Has Abenomics in Japan found what it is looking for?

This morning has brought news from Nihon the land of the rising sun and no I do not mean that the summer has been especially hot this year peaking at above 40 degrees centigrade around Tokyo. I mean this from The Japan Times.

Separate data showed workers’ real wages rose 2.8 percent in June from a year earlier, accelerating from a 1.3 percent increase in May and marking the fastest pace of growth since January 1997.

We have been noting a change in the pattern and waiting for developments and the June numbers are good but come with a kicker. What I mean by this is that it is the month where around two thirds of the summer bonuses are paid so it is good for workers as the 2.8% is of a larger than normal amount as pay is 41% above average in the month. But the kicker is that the boost is mostly bonuses and therefore will fade.

Looking into the detail we see that nominal wage growth was 3.6% and was pulled higher by the manufacturing sector where the summer bonuses saw wage growth rise to 4.2%. It must have been party time in the wholesale and distribution sector as total wage growth rose at an annual rate of 10.7%. So there was an excellent bonus season as 3.6% growth replaced the 0.4% of this time last year.

What about base or regular pay?

This was by no means as good as contracted earnings rose at an annual rate of 1.5% and scheduled earnings at 1.3%. However these are better numbers than seen in 2017 or indeed in the Abenomics era. Just to give you the picture starting in 2014 annual growth has gone -0.1%, 0.2%,0.2% and 0.4% last year. When you consider that one of the Abenomics “arrows” was supposed to be higher wages that was quite a failure when you consider all the monetary easing.

Now the picture looks a little better as real wage rises have replaced falls albeit that they are small such that pressure is put on the accuracy of the data. They probably cannot take it but they are what we have.

Full employment

I get regularly asked what this concept is and if it is seen anywhere in practice Japan seems to be it. For example whilst the unemployment rate nudged higher to 2.4% in June it is extraordinarily low. The job applicant to vacancy ratio has been setting new highs at 2.47 according to Japan Macro Advisers. Thus economic theory would predict that wages would have been rising and frankly surging, after all the Bank of Japan estimated that the structural rate of unemployment was 3.5% as another Ivory Tower foundation bites the dust.

The blame game

At the end of last month the Bank of Japan published some new research on this issue. First we get something of a criticism of what is called Japan Inc.

Basically, the reason for this is that, under Japan’s
labor market structure, which is characterized by
different wage-setting mechanisms for regular and
non-regular employees, the increase in wages of
regular employees has been remarkably
sluggish.

This is pretty standard analysis world-wide of course except the degree of tightness of the labour market is exceptional in Japan. But the theme of employers being willing to do almost anything other than raising basic pay we have seen pretty much all over the world. However the next bit of research has more than a few implications.

With labor shortage intensifying recently, the pace
of increase in the labor force participation rate,
especially among women and seniors, is
accelerating.

Encouraging women to work has been a government objective and you can see the rise in older people working in two ways. One as a sign of good health in that they can but the second is not so positive as I have noted before some are forced to work because times are hard. A while back I noted the issue of retired women in Japan sometimes being very poor which is against its culture. Well if you throw all of these factors into the pot look what the Bank of Japan thinks you get.

In other words, among these groups,
there will be greater labor supply for the same rate
of increase in wages . As a result, as
labor demand increases (represented by a shift of
the labor demand curve to the right in the chart),
women and seniors will supply more labor, which
in turn suppresses wage increases.

So this has been a boost for Japan Inc which has increased its labour supply cheaply but not good for existing workers.

If the labor supply of women and seniors were not elastic,
wage increases likely would have been larger.

So it was them that done it if we look at it in tabloid terms but where the Bank of Japan does not go I will. You see if we go back to the critiques of the likely behaviour of Prime Minister Abe before he was elected there was the case that he would favour Japanese businesses and Japan Inc. Just like he had in his first term. Well is there anything they would like more than a cheap labour supply? Especially in a country which due to a shrinking population has a clear issue with labour supply.

Next comes the impact of a supply of cheap labour. This makes me think of the UK where the Ivory Towers tell us again and again that the increase in labour supply from net immigration did not affect wage growth. Now there are various factors to put in this particular melting pot but this research from the Bank of Japan is clearly heading in the opposite direction.

Productivity

Here is something you may not expect but I mention it from time to time so let me hand over to the Bank of Japan and the emphasis is mine.

One reason is that the productivity of
Japanese firms is relatively low and there is large
room to raise productivity, mainly in the
nonmanufacturing sector. In fact, Japan’s labor productivity remains at only 60 to 70 percent of the U.S. level.

Japan has been doing well in terms of growth recently but there are two issues. Firstly even 1.2% per annum is not great and secondly it has been forced on it as it looks to a future of labour shortages.

Comment

There is a fair bit to consider here. The rise in wages in June is welcome and the Yen in the workers pocket does not know whether it is a result of regular or bonus pay. But for now it looks like some icing on a similar cake. Combining this with the news on inflation that I discussed last time means that one area of Abenomics failure will in fact  be a positive here.

Another factor is that households are reluctant to
accept rises in housing rent and administered
prices given the low actual inflation rate and
inflation expectations ( Bank of Japan)

If we throw in imputed rent as well that is half the inflation measure. The Japanese do not know have lucky they are to have this and for all the Turning Japanese themes the Bank of Japan wants them to turn British in this respect. But if we move on from the detail we see that low inflation means this looks like a better year for real wages. Accordingly if we look back to my last update on this issue from a fortnight or so ago this from Gavyn Davies in the Financial Times looks even worse than it did then.

Even with very careful communication and forward guidance, monetary policy may not be sufficient, on its own, to reach the inflation target. Eventually, unconventional fiscal easing may also be needed, though this is not remotely on the horizon at present.

As ever the picture remains complex as so far the wages growth has yet to filter through.

Household spending fell 1.2 percent in June from a year earlier, government data showed on Tuesday, marking the fifth straight month of declines.

 

 

 

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What is the problem with wage growth?

The problem with wages growth has been a long running theme of this website, also if we look back it is something which even preceded the credit crunch. Although of course the credit crunch has made it worse. The world of economics has been wrong-footed by this as the Ivory Towers as usual projected that it would be “the same old song” as the Four Tops told us. For example the UK Office for Budget Responsibility projected that wages growth in the UK would be 4.5% now, and if they had known how far that unemployment would fall would presumably have projected it even higher.

A contributor to this has been the concept of full employment. From Investopeadia.

Full employment is an economic situation in which all available labor resources are being used in the most efficient way possible. Full employment embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time. Any remaining unemployment is considered to be frictional, structural or voluntary.

There were and amazingly still are concepts such as the “natural rate of unemployment” below which inflation was supposed to rise. The catch has been that as we have seen unemployment rates fall post credit crunch we have seen wages either rise weakly or stagnate. At best wage growth has been lower than expected and at worst we have seen it actually fall. Something has changed.

One factor in this is clearly that the old Ivory Tower way of looking at the labour market through the lens of official unemployment rates is flawed. The concept of “underemployment” has been developed whereby people work fewer hours than they would like or take a lower skilled job. This has become entwined with quite a few issues around the concept of self-employment which is often counted as a type of “full” employment when it is not. Indeed being fully employed is in fact in the UK something you think you are rather than being something properly defined. On this road we start to understand that the clouds have yet again gathered between the elevated heights of the Ivory Towers and the ground zero where the rest of us live and work.

Japan’s problem

Weak wages growth has been one of the features of the “lost decade(s)” for the Japanese economy and accordingly it was one of the objectives of the policies of Prime Minister Shinzo Abe to reverse this. So let us examine today’s data as reported by Reuters.

Japan’s March real wages fell at the fastest pace in almost two years, pressured by meagre nominal pay hikes and a slight rise in consumer prices,

The detail is not good.

Inflation-adjusted real wages dropped 0.8 per cent in March from a year earlier to mark their biggest rate of decline since June 2015, labour ministry data showed on Tuesday (May 9)….In nominal terms, wage earners’ cash earnings fell 0.4 per cent year-on-year in March, also notching the biggest rate of decrease since June 2015.

If we continue the themes expressed above then if we imagined that we were inhabitants of an Ivory Tower we would be projecting fast wage growth. From Japan Macro Advisers.

The demand/supply balance in the Japanese labor market continues to remain tight. The unemployment rate remained steady at 2.8% in March 2017, matching the lowest rate since June 1994. Japan is likely to be at its full employment status, with only frictional unemployment remaining in the labor market.

Full employment with no wage growth and maybe even falls in real wages? Actually this is perhaps even worse for the concept of a natural rate of unemployment.

NAIRU, the Non-Accelerating-Inflation-Rate of Unemployment rate, was considered to lie between 3.5% and 4.5% in Japan.

So wages should be rising and doing so quite quickly whereas in reality they are not rising at all. Indeed contrary to the hype and media reporting they have been falling in the period of Abenomics  as the 103.9 of 2013 has been replaced by the 100.7 of 2016 where 2015 =100. The slight nudge up in 2016 has been replaced by falls so far in 2017.

This from Morgan Stanly only last month already seems like it is from a parallel universe.

Record low unemployment rates are pushing up salaries,

The Bank of Japan regularly tells us that wages will rise next year and Governor Kuroda stated this again only on Friday, but so far next year has never arrived.

Is Japan are forerunner for us and should we be singing along with The Vapors one more time?

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

The United States

A month ago US News reported this from US Federal Reserve Chair Janet Yellen.

“With an unemployment rate that stands at 4.5 percent, that’s even a little bit below what most of my colleagues and I would take as a marker of where full employment is,” Yellen said. “I’d say we’re doing pretty well.”

Yet on Friday the Bureau of Labor Statistics told us this.

In April, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $26.19. Over the year, average hourly earnings have risen by 65 cents,
or 2.5 percent.

So we are at what we are told is pretty much full employment and we are below the natural rate of employment ( 5.6% according to the Congressional Budget Office) and yet pay growth is still rather weak. It has been so for a while.

http://www.epi.org?p=117112&view=embed&embed_template=charts_v2013_08_21&embed_date=20170509&onp=75850&utm_source=epi_press&utm_medium=chart_embed&utm_campaign=charts_v2

The other issue is that in spite of us apparently being at full employment the level of wage growth is not a lot above inflation with the US CPI being at 2.4% and the Personal Consumption Expenditure being at 1.8%. Something is not right here and we do perhaps get some more perspective by looking at both the underemployment rate in the US ( 8.6%) and the way that the participation rate has fallen.

The UK

The situation here as I have been pointing out pretty much each time the data is released is very good in terms of the quantity measures as we see falling unemployment and rising employment but poor on the price or wages measure. This has been illustrated somewhat ironically by one of the failures of the Bank of England. Remember when it made an issue of the unemployment rate falling below 7%?

In particular, the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey headline measure of the unemployment rate has fallen to a threshold of 7%,

There was a clear implication there that it expected economic changes as we moved below that threshold such as higher wage growth. Of course this was abandoned very quickly as unemployment fell sharply leaving the Bank of England’s spinners and PR people with plenty of work. But with the unemployment rate now well below 7% and indeed being 4.7% then wages should be rising quickly as we are well below the rate at which it was expected by our central banking overlords and masters. Er no, as you see wage growth for total pay was 2.3% back then and is 2.3% now. In terms of exact numbers that is happenstance but in terms of theme and principle it is yet another sign that the economic world has seen ch-ch-changes.

Comment

We are seeing something of a shift in the economic tectonic plates. Some of this is welcome as we see a strong recovery in levels of employment and falls in unemployment. However the other side of this coin is that wage growth is weak and in my home country the UK real wages have in spite of the economic recovery are still short of where they were a decade ago. It was only yesterday when I noted the German housing market getting like us well today it is our labour market which has mimicked theirs! Weak wage growth with low unemployment is rather Germanic and in fact is something we aimed at, well until we got it anyway.

Until now I have left out productivity which is an important factor in real wage growth as we wonder if the switch to a mainly service based  economy has neutered it? But there have been issued here as this morning’s working paper from the ECB indicates and its analysis applies much wider than just in the Euro area.

Higher labour productivity growth is a key factor in raising living standards in advanced economies……..Recent labour productivity growth in the euro area has, however, been low – by both historical and international standards – albeit against the backdrop of a generalised slowdown in global labour productivity growth…………..Over the period 2008-16, annual growth in euro area labour productivity per person employed slowed to an average of around 0.5% (based on a three-year moving average), from an average of around 1.1% over the course of the decade to 2007

 

Do full employment and the natural rate of unemployment mean anything any more?

One of the features of economics in the pre credit crunch era was confidence about concepts concerning the labour market. We had the concept of full employment which is defined below from the Financial Times lexicon.

When labour supply and demand in an economy are balanced at market wages. This does not mean everybody in the labour force is employed (see frictional unemployment) but in theory, it is the highest possible level of employment in a market economy.

It is hard not to have a wry smile at the way that full employment does not mean full (100%) employment. A bit like the way many central bankers define “price stability” as an inflation rate of 2% per annum. But we have an allowance for people changing jobs ( frictional unemployment)  and often an allowance for a mismatch between skills and jobs which is called structural unemployment.

In terms of numbers here are some estimates. From the BBC.

William Beveridge, the man who inspired Britain’s post-war welfare state, said full employment meant a figure of under 3%.

Other estimates tended to be higher than this and William T Dickens did some work in the US which estimated it as being around 5% in the pre credit crunch period. Also Mr. Dickens added quite a bit to the debate by publishing a graph showing that his work had a lower bound of 2% and an upper bound of 7%. That narrows it down.

Also the definition had shifted somewhat as the phase full employment became pretty much interchangeable with the cumbersome phrase the non-accelerating inflation rate of unemployment or NAIRU. Estimates of this I saw pre credit crunch tended to be of the order of 4.5% for the unemployment rate.

A modern challenge

This comes as so often in the modern era from Japan where the Statistics Bureau has reported this today.

  The unemployment rate, seasonally adjusted, was 3.0%.

So below the natural rate and now in the full employment zone? We can see what is on the quantity measures an improving situation.

The number of employed persons in July 2016 was 64.79 million, an increase of 980 thousand or 1.5% from the previous year……. The number of unemployed persons in July 2016 was 2.03 million, a decrease of 190 thousand or 8.6% from the previous year.

As you can see unemployment is on the edge of two thresholds here as we wonder if it will dip below 2 million and the rate fall below 3%. A rising employment situation is also strong when we remind ourselves that the population is shrinking although some care is needed as we are given numbers for the labour force which are amazingly constant.. If we dig deeper we see that those who have involuntary employment are a relatively mere 540,000, is that structural unemployment? Even youth unemployment ( 15-24) is a lowly 4.7%.

Why aren’t wages rising quickly?

A problem for the theorists in their ivory towers has been the behaviour of wages in Japan. They should be rising strongly as we have passed the NAIRU but they continue to struggle. Indeed figures for workers households today hint at possible moves in the opposite direction.

The average of monthly income per household stood at 574,227 yen, down 2.2% in nominal terms and down 1.8% in real terms from the previous year….  The average of consumption expenditures per household was 302,422 yen, down 3.9% in nominal terms and down 3.5% in real terms from the previous year.

Employment is not what it used to be

There has been a structural change in employment in Japan over time. Back in September 2014 Fathom Consulting told us this.

Since the depths of Japan’s economic crisis in the late 1990s there has been a marked switch away from full-time into part-time work. The old ‘job-for-life’ culture is just that…….There are more people now working part-time in Japan who would rather work full-time than there are unemployed people. On that basis Japan has a much larger ‘underemployment’ problem than either the US or the UK.

If we look at the latest data we see that there are 33.57 million regular employees in Japan and 20.25 million irregular employees. If we switch to hours worked per month we see that regular employees get 188 of them but for irregular employees get a much lower 120.

The wages situation is rather divergent too as Japan Macro Advisers point out. There was good news for salarymen and women.

The regular (basic and overtime) part of wages was flat, only up by 0%, but the bumper bonus, up by 3.6%, pushed up the overall paycheck in June. It is going to be a good summer for all those army or loyal company men (and women) in Japan.

But not so good news for others.

The talk of good summer bonus must be a pain for irregular workers in Japan though. Over 1/3 of employment in Japan are irregular workers, and most of them are not eligible for bonuses. In June, wages of part time workers were only up by 0.4% year on year, compared with 1.5% year on year rise for full time workers.

The number of regular jobs was falling but that has changed albeit marginally as 19,000 have been created over the last year. However we found ourselves looking at irregular jobs for the majority of jobs growth.

A difference in the sexes

The situation for Japanese women has been lauded as a success for Abenomics and employment has risen from 23.24 million in 2013 to 24.57 million in July of this year. However proportionately much more women are irregular workers with 13.79 million of them now and 830,000 of the employment growth just discussed being in that category.

Now there are issues here as to type of work and perhaps some would only want part-time work which is more likely to be in the irregular category but we also have to face up to the fact that a difference between treatment of the sexes may well be a feature of the new Japanese employment structure.

What is life like for an irregular employee?

Back in March 2015 the Wall Street Journal gave us some insight.

Mr. Kinoshita is a member of Japan’s large and growing army of so-called nonregular workers—temporary, often part-time employees who are usually paid less than their “regular” counterparts. Like many of them, the 49-year-old Mr. Kinoshita has been unable to find permanent employment for years and struggles to make ends meet, despite working nearly full time. His new job pays ¥1,000 ($8.25) an hour, well below the ¥1,400 he earned in his last position at an auto-parts maker.

Oh and he does not seem to be too keen on plans to raise the inflation rate.

Everything is expensive,” he said. “A bag of tangerines costs ¥400.”

How can things be expensive in a place that has not had any inflation for years and indeed decades?

Comment

The example of Japan shows us that Ivory Tower concepts of full or natural rates of employment are full of more holes than a piece of Swiss cheese. For a start they completely miss the concept of underemployment. Then they fail to allow for the trend towards newer jobs being on worse terms than established ones. This is not only in wages but in hours worked and conditions.

If we move geographically away from Japan we have seen similar effects at play in other countries where the unemployment rate has fallen such as the US and UK. The obvious signal is the way that wage growth has been slow with levels of unemployment at what was considered to be the natural rate level and in some cases below it. The UK ONS has done work which suggests that like in Japan wage growth has been held back by the fact that newer jobs have been at lower wages. Also we note that in the UK wages for younger workers have been disproportionately affected which is exactly the opposite of where we should be now.

Of course we also need to allow for the fact that the information we get is much less than some would claim. There are wide margins of error in the two US labour market surveys which frequently contradict each other. In the UK we know so little about what is happening in the growing self-employment sector and know almost nothing about their wages.