UK employment remains incredibly strong with even a flicker from real wages

Yesterday brought good news in that UK inflation is looking like it will be a little more subdued than our worst fears. However even so today we move onto comparing it with wage growth which is in a phase where it is below the inflation target measure of the Bank of England ( CPI 2.6% ) and even more so compared to the Retail Price Index at 3.6%. We started the week with some ominous news on the wages front as the Chartered Institute of Personnel and Development or CIPD released this survey on Monday.

basic pay award expectations for the next 12 months remain at just 1%

That was a downgrade from the circa 2% that we seem to be rumbling forwards at. According to the CIPD the reasons for this are as follows.

Against the backdrop of poor productivity growth, the report points to an increase in labour supply over the past year as a key factor behind the modest pay projection. This is driven by relatively sharp increases in the number of non-UK nationals from the EU, ex-welfare claimants and 50-64 year olds; although the report is keen to stress the future migration trends appear highly uncertain.

I do not know about you but I was not expecting to see a rise in employment based migration from the European Union being reported! This seems to be predominantly for lower-skilled jobs.

Employers report a median number of 24 applicants for the last low-skilled vacancy they tried to fill, compared with 19 candidates for the last medium-skilled vacancy and eight applicants for the last high-skilled vacancy they were seeking to fill.

This is fascinating in an economics concept and of course yet more dreadful news for the Ivory Tower theorists who face yet again the prospect of explaining why 2+2=5. Labour supply is supposed to have shrunk as EU citizens leave adding to the output gap which means wages will surge. We got something on those lines from Ben Broadbent of the Bank of England a week or two ago. The same Bank of England that makes this mistake every year.

The good news was that labour demand was reported as strong.

the long-term unemployed are finding work more quickly and the amount of workers aged 50-64 who are in employment has risen by around 200,000 during the past year……This is reflected in the quarter’s net employment balance – a measure of the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels in Q3 2017 – which shows an increase from +20 to +27 during the past three months.

Bank of England Agents

They were more upbeat perhaps indicating that bonus pay is on the rise.

Recruitment difficulties had edged higher, and were gradually broadening across sectors and skill areas. Despite this, labour cost growth had been modest, with pay awards clustered around 2%–3%.

Today’s data

Employment

There is continuing evidence that labour demand continues its long climb in the UK.

There were 32.07 million people in work, 125,000 more than for January to March 2017 and 338,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.1%, the highest since comparable records began in 1971.

This backs up the CIPD view that labour demand remains strong and poses yet again a conundrum that was in vogue around 4 years ago. This is that the employment figures look stronger than the economic output ( GDP ) ones. Last time around it was the employment figures which were the leading indicator so let us cross our fingers. Also there was another piece of news hinting at a stronger jobs market.

There were 883,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 20,000 fewer than for a year earlier.

Also the numbers employed had something that you might not have thought was true if you read the mainstream media. From Andy Verity of the BBC.

In year to end of June, the number of UK born people working in the UK increased by 88,000. Non-UK born people working increased by 262,000.

I thought everyone was leaving? If we look at the sector mostly likely to be affected EU nationals there has still been growth mostly driven by Bulgarians and Romanians but slower growth than before.

Unemployment

There was further good news here.

There were 1.48 million unemployed people (people not in work but seeking and available to work), 57,000 fewer than for January to March 2017 and 157,000 fewer than for a year earlier……The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.4%, down from 4.9% for a year earlier and the lowest since 1975.

For newer readers higher employment mostly means lower unemployment but does not have to as there are other factors such as size of the labour force. The good news extends to the news on underemployment. We only get quarterly hints on this but in the 3 months to June the rate was 0.5% lower than last year at 7.7%. So relatively good but if we look back for some perspective then we see that it was pre credit crunch mostly in the mid 6% range.

Wages

There was some better news here which is welcome to say the least.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.1%, both including and excluding bonuses, compared with a year earlier.

This means that real wages fell by a little less than the trend predicted.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.5%, both including and excluding bonuses, compared with a year earlier.

Actually if we drill down into the monthly detail we see that in terms of official calculations real wages nudged a little higher in June as annual wage growth was 2.8%. This was due to two factors one is that bonus payments were strong and that weekly wages fell by £1 last June so sadly it seems set to drift away. Also for those of us who still look at the RPI inflation figures even this better number still gives a negative answer for real wages.

Comment

There is some genuinely good news here as we see that the employment picture remains very strong a year after the EU leave vote ( as the numbers stretch to June). Unemployment is hitting lifetime lows for an ever higher percentage of the population and even wage growth has nudged higher. Yet as ever we need to ask if this is an example of “tractor production is higher?”

As we do so then we need to note that the underemployment numbers are higher giving a rate a bit more than 1% higher than in the pre credit crunch era. So more jobs but perhaps not quite as much more work as one might think. This is a partial explanation of what are wages growth numbers less than half of Ivory Tower output gap style explanations and expectations.

As to the wages numbers themselves we need to remind ourselves that they exclude the self-employed which means that we are likely to need to subtract something. But there is another factor heading the other way which is that we have created more lower paid jobs which seem to have weak wage growth and may be influencing the numbers or what is called compositional change. As ever the numbers let us down or as the TV series Soap reminded us.

Confused? You will be…..

 

 

 

The UK productivity crisis meets real wage growth

As we advance on the UK labour market data let us first note some good news. This is that the procedure for an “early wire” to be given to the UK establishment has been stopped. To be specific a list of people were in the past given the data some 24 hours before the rest of us, and as the ship of state is a somewhat leaky vessel there were obvious concerns that some traders would be more equal than others.

Moving back to today’s data the background to it was set by this official release from last week.

Productivity – as measured by our main measure, output per hour – fell by 0.5% in Quarter 1 (Jan to Mar) 2017.

As this is a factor in wage growth we have a potential driver of the dip in wage growth we have seen in 2017 but the problematic news did not stop there.

A fall of 0.5% takes productivity Quarter 1 2017 back below the peak achieved in Quarter 4 (Oct to Dec) 2007, which was broadly matched in Quarter 4 2016. Productivity is now 0.4% below the pre-downturn peak and 0.4% below the post-downturn peak.

The productivity problem

This is an example of what Winston Churchill meant when he said that Russia was a riddle wrapped in a mystery inside an enigma. The same type of thinking applies to productivity especially when it is described like this.

Productivity in Quarter 1 2017, as measured by output per hour, stood 16.8% below its pre-downturn trend – or, equivalently, productivity would have been 20.2% higher had it followed this pre-downturn trend

In my opinion looking at it like that merely tells us that the world has changed and that the productivity boat we were previously on sailed elsewhere. There is little point regarding it as a gap we can regain and I find it fascinating that those who seem to think we can get it back are supporters of policies like QE which have supported the zombie banks and companies which are a factor in this.

More significant to me is this from the June 2016 Economic Review.

Productivity is estimated to have grown at a compound average growth rate of 0.1% per quarter during the recovery between 2009 and 2014. This near-flat productivity growth is a phenomenon unprecedented in the UK since the Second World War.

We can update that because if we look at the expansion since the middle of 2013 we see that output per hour has risen from 98.1 then to 99.6 at the end of the first quarter. So a bit better than flat but not by much. This compares to past episodes.

This is in contrast with patterns following previous UK economic downturns where productivity initially fell, but subsequently bounced back to the previous trend rate of growth.

If we look back to the June 2016 Economic Review we can put a number on that.

However, at the same stages of both the 1990s and 1980s recoveries, productivity was more than 16% above the respective pre-downturn levels.

It is worse than that now as productivity three years or so later is where we thought it was then as whilst it has grown since the past was worse than we thought. What we can now clearly see is that yet another type of lost decade has been in play.

Moving to my explanation if we move on from the drop caused by the credit crunch and look at the more recent period I have written before that there are real problems in measuring productivity in the service industries. Not only are they pretty much 80% of our economy but they have been in essence our economic growth. Productivity in haircuts or operations for surgeons? Maybe in some cases but in others no.

The latest numbers seem to be picking this up.

Labour productivity fell in services but rose in the manufacturing industries; services productivity fell by 0.6% on the previous quarter, while manufacturing productivity grew by 0.2% on the previous quarter.

Employment

This is the good news side of the issue. What I mean by that is that the number of people who are employed continues to grow.

For March to May 2017, there were 32.01 million people in work, 175,000 more than for December 2016 to February 2017 and 324,000 more than for a year earlier.

Which brings more associated good news.

For the latest time period, March to May 2017, the employment rate for people was 74.9%, the highest since comparable records began in 1971.

My argument would be that the employment is mostly in the service sector where we struggle to measure productivity. If we note the rise and the recent struggles of UK output it may be that measured productivity fell again in the second quarter of this year. So there you have it would you prefer more people in employment or higher productivity? It is not of course completely that simple but it is a factor in play.

Oh and I noted another factor in rising employment.

The increase in the employment rate for women is partly due to ongoing changes to the State Pension age for women resulting in fewer women retiring between the ages of 60 and 65.

Unemployment

This does not necessarily get better as employment improves but generally does.

the unemployment rate for people was 4.5%; it has not been lower since April to June 1975………1.49 million unemployed people, 64,000 fewer than for December 2016 to February 2017 and 152,000 fewer than for a year earlier

Wages

Actually these were a little better although you might not think so from the official release.

Between March to May 2016 and March to May 2017, in nominal terms, total pay increased by 1.8%, lower than the growth rate between February to April 2016 and February to April 2017 (2.1%).

If you look into the detail you see that the annual rate of growth in May at 1.8% was better than the 1.3% in April ( where the annual bonus season was weak dragging it lower). This meant that if we switch to real wages the annual rate of fall rose to -0.9% from the -1.3% of April.

If we look deeper into the real wage situation we see that the index in May was at 100.8 which means that as it was set at 100 in 2015. So we have had economic growth with little if any real wage growth and that stretches back as the index was at that sort of level in the summer of 2011. There is a long way to go to the January 2008 peak of 105.8.

Actually as the “not a national statistic” CPIH is used as the inflation measure I am sorry to have to tell you that a more accurate inflation measure would show an even worse performance.

Comment

To my mind we should be more concerned about the slow rate of productivity growth than the drop in 2007/08. We are now in a world of QE and zombie banks which will take us some time to get out of especially as many places are still getting in it! I would be looking to take some of the service sector out of the numbers on two grounds. The first is that we simply cannot measure it and for others it is not appropriate. As to improving our performance there have been some interesting ideas from Diane Coyle but there are also dangers as I find myself thinking of all the money being spent on Smart Meters for a very small potential gain as I read this.

Ensuring adequate investment in infrastructure to meet our current and future needs and priorities

Also today is another grim day at the Bank of England especially for its Chief Economist Andy Haldane. Perhaps this is the true reason he is on something of a tour of the UK! Regular readers will be aware that I have listed the many failings of “Output Gap” theory in my time here. Andy has been a test case for these as he has got wage growth wrong again and again and again by using it. Well in February he thought he had struck a cunning plan by changing his framework so that the level at which wages would start to surge higher ( NAIRU) would be when unemployment fell to 4.5% or where we are now only a few months later as opposed to the couple of years he expected/hoped.

Dreamer, you know you are a dreamer
Well can you put your hands in your head, oh no!
I said dreamer, you’re nothing but a dreamer (Supertramp)

 

Of weak wage growth and bond markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Moving On

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

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

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

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

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

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

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

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

Bond Markets

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

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

Comment

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

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

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

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

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

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

 

 

UK Real Wages took quite a dip in April

As we looked at the inflation data yesterday it was hard not to think of the implications for real or inflation adjusted wages from the further rise in inflation. There were quite a few such stories in the media about a fall in real wages although they were a little ahead of events because the inflation data was for May and even today we will only get wages data up to April. However there is an issue here that has been building in the credit crunch era where real wages fell heavily as the Bank of England looked the other way as inflation went above 5% in the autumn of 2011. Sadly they relied in their Ivory Tower models which told them that wages would rise in response. Not only did that not happen but the recovery since has been weak and was in fact driven much more by low inflation than wage growth. This is different to past recessions as this from the Resolution Foundation shows.

As you can see the pattern has been very different from past recessions. Real pay rebounded very strongly after 1979 and did well after 1990 but on the same timescale in remains in negative territory this time around. A lot of care is required with long term data like this but this is a performance that looks the worst for some time.

The Napoleonic war period seems especially grim for real wages. If I recall correctly we were imposing a blockade on much of Europe which seems to have our economy hard as well.

Today’s data

We see that wage growth has faded a bit in the latest numbers.

Between February to April 2016 and February to April 2017, in nominal terms, regular pay increased by 1.7%, slightly lower than the growth rate between January to March 2016 and January to March 2017 (1.8%)……..Between February to April 2016 and February to April 2017, in nominal terms, total pay increased by 2.1%, lower than the growth rate between January to March 2016 and January to March 2017 (2.3%). The annual growth rate for total pay, in nominal terms, has not been lower than 2.1% since October to December 2015.

This is of course happening at the same time that inflation is rising and leads to this situation.

The rate of wage growth slowed in the 3 months to April 2017; adjusted for inflation, annual growth in total average weekly earnings turned negative for the first time since 2014.

That is rather ominous when we consider the first chart above as it means that we are getting further away from regaining where we were in 2008 rather than nearer so let us look deeper. The emphasis is mine.

Average weekly earnings, including bonuses, grew by 2.1% in the same period and are the weakest since the December to February 2016 period. Taking into account recent increases in inflation, real average weekly earnings decreased by 0.4% including bonuses and by 0.6% excluding bonuses in the 3 months to April 2017 compared with the same period a year earlier. This is the first annual decline in total real average weekly earnings since 2014.

Of course they are using the new lower headline measure of inflation called CPIH which uses Imputed Rents to estimate owner-occupied housing costs. So the goal posts have been moved a little and this happens so often these days that we should be grateful that so many goal posts now come with wheels.

Where does this leave us overall?

The situation is as follows according to our official statisticians. They are using constant 2015 prices so they are real numbers.

average total pay (including bonuses) for employees in Great Britain was £487 per week before tax and other deductions from pay, £35 lower than the pre-downturn peak of £522 per week recorded for February 2008.

Number Crunching

We can go deeper because there are numbers for the month of April on its own. In that month total pay only rose at an annual rate of 1.2% because whilst regular pay rose by 1.8% bonuses fell by 5.8%. Care is needed as if we look back April has been an erratic month for bonuses but we see that real wages were falling at an annual rate of 1.5% if we use CPI inflation. 1.4% if we use CPIH and 2.3% if we use RPI. Even if we ignore the bonus numbers we see -0.9% for CPI, -0.8% for CPIH and -1.5% for RPI.

The sectors which seem to have impacted in April are the finance and construction ones which both saw total pay fall at an annual rate of 0.5%.

Is the UK labour market tight

Conventional analysis based on such theories as the Phillips Curve will be telling us that the UK labour market is “tight”. An example of this is below from Andy Verity of the BBC.

Unemployment: a 42-year low (1.53m, 4.6%); work force: another record high (31.95m people). But tight labour market isn’t pushing up pay.

If we put some more meat on those bones there are things heading in that direction as this shows below.

The number of people in work increased by 109,000 in the 3 months to April 2017 compared with the previous 3 months, to 31.95 million, with an increase in full-time employment (162,000) partly offset by a fall in part-time employment (53,000) . The employment rate reached a joint record high of 74.8%.

This looks good and indeed is but questions remain. For example having checked I know that there is not a clear definition of full-time work it is something that responders to the survey decide for themselves. Added to this is the issue of self-employment and how much work they are actually doing.

self-employed people increased by 103,000 to 4.80 million (15.0% of all people in work).

Just as a reminder the self-employed are excluded from the official wages data. There is more reinforcement for the labour market being tight here.

Total hours worked per week were 1.03 billion for February to April 2017. This was 0.7 million more than for November 2016 to January 2017 and 15.4 million more than for a year earlier.

We are left with the concept of underemployment here I think which measures the gap between the work that people are doing and what they would like to do. Sadly the UK does not have an official measure of this unlike the US with its U-6 data. We only have flickers of insight via the growth of self-employment which needs to be sub-divided into positive and negative and the rise of zero hours contracts. In terms of influencing pay there seems to have been an associated rise in job insecurity but we have no clear measure of this.

Comment

The real wage squeeze we feared for this year is now upon us and we face the grim reality that it has been more than a lost decade for them.

Looking at longer term movements, average total pay for employees in Great Britain in nominal terms increased from £376 a week in January 2005 to £502 a week in April 2017; an increase of 33.5%. Over the same period the Consumer Prices Index including owner occupiers’ housing costs (CPIH) increased by 31.8%.

The cross-over was in early 2006. This poses all sorts of problems for the Ivory Towers who will look at the employment numbers and forecast much stronger wage growth. Of course they were usually responsible for the increasingly inadequate employment data as we note that one thing they are certainly very poor at is adapting to ch-ch-changes.

Grenfell Tower

Let me express my deepest sympathies for anyone involved in the dreadful fire there which started this morning.

 

 

Abenomics does not address the economic problems facing Japan

At the moment Japan must be looking at the UK with some bemusement. That is because it has been a country with political instability with a merry-go-round of Prime Ministers and yet an axis has shifted. We are now in a type of flux whereas Prime Minister Shinzo Abe has been in power since November 2012. This means that his economics policy of Abenomics has had a decent run in terms of time and yet again we see someone who has taken the Matrix style blue pill and declared it a success. Let me hand you over to Matt O’Brien of the Washington Post.

Its unemployment rate has fallen to a 22-year low of 2.8 percent — yes, you read that right — due in large part to all the yen it has created the past four years.

The former which we have looked at before is a success and it is the flip side of this.

Maybe the best way to tell isn’t its super-low unemployment rate, but rather its super-high employment rate. That, as you can see below, has shot up since the start of Abenomics to an all-time high of 83.5 percent, making our own 78.3  ( He means the US ) percent rate look downright measly in comparison.

Again a success in itself as the quantity measures in the labour market are as strong as anywhere. But then we get an enormous leap of what I can only call faith.

It can’t be the fiscal or structural parts of Abenomics, because they’ve barely been tried……..All their money-printing seems to have given businesses the confidence — and the cheaper currency — they needed to expand a little more.

Thus we see a conclusion that the money printing has led to higher employment. Some would argue that with a fiscal deficit of 4.8% of GDP in 2015 and 4.5% last year with a debt to GDP ratio that fiscal stimulus had been tried rather a lot. Also there seems to be any lack of a causal relationship as the phrase “seems to have” suggests. Let us finish with some hyperbole.

And all it would have taken was printing a few trillion yen, which actually isn’t that high a price to pay.

Numbers may not be a strength for Matt as we remind ourselves of this from the 6th of this month.

At the end of May 31 2017, the Bank of Japan held a total of 500.8 trillion yen in assets,

Taking the red pill

Dissent in Japan is mostly considered to be non-Japanese so this from the Nikkei Asian Review ( NAR ) is interesting. First the ground is described.

“In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth after that, it is essential to strengthen Japan’s growth potential,” proclaimed a key economic and fiscal policy plan finalized in June 2013,

Okay so what has happened since then?

But the country’s potential growth rate now stands at 0.69%, according to the Bank of Japan, compared with 0.84% in the second half of fiscal 2014 — a sobering take on what Abenomics has actually accomplished.

If we return to the case made by Matt O’Brien above the fact that estimates of the potential growth rate have fallen seems to be missing doesn’t it? That is awkward for business supposedly being more confident in response to a promise to print money to infinity and maybe beyond. The tectonic plates on which supporters of QE stand would be on their own Ring of Fire if there are further suggestions that it reduces potential economic growth. I have been a critic of QE style policies and note that this below suggests yet another problem with the claimed transmission mechanism.

But while tax cuts helped boost businesses, many are merely hoarding their cash. Total internal reserves held by Japanese corporations have grown some 40% under Abe to 390 trillion yen. No solutions are in sight.

The NAR seems to agree with me about the trajectory of fiscal policy as well.

In terms of fiscal policy, Japan has passed seven supplementary budgets in just five years, spending about 25 trillion yen in the process.

“Extreme fiscal spending and other measures have led to a distorted allocation of resources in the economy and reduced productivity,” said Ryutaro Kono, chief Japan economist at BNP Paribas.

Also the NAR fires a lot of criticism at the so-called third arrow of Abenomics which is reform in Japan.

The debate on compensation for unfairly dismissed employees has stalled. While Tokyo opened the door for foreign workers with exceptional skills or those in certain sectors such as cleaning, it has shied away from a comprehensive discussion on immigration. Momentum to tackle regulatory barriers is fading.

It points out that if Abe wished to reform the labour market politically he is in what might be called a “strong and stable” position due to the way his party the LDP controls both the upper and lower houses in parliament.

The economy

There was some disappointment last week as the economic growth figures for the first quarter took a downwards revision.

The expansion in real gross domestic product, the total value of goods and services produced in the country adjusted for inflation, was revised to an annualized 1.0 percent growth from the previously estimated 2.2 percent expansion, the Cabinet Office said. ( The Japan Times ).

The good part of that was that it meant that Japan had grown for five quarters in a row which it had not done for over a decade. There were two bad parts though in that as well as being in the economic growth dog kennel with the UK there was an implication for the Abenomics plan of boosting inflation to 2% per annum.

In  nominal terms, or unadjusted for price changes, the economy shrank an annualized 1.2 percent, the biggest contraction since 2.2 percent registered in the July-September period of 2012.

Also the period of Abenomics was supposed to see a rise in inflation and more particularly a rise in wages. As the Japan Times reminds us the labour market is tight.

Moreover, there were 148 job positions open for every 100 people looking for work, the highest ratio in 43 years.

But wage growth is at best anemic.

But the labor ministry reported that in 2016, wages across the board — regardless of whether we’re talking full-time or part-time employment, regular or nonregular employees — only rose by 0.4 percent

Why? Well as we observe in some many countries official definitions of being in a job miss changes in the real world.

a larger portion of the workforce is in part-time and non regular jobs, which traditionally pay less.

Comment

There have been some extraordinary claims made for the success of monetary easing and QE. In my opinion we see a clear divorce between the financial and real economy. If we look at the financial economy in the era of Abenomics we see booming equity markets ( the Nikkei 225 has risen from 9000 or so to ~20,000), a lower currency ( versus the US Dollar it has gone from 80 to 110) and booming bond markets with a ten-year yield of 0%. But the real economy has not seen the boom in wages promised nor any great turn in the rate of GDP growth. Ironically it has been the recent fall in inflation that seems to have given GDP an upwards push rather than the claimed surge to 2% per annum.

Meanwhile the real challenge is adapting to this.

The annual number of babies born in Japan slipped below 1 million in 2016 for the first time since records began, with the estimated figure for the year coming in at 981,000, according to government figures. ( Japan Times)

The reminds us of the demographic changes underway highlighted by the fact that the figures for the 6 months to May showed the population falling by another 245,000. Exactly how will QE fix those?

 

 

 

 

UK employment improves and so does underemployment

As we look at the UK labour market today let us start with something which in one way is good news and in another poses questions. From Reuters last week.

Manchester United winger Jesse Lingard has signed a new contract that will keep him at Old Trafford until 2021, the Premier League club said in a statement on Thursday.

Lingard, who will earn up to 100,000 pounds a week according to British media reports, has an option to extend the deal by a further year.

Firstly congratulations to Jesse and for once it is nice to see an English player benefit from the largesse of the Premier League these days. There is invariably hype in the exact numbers but he seems to have approximately trebled his wages which will do there bit for the average wages series in the future. However those who watched an outstanding display by Juventus last night in the Champions League as they put Barcelona to the sword have been mulling the concept of relativity. From @Football_Tweet

– Paulo Dybala earns €3M a season at Juventus. – Jesse Lingard earns €6M a season at Man Utd.

we return to a familiar question which is how much of the wages growth is in effect a type of inflation?

The impact of Robots

If we look ahead on a more general level then we can expect to see not only more robots in our economy but more advanced ones appear. Not quite as advanced as the ones in the Foundation saga of Isaac Asimov that I am currently reading again but considerable advances are being made. According to Bloomberg such improvements are likely to have an impact on labour markets and wages especially.

Robots have long been maligned for job-snatching. Now you can add depressing wages and promoting inequality to your list of automation-related grievances.

Industrial robots cut into employment and pay for workers, based on an new analysis of local data stretching from 1990 and 2007. The change had the biggest impact on the lower half of the wage distribution, so it probably worsened America’s wage gap.

The exact results are as follows.

One additional robot per thousand workers reduces the employment-to-population ratio by 0.18 percentage points to 0.34 percentage points and slashes wages by 0.25 percent to 0.5 percent, based on their analysis.

Food for thought as we look forwards in years and decades and of course ground which many of the best science fiction writing has warned about.

Today’s data

The quantity data remains pretty strong as you can see.

There were 31.84 million people in work, 39,000 more than for September to November 2016 and 312,000 more than for a year earlier.

There was an additional kicker to this as we got a glimpse into a potentially improving situation regarding underemployment as well.

with an increase in full-time employment (positive 146,000) partly offset by a fall in part-time employment (negative 107,000)………….strong demand for labour is translating into a shift from part-time to full-time employment, and an increase in the average hours worked per week by both full time and part-time employees.

Here is the analysis of hours worked.

Average hours worked per week increased from 32.0 to 32.4 in the 3 months to February 2017, the highest since July to September 2002, largely due to more hours being worked over the Christmas and New Year period compared with recent years.

Fewer part-time workers are looking for full-time work.

Data released today (12 April 2017) show that this measure continued to contract with the proportion falling to 12.6%, down from 14.2% a year ago (and down from a peak of 18.4% in 2013). This proportion is now at its lowest since March to May 2009, but still well above its pre-crisis average of 8.3%.

So it looks as though the situation regarding underemployment has improved as well although the data is only partial and let us finish this section with the unemployment numbers.

There were 1.56 million unemployed people (people not in work but seeking and available to work), 45,000 fewer than for September to November 2016 and 141,000 fewer than for a year earlier.

What about wages?

These were the same as last month in terms of growth.

Between the three months to February 2016 and the three months to February 2017, in nominal terms, total pay increased by 2.3%, the same as between the three months to January 2016 and the three months to January 2017.

Actually there was a rise in the month of February by 2.9% on the year before so maybe a hopeful hint of a pick-up! We will find out as we go through the bonus months of March and April. One thing we do know is that both Sky News and the Financial Times ( “UK wages have grown at their weakest pace in seven months,”) have not checked this.

The official numbers on real wages are below.

adjusted for inflation, average weekly earnings grew by 0.2% including bonuses and by 0.1% excluding bonuses, over the year, the slowest rate of growth since 2014.

So we have something of a discontinuity as we had some real wage growth in February it would appear. Let us cross our fingers that it continues but sadly it seems unlikely ( the comparison is flattered by bonuses falling last year). Of course even if we use the figures for February alone then real wage growth was negative if we compare it to the Retail Price Index.

Also the exclusion of the self-employed from the wages data gets ever more shameful.

self-employed people increased by 114,000 to 4.78 million (15.0% of all people in work).

Can we increase tax on income from wages?

After the debacle of the U-Turn on higher National Insurance contributions from the self-employed there have been arguments that the UK is unable to ever raise more taxes from income. It was interesting therefore to see some international comparisons from the OECD today.

The average single worker in Belgium faced a tax wedge of 54.0% in 2016 compared with the OECD average of 36.0%…..Belgium had the 4th highest tax wedge in the OECD for an average married worker with two children at 38.6% in 2016, which compares with the OECD average of 26.6%.

Not the best place to be single and childless it would appear! But now the UK.

The average single worker in the United Kingdom faced a tax wedge of 30.8% in 2016……..The United Kingdom had the 22nd lowest tax wedge in the OECD for an average married worker with two children at 25.8% in 2016,

So in theory we could if we wished to reach the peak that is Belgium. The Anglosphere ( US, Australia and Canada) if I can put it like that has similar numbers to the UK although the Kiwis stand out at only 17.9% for a single person. The lowest is Chile at 7%.

Interestingly with its debt and deficit problems income in Japan is slightly more taxed than here.

Comment

I would like to take a step back and consider the last couple of years. Remember the number of economists and media analysts who warned about what they called “deflation” and sometimes they shouted it so loud it was “DEFLATION”? Well it morphed into this.

By late-2014, an increase in nominal wage growth and low CPIH inflation, led to average real earnings increasing by 1.7% in the 18 months to mid-2016. ( Office for National Statistics).

This of course boosted the economy mostly via the retail sales boom but also in other ways as I pointed out on the 29th of January 2015.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

If there was a musical theme to the deflation paranoia then it was “clowns to the left of me, jokers to the right” from Stealers Wheel. Please do not misunderstand me I am talking about the so-called experts here not those influenced by them. Sadly we seem to be heading into a period where something they wanted ( higher inflation) will slow the economy down. I wonder how the inflationistas will spin that?

 

 

 

 

 

UK real wages fell in January ending over 2 years of growth

Today sees us receive the latest UK labour market data with the main emphasis being on wages as we mull how they will compare with inflation as 2017 progresses. The phase where low inflation boosted real wages is over for now at least as we cross our fingers and hope it will not rise too far. On that front we have had some better news from the recent dip in the price of crude oil but as a ying to that particular yang there has also been this.

In case you missed it, iron ore in China is up 10% since Monday. Cheers ( @DavidInglesTV )

On the usual pattern we would know the latest inflation data but that is not due until next week whilst our statisticians perhaps drink gin, play jigsaws whilst wearing a base layer and a cycle helmet.

Public-Sector Pay

This is something which has perhaps been too much in the background. For many who work in the public-sector wages have been under an austerity style squeeze for some time now. The area has also got more complex as many such jobs have been outsourced to private companies as for example many of the staff in Battersea Park work for a company called Enable now rather than Wandsworth Council. In terms of scale here are the numbers involved.

There were 5.44 million people employed in the public sector for December 2016. This was little changed compared with September 2016 and with a year earlier. Public sector employment has been generally falling since December 2009.

Although the picture gets ever more complex.

The Institute of Fiscal Studies has looked into the wages trend and point out that it is more complex than it may initially appear.

Public sector pay has been squeezed since public spending cuts began to take effect from 2011, and it looks set to be squeezed even further up to 2020. However, this comes on the back of an increase in public sector wages relative to those in the private sector during the Great Recession.

They think that this is set to continue for the rest of this decade.

On the basis of current forecasts and policy, we expect public sector pay to fall by 5 percentage points relative to private sector pay between 2015 and 2020. This would take the raw wage gap to its lowest level for at least 20 years.

However the starting point may not be what you would have expected.

In 2015–16, average hourly wages were about 14% higher in the public sector than in the private sector, according to the Labour Force Survey. After accounting for differences in education, age and experience, this gap falls to about 4%.

This is a complex area as we mull the usefulness of some type of education. For example by interest (athletics) I know people who specialise in the physiotherapy area where attainment is higher in that graduates are recruited but some for example have never manipulated someone’s back. Of course there is also the issue of pensions.

Reforms to public sector pensions have reduced the value of the pension public sector workers can expect to enjoy in retirement, though this is still probably more than private sector workers can expect

I do not know what the IFS has been smoking here as public sector pensions look ever more valuable in relative if not absolute terms to me.

Good News

This as so often these days comes from the quantity numbers in the labour market report.

There were 31.85 million people in work, 92,000 more than for August to October 2016 and 315,000 more than for a year earlier……..There were 23.34 million people working full-time, 305,000 more than for a year earlier. There were 8.52 million people working part-time, 10,000 more than for a year earlier.

The extra number of people in work helped reduce unemployment as well, oh and in case you assumed it was an obvious link it is not always that simple due to a category for inactivity.

There were 1.58 million unemployed people (people not in work but seeking and available to work), 31,000 fewer than for August to October 2016 and 106,000 fewer than for a year earlier………….The unemployment rate was 4.7%, down from 5.1% for a year earlier. It has not been lower since June to August 1975.

 Bad News

This was demonstrated by this on the wages front.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.2% including bonuses, and by 2.3% excluding bonuses, compared with a year earlier.

So we see a slowing from the 2.6% reported last time. If we look into the single month detail it is worrying as you see December was 1.9% and January 1.7% giving a clear downwards trend. If we look further we see that those months saw much lower bonus payments than a year before and in fact falls as for example -3.9% and -2.7% was reported respectively. Putting it another way UK average earnings reached £509 in November but were £507 in both December and January.

Ugly News

This comes from the position regarding real wages.

Comparing the 3 months to January 2017 with the same period in 2016, real AWE (total pay) grew by 0.7%, which was 0.7 percentage points smaller than the growth seen in the 3 months to December 2016.

There has been something of a double whammy effect at play here as inflation has risen as we expected but sadly wage growth has dipped as well. So the period since October 2014 when real wages on the official measure began to rise is certainly under pressure and frankly seems set to end soon.

If we look at January alone then real wages were 0.1% lower than a year before as inflation was 1.8% and using the new headline measure ( from next month) they fell by 0.3% on a year before. Using the Retail Price Index or RPI has real wages falling at an annual rate of 0.9% in January.

Comment

There are quite a few things to laud about the better performance of the UK economy over the past few years as employment has risen and unemployment fallen. Although of course we would like to know more ( indeed much more…) about the position relating to underemployment which is one of the factors at play in the situation below.

The number of people employed on “zero-hours contracts” in their main job, according to the LFS, during October to December 2016 was 905,000, representing 2.8% of all people in employment. This latest estimate is 101,000 higher than that for October to December 2015 (804,000 or 2.5% of people in employment).

For a while this was also true of real wages although to be fair the situation here mostly improved due to lower levels of recorded consumer inflation. Sadly if the data for January is any guide that happier period is now over even using the official inflation data.Of course this also omits the ever growing self-employed sector.

City-AM

Here are my views on US interest-rates from today’s City-AM newspaper