affairs and Communications Ministry said. ( Japan Times)

But that will now rend to fade away after the welcome bonuses are spent. Sadly the output gap style theories are unlikely to fade away as reality is always “Tis but a scratch” along the lines of the Black Knight in Monty Python.

The UK

In the UK we keep being told that wage growth is just around the corner. From the REC this morning.

Starting salaries for people placed into permanent
jobs increased at the quickest pace since April 2015
during September. Hourly rates of pay for temp staff
also rose at a faster pace than in the preceding
month.

The strongest area was this.

IT & Computing remained the most in-demand
category for permanent staff in September.

Perhaps it is the banks finally waking up to the all the online outages and problems. But the problem is that a sustained rise keeps being just around the corner. In its desperation to justify its theories the Bank of England switched to private-sector regular pay in its attempt to find any reality fitting the work of its Ivory Tower. But if you pick a sub-section it has to eventually fire up the overall numbers to be significant and the picture there is that total wage growth has surged from 2.8% in January to 2.6% in July. Oh hang on…..

Or real wage growth is somewhere around 0% on the official inflation measures or negative on the “discredited” RPI which gives a higher reading.

The US

Today brings the labour market data for September but until then we are left with this.

In August, average hourly earnings for all employees on private nonfarm payrolls rose by 10 cents to $27.16. Over the year, average hourly earnings have increased by 77
cents, or 2.9 percent.

August was a good month but if we switch to the annual rate but we see that even in an economy that according to the GDP nowcasts is keeping up its 4% per annum growth rate wages are struggling to break 3%. The US economy has recovered better than most and is doing well now and yet wage growth has not followed much. Real wage growth is as you can see minimal.

Over the last 12 months, the all items
index rose 2.7 percent before seasonal adjustment.

According to the Financial Post it is a case of O Canada as well.

Over the three years he’s been in power, real wages have averaged annual gains of just 0.3 per cent, versus 1 per cent the previous decade.

Comment

A feature of the credit crunch era continues to be the attempt to ignore the more uncomfortable aspects of reality. There is welcome news in the way that employment levels recovered but the price of that seems to have been weak wage growth and especially real wage growth. This afternoon that number from the US Bureau of Labor Statistics will be poured over again for that reason. The big picture though comes from David Bowie.

Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Where’s your shame?
You’ve left us up to our necks in it

 

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29 thoughts on “Will real wage growth ever go back to “normal”?

  1. Hi Shaun

    Great article as always.

    Not sure if you’ve had a chance to checkout out September Halifax HPI data. It contains revisionism the boe would be proud of:

    September:
    https://static.halifax.co.uk/assets/pdf/mortgages/pdf/september-2018-House-Price-Index.pdf

    August
    https://static.halifax.co.uk/assets/pdf/mortgages/pdf/august-2018-House-Price-Index.pdf

    So in August they managed to eek out a 0.1% increase.But in September it magicially reverts back to -0.2% to soften this months falls. So two months worth of declines now, but as always the well drilled press concentrate on the annual 2.5 increase 😉

  2. Without wishing to delve into politics, you would think that politicians would pay more attention to real wages. In my opinion (but it is just an opinion), many of the seismic shifts in politics (Brexit, Trump, Corbyn, Eastern European politicians) arise from the lack of increasing prosperity among great swathes of the population. This has affected the dialogue on:
    1. Immigration/freedom of movement in the EU (seen to drive wages down)
    2. Government borrowing – look at demands for the end to austerity here in the UK or in Italy, despite high levels of debt and deficit
    3. Any sense of national unity, as it is obvious that the top earners have seen significant increases over the rest of the population. For example, Wall Street has just carried on increasing salaries, while flyover states stagnate on the wages front.
    4. Any sense of respect for experts, as these are all lumped in with those benefiting from the current system.

    So, while the Establishment has spent trillions on rescuing the banks,has failed to dent the WAll Street/City bonus structure etc, almost nothing has been done to secure an improved standard of living for the average earner.
    No wonder people are angry …

  3. Hi Shaun, this is truly worth discussion in the UK. Especially around immigration which has been substantial but also regarding the shortage of health professionals. We are immigrating doctors and nurses, not training enough and suffering significant attrition as working age folk leave the service. Mid-wives and nurses especially. This is not a private sector screw-up… its all Govt.

    I propose a Russian approach, the one they are doing now. Identfy the average age of death (Russia 65 for women and 60 for men). Then move the pension paying age to the death age. I think this would solve many of the problems around labour shortages but could depress wages also. In the UK maybe 73 and 71.

    On the other front of measuring so called unemployment I’ve seen believable studies which suggest percentages between 15% and 20% of working age people are not going to work in the UK and US. I posit that 5% in the UK dont go to work because they earn more staying at home watching their property (ies) value rise and living off that.

    Your notes on Japanese companies is interesting, I currently work for one and they are only paying me a year end bonus. I seem to be missing that summer holiday bonus. I will take it up with them.

    Regarding starting pay. I applied for a job with Brexit Dyson this week. They say they are “proud” to pay less than market value for my skills because people who apply to them really love the plastic vacuum cleaners and will work for less because of that.

    Its a crazy crazy world… probably a song in that?

    • Hi Paul,
      The issue you raise regarding skills shortages in the NHS is interesting and rarely covered in the mainstream lying media unless it is used as an excuse for mass uncontrolled immigration of which the non EU portion is predominantly unskilled and therefore dependent on benefits for their entire lives.

      If sensible rules were applied to immigrants so that a points system or fast tracking of doctors and specialist nurses etc were applied there would be no need for arguments about immigration as only peope who wanted to work and contribute would be allowed in, but those who are behind the mass immigration want to shut down those who oppose it and call then far right/racist etc, and have no barriers to entry.

      The issue of doctor shortages was accurately put by a consultant I once saw interviewed in a fly on the wall documentary following A&E doctors. He said due to political correctness every year women have to comprise almost half of all new trainee doctors, this is despite the government knowing that after qualifying the vast majority have retired or only work part time within ten years. The enormous cost and the time taken to train(about seven years) is all wasted, and as a result there are only half the number of doctors qualifying that they expect, add into that equation the increasing number of male doctors who quit the NHS(for obvious reasons) to emigrate to Canada,New Zealand, Australia or USA and it’s not difficult to see why we have a permanent shortage.

      Regarding Dyson, I would just like to say that I’m really proud of my £100 Vax, as I just love the fact it does exactly the same job as a £400 Dyson, but like Apple products, you’re not just buying a product, you are bragging to everyone that you have so much money that you don’t care how much you overpay for it aren’t you!

      • I have watched the ‘Americanisation’ of the UK over the decades and how younger people have become very label conscious and avid consumers. This is in total contrast to my generation, where flashing a label is considered incredibly vulgar. If we have got to the stage where folk now brag about the make of their vacuum cleaner then we are in a worse state than I had imagined!! What next – the brand of toilet paper you use?

        • Here’s my 2 cents worth –
          I started my career in the IT industry in the early 60s. Throughout the late 80s and early 90s I struggled at home with PCs and Microsoft. From the mid 90s onwards I chose Apple for home use and never looked back. More expensive but far, far less trouble (but I did worry the company would go bankrupt). I don’t like any of the bagless vacuum cleaners. The household Kirby dates from 1994 and works fine.
          I’ve never worn clothes with writing on them and never will. And the brand of toilet paper I use is my business.

      • I believe that the current trainee doctor position is now slightly more that 50% female and I read on a Dr’s blog (although I failed to confirm it elsewhere) that the average retirement age of female doctors is 39 years. The Dr was blogging as a GP with his experience of trying to fill a GP vacancy (very difficult these days) with a string of young ladies who rarely lasted 6 months before becoming pregnant and NOT returning. My GP tells me that he has to pay a Non-partner GP more than he earns himself – if he can find one. You will understand that none of this can be mentioned in polite society for reasons of political correctness.

        • I wonder what all the Brits are doing. We don’t have enough doctors or nurses or fruit pickers or social workers and carers or builders and allied trades . . . Also, the Government’s Brexit readiness papers warned there would not be enough trained vets to check animal transports at the new borders. Where is everyone?

      • Immigration: Why are we raiding Third World countries for doctors and nurses and IT professionals, yet training tens of thousands of kids, to degree level, in media/gender/women’s studies?
        Could it be because we know that most of these kids are the factory-fodder of yesteryear, want to keep them off the unemployment figures as in S. Europe & can’t afford to educate them openly on the public purse, so we kick the debt down the road by taking the hit in 40 years when it is written off?

        Absolute disgrace taking highly skilled medical staff from these countries after they have paid for their training.

        Economic aid in reverse, but taking from the poor to give to the rich is the meme of tptb.

    • If you are going to die before you receive a pension, why pay into it?
      Imagine what would happen to all company pension schemes, and eventually financial institutions, if it became too obvious that people were being royally shafted throughout their working lives?

      Where then is the justification for NI payments?
      Imagine having to end it and add it to the rate of Income Tax?
      Where would be the justification for upper level limits?

      TPTB would have to dream up another scheme to drain the poor for the little they have.

      BTW, wages have been going backwards vis-à-vis house prices since the election of Margaret Thatcher.

  4. A lot of discourse in economics is about cycles; words such as “normalisation” imply that there is a trend that we will get back to: GDP growth of X%; wage growth of Y%; inflation of Z%.

    What is never taken into account is where underlying secular trends are taking things and there is a confluence of several current trends which militate against the BAU scenario, most particularly: demographics; automation and energy costs all of which provide a substantial challenge going forward.

    Demographic changes to the working population are beginning to affect the economic situation markedly. You may deduce that this means less people at work in which case why is the working population increasing? However are we working more hours in total or less? A higher employment figure is consistent with less hours worked.

    Furthermore the older members in the workforce are inclined to consume less so this affects consumption but not employment.

    Automation and AI are, and will, make increasing inroads into labour and put pressure on real wages.

    Energy costs have been increasing since 2000 and are included in almost everything we consume. The “free income” that is available for discretionary spending after the cost of essentials is coming down and will continue to do so.

    All of these are driving one way so the answer to your question is: maybe not!

    • Hi Bob J

      I agree completely about the issue of cycles with the implication that there is an equilibrium somewhere. The truth is there are times when there isn’t one. It may be that the period of real wage growth was a fluke. I hope not but there is no sign of it returning.

      The thing about energy costs that annoys me is the dishonesty and the way “green” costs have been slipped in by the back door with governments enforcing it then trying to claim they are keeping costs low.

  5. Prices rising at 2% are “stable”, and unemployment of 5% is “full employment”. Of course they are.

    “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean- neither more nor less.”

    “The question is,” said Alice, “whether you can make words mean so many different things.”

    “The question is,” said Humpty Dumpty, “which is to be master-that’s all.”

  6. The real wage growth a complex area as discussed many times before. I did have a business which I ran for over 50 years and come into contact with the rich and poor alike related to the building industry. What I can say is despite some thinking the building trade doing well it doesn’t feed through to the workers.

    I have friends still in the building trade at the self employed level ands their pay no no where near what it was over 15 or years ago, some self employed could earn £1,000 a week but now are still fortunate in most cases to get nearer £750 a week bear in mind they have to pay expenses out of that vans/cars and receive no pension benefits from employers, no sickness benefit or holiday pay.
    So far as the construction sector is concerned real wages for the workers (excluding some staff) and it makes no matter whether they be employed or self employed poor.

    The construction sector worse than the building sector the builders. Construction tight margins but building companies been making circa 25% profits, however the workers not seeing rises like that.

    From my experience in business over the last 50 years is workers now have to do far more work for tight pay, that is seen with Supemarket workers in some cases not receiving the same overtime as they did working Saturday and Sunday when many got double time.

    What the bosses rely on is convincing the staff its suits many a female worker to work unsociable hours and as such they shouldn’t need overtime! I am not saying this is rampant as I don’t have inside better information but have seen reports of this going on. According to reports many middle managers gone the ones which are left have to double their work load.

    To put some of this in context one only has to look at the work ethic with Aldi and Lidl, the checkout staff deal with tills and stock up shelves and run off their feet they are timed on a check out its hard work. The pay probably 10 to 20% more than a Tesco worker but they work 30% harder and need to have a goof brain be quick thinking and prepared to graft.

    What I am trying to say is in real terms the British worker works far harder now than in the 70s and far less pay in comparison

    However the problem today is people expect far more now than we had in the 70s with mobile phones, all the tech stuff as well and kids expect a car when they are old enough. Even in the 60s only professionals had cars and phones central heating hadn’t been rolled out.

    I was fortunate to see both ends of the spectrum being born in a mill town and seen the poverty back to back houses with no inside toilet and no bathroom then later on moved away into a prosperous area and seen the lavish lifestyle more Rolls Royce cars than most areas in the UK, so seen the changes over the years.

    Neither is there an answer at the moment because in the UK we are still behind the US and Europe so far as productivity is concerned that is frightening in itself so that means less pay and more work for the same unless we move into more technology.

    The world is getting over populated with less resources and an ageing world wide elderly as well far more need for care in retirement and not enough young to finance the elderly.

    Wars have sometimes resolved some issues but no one want that one anymore. Neither do I. The world is in a bigger mess than many realise at the moment living on a time bomb of too much debt and no one knows what to do about it.

    it will surely blow again and another financial crisis is surely round the corner. Then disaster strikes in some form or another then we all start all over again trying to pick up the pieces bewildered wondering who’s fault it was and how to prevent it happening again.

    Man has lost his way I am afraid we live in a consumption society all wanting more than our neighbour in some cases being entirely driven by greed, no matter what it takes.

    I feel sickened when I see the football families who I will not name displaying their wealth day after day when the poor cannot feed feed their kids. I know the parents sometimes to blame for wanting more than they can afford but it isn’t the kids fault and they are our next generation.

    Taxation needs to be fairer the people at the top need to curb their excess. I have said my peace.

    • Hi Peter

      The people at the top have got uber greedy. Consumers have seen plenty of gains but some of it is at the expense of workers who of course are mostly the same people. Putting it another way in terms of overtime in central London where I live the days are very similar now. Even so I occasionally do a double take at a supermarket delivery on a Saturday or Sunday night.

      • Sorry for any bad grammar its no editing and I am not that good typing on a laptot with some sticky keys.

        But in essence you are right people at the top have got very greedy indeed at the expense of the working class and poor.

        Sometimes these things can be rectified by riots or an uprising who knows what would happen with another financial crisis which many think is on its way soon.

  7. Hello Shaun,

    the answer is currently lost in the post ………

    so the creaking and groaning of the UK ship of state timbers grow louder …. “House prices dropped 1.4 percent on the month in September after a 0.2 percent fall in August” Halifax.

    wages are not growing enough and Wonga is maxxed out or otherwise out to lunch

    now we’re taxing the foreign buyers of the London housing market.

    as I’m still a pest at the DWP I can report that still UK industry is still the same as it was years ago – we want you but take a 10-20% paycut and these 37.5 hour weeks , well you’ll need to work 70 to do the work we’ve got for you .

    be grateful to have a job offer , you SERF…………… the boss needs more money for his super yatch..

    AI , robots ? why ? we can get labor in cheaper than that from abroad.

    raise the pension age to 70 – then only count those under 55 and then if you’re out of work and ill – back to the DWP and last 10-15 years on bennies till yer 70 ( check the change in costs of pensions to bennies as time goes on ) .

    what can we do ?

    too late to raise interest rates – that was needed years ago – today we’d tank the economy faster than its tanking now – brexit or no brexit ( or brexit lite as it looks like to be ) .

    piece work and a life time of poverty , would you really be a uber or zero hour contractor if you could get a proper job ? ( one that pays taxes and does not need bennies top-ups – we should be honest and exclude them from full employment stats – except I suspect that would give the game away )

    I see there’s more talk of renting stuff now , why bother to own when you can rent ?? Well indeed , must be ignoring history here , but hey ho

    got to secure some more popcorn ……

    Forbin

  8. Great blog as usual, Shaun.
    Thank you for the link to yesterday’s FP article on Canada’s stagnant real wages, which I hadn’t seen. The breadth of your reading never fails to impress. Today saw the publication of labour market data for Canada as well as the US. Although there was a drop in the unemployment rate it confirmed Canada’s dismal performance in terms of real wage growth. Average hourly earnings in 2002 constant dollars (my estimate, using the seasonally adjusted CPI as the deflator) had an annual increase of 0.2% in August, but a decrease of 0.3% in September. Average weekly earnings in 2002 constant dollars similarly went from a 0.2% August increase to a 0.4% September decrease.
    The average annualized rate of change of AHE in 2002 K$ has been negative (-0.1%) under Trudeau, while the average annualized rate of growth of AWE in 2002 K$ has only been 0.4%, both better than the results over September 2017 to September 2018, but substantially inferior to those achieved under the Harper Conservative government. The FP article noted increased immigration stimulating growth, which is true, but it hasn’t been favorable to real wage growth, the more so since there has been a big increase in illegal immigration starting in 2017. While real GDP growth has been good, business investment and labour productivity growth have been weak. Although one source of uncertainty has disappeared with the negotiation of the successor to NAFTA, even the coolest international investor is going to be at least a little rattled when Canada’s PM and Foreign Affairs Minister have set themselves up as global leaders of the Donald Trump Resistance Army.

    • Hi Andrew and thank you

      As to Canada the interest for an outsider like me so to speak is noting if there is any difference caused by the availability of resources. Some of the trends are favourable as in I know the Alberta oil is priced lower than Brent Crude but there still should be a gain for the price rises. Yet pretty much everywhere real wage rises have one missing. Something the globalists keep quiet about.

  9. Businesses are not charities they are insatiable for ever increasing profit.
    It is no coincidence that declining union membership is accompanied by declining wages.

    • Hi Private Fraser

      Many of the checks and balances have failed us. We get a flicker from time to time as for example with Unilever today where the shareholders impose some discipline on the managerial class. But the managers and directors have become a self imposed elite often above the law as well and it is not a good thing.

  10. What would ‘real wage growth’ look like if Osborne hadn’t increased the minimum wage by law to bring down spending on tax credits?

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