Of hot air, wind power and UK real wages

Today brings us to the latest UK labour market data but before we get there we see two clear features of these troubled times. One is in fact a hardy perennial referred to in Yes Prime Minister by Jim Hacker over thirty years ago although he was unable to arrange one. From Kensington Palace..

Their Royal Highnesses The Duke and Duchess of Sussex are very pleased to announce that The Duchess of Sussex is expecting a baby in the Spring of 2019.

Who says the UK has no plans for Brexit when a Royal Baby is in the process of being deployed?

Next comes some intriguing news from Scottish Power reported by the BBC like this.

Scottish Power to use 100% wind power after Drax sale

My first thought was to wonder what happens when the wind does not blow? Or only weakly as for example if we look at UK electricity production this morning where according to Gridwatch it is 5 GW out of a maximum of around 12.5 GW? There is little extra on this to be found in the detail.

Scottish Power plans to invest £5.2bn over four years to more than double its renewables capacity.

Chief executive Keith Anderson said it was a “pivotal shift” for the firm.

“We are leaving carbon generation behind for a renewable future powered by cheaper green energy. We have closed coal, sold gas and built enough wind to power 1.2 million homes,” he said.

As you can see the issue of when the wind does not blow gets entirely ignored in the hype. Indeed one part of its past production which could help to some extent by being used when the wind does nor blow which is hydro power has just been sold! As to the claims I see that this provides cheaper electricity that is rather Orwellian as we know that the green agenda is driving prices higher but tries to hide it. Still the good news for Scottish Power customers is that if all the statements are true then there will be no more price rises because energy costs are now pretty much fixed.

As you might expect raising such thoughts on social media leads to some flack. According to @Scottishfutball I am a stupid man although that tweet has now disappeared. Here is a longer answer to show the other side of the coin from Is anybody there on Twitter.

When the wind doesn’t blow they have hydroelectric power, wave power, solar, biomass, pumped hydro storage. Add in micro grids, battery storage and deferred demand and it’s very achievable.

The hydro power they just sold? And what’s “deferred demand”?

Wages

Here the news was a little better.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 3.1% excluding bonuses, and by 2.7% including bonuses, compared with a year earlier.

So we see that on this three-monthly measure total pay has risen at a 0.1% faster rate and basic pay by 0.2%. The balancing item here is bonuses which fell by 1.3% in August on a year before.

Let us take a look at this as the Bank of England wants us to. Here is its Chief Economist Andy Haldane from last week.

A year on, I think there is more compelling evidence of a new dawn breaking for pay growth, albeit with the
light filtering through only slowly……….Looking beneath the headline figures, evidence of an up-tick in pay is clearer still. Private sector pay growth (again excluding bonuses) has been grinding through the gears; it recently hit the psychologically-important 3% barrier. Private sector wage settlements so far this year are running at 2.8% and in some sectors, such as construction and IT, are running well in excess of 3%.

Someone needs to tell Andy that if an average is 3% some will be above and some will be below. Also is the growth 3% or 2.8%? But let us ignore those and Andy’s lack of enthusiasm for bonuses, no doubt influenced by his own personal experience. On this measure we see that private-sector pay growth is now 3.1% so another nudge higher and with July and August both registering 3.3% we could see another rise next time. The trouble is that whilst this is welcome we are back at the old central banking game of cherry picking to data to produce an answer you arrived at before you looked at it. Also one cannot avoid noting that the theory Andy so loves – and has led him regularly up the garden path over the past 5 years or so – would predict this wage growth to be more like 5%. Or to put it another way the view shown below seems not a little desperate and the emphasis is mine.

This evidence suggests the pulse of the Phillips curve has quickened as the labour market has tightened.
Unlike over much of the past decade, estimated wage equations are now broadly tracking pay.

So the new “improved” models are just the old ones in a new suit?

Some reality

If we switch to total pay we see that over the course of 2018 it is much harder to pick a clear pattern.  Whilst we are a little higher than a year ago as 2.7% replaces 2.4% it is also true that we opened the year at 2.8%. Next month should be better as the May 2% reading drops out but it is a crawl at best. If we switch to real wages we are told this.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) increased by 0.7% excluding bonuses, and by 0.4% including bonuses, compared with a year earlier.

Here comes my regular reminder that even such small gains rely on using an inflation measure that is not fit for purpose. This is because the CPIH measure relies on imputed rents which are a figment of statistical imagination and which, just by chance of course, invariably lower the reading. We will be updated on the inflation numbers tomorrow but it was 2.4% compared to the 2.7% of its predecessor ( CPI ) and the 3.5% of the one before that ( RPI)  as we try to detect a trend. Even using it shows that the last decade has been a lost one in real wage terms.

For August 2018, average total pay (including bonuses), before tax and other deductions from pay, for employees in Great Britain was: £523 per week in nominal terms, up from £508 per week for a year earlier……..£492 per week in constant 2015 prices, up from £489 per week for a year earlier, but £30 lower than the pre-downturn peak of £522 per week for February 2008.

As you can see even using the new somewhat deflated inflation number there will be another lost decade for real wages at the current rate of progress.

Comment

Today has mostly been a journey of comparing wish-fulfillment with reality, or the use of liberal quantities of hopium. Still perhaps it will be found at a fulfillment center, whatever that is. From CNBC.

Tech giant Amazon is set to install solar panels at its fulfillment centers across the U.K.  ( H/T @PaulKingsley16 )

If we switch back to the Bank of England which of course is also full of rhetoric on the climate change front, as after all someone has to offset all the globetrotting of Governor Carney, we return to wages again. Actually it has reined in its views quite a bit.

The rise in wages projected by the Bank is, to coin a phrase, limited and gradual. Private sector pay is
assumed to rise from 3% currently to around 3 ¾% three years hence, or around 25 basis points per year.

The catch is the implied assumption that we will always grow because any slow down would then knock real wages further. But even on that view once we allow for likely inflation it looks as if there will be only a little progress at best.

 

 

 

 

 

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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

 

For many in the UK there is nothing going on but the rent

The words of Gwen Guthrie’s song are echoing this morning as the BBC seems to have discovered that renting in the UK has become very expensive. In particular it focuses on the impact on your people.

People in their 20s who want to rent a place for themselves face having to pay out an “unaffordable” amount in two-thirds of Britain, BBC research shows.

They face financial strain as average rents for a one-bedroom home eat up more than 30% of their typical salary in 65% of British postcode areas.

Many housing organisations regard spending more than a third of income on rent as unaffordable.

A salary of £51,200 is needed to “afford” to rent a one-bed London home.

How have we got here? There have been two main themes in the credit crunch era driving this of which the first has been the struggles of real wages. If we use the official data we see that setting the index at 100 in 2015 took them back to where they were in the summer of 2005 or a type of lost decade. In spite of the economy growing since then and employment numbers doing well we find that the latest number is a mere 101.7 showing so little growth. Even worse in an irony some of the growth is caused by the fact that our official statisticians use an inflation measure called CPIH which has consistently told us there is no inflation in rents.Oh Dear!

Added to this problem was a further impact on younger people from the credit crunch. We could do with an update but this from a paper by David Blanchflower and Stephen Manchin tells us what was true a few years ago.

The real wages of the typical (median) worker have fallen by around 8–10% – or around 2% a year behind inflation – since 2008. Such falls have occurred across the wage distribution, generating falls in living standards for most people, with the exception of those at the very top.

Some groups have been particularly hard hit, notably the young. Those aged 25 to 29 have seen real wage falls on the order of 12%; for those aged 18 to 24, there have been falls of over 15% (Gregg et al. 2014).

So younger people took a harder hit in real wage terms which will have made the rent squeeze worse. Hopefully recent rises in the minimum wage and looking ahead the planned rise from Amazon will help but overall we have gained little ground back since then.

Rents

Here is at least some of the state of play.

In London, a 20-something with a typical average income would spend 55% of their monthly earnings on a mid-range one-bedroom flat. Housing charity Shelter considers any more than 50% as “extremely unaffordable”.

That rises to 156%, so one-and-a-half times a typical salary, in one part of Westminster – the most expensive part of London – where an average one-bedroom home costs £3,500 a month to rent.

In contrast, a tenant aged 22-29 looking for a typical property of this kind in the Scottish district of Argyll and Bute would only have to spend 15% of their income.

Even to a Battersea boy like me that all seems rather London centric. Wasn’t the BBC supposed to have shifted on mass to Manchester? Perhaps it was only the sports section which has quite an obsession with United as otherwise no doubt we would have got an update on Manchester and its surrounds. Still Westminster is eye-watering and no doubt influenced by all MPs wanting somewhere close to Parliament. By contrast renting in Argyll and Bute is very cheap although the number of people there is not that great.

Mind you there is at least an oasis below for those who want a Manchester link.

This all comes at a time when young adults might look back in anger at previous generations

Still I guess they will have to roll with it or try to anesthetise any pain with cigarettes and alcohol.

Relativities

This provided some food for thought.

The BBC research shows that a private tenant in the UK typically spends more than 30% of their income on rent.

In 1980, UK private renters spent an average of 10% of their income on rent, or 14% in London.

So the amount spent has risen across the board and especially so in London. This however begs a question of our inflation measure which accentuates the use of rents by assuming and fantasising that owner-occupiers pay them. This is around 17% of that index. But contrary to the fact that rents are more expensive they seem to have got there without there being much inflation! As the fantasies are recent we sadly do not have a full data set but the response to a freedom of information enquiry tells us that the index has risen from 89.3 at the beginning of 2005 to 103.8 in early 2017. However they have apparently revised all this in the year or so since and now we are at 103.3 but 2005 is at 77.1. So measuring rents can go firmly in our “You don’t know what you’re doing” category and should be nowhere near any official inflation measure. What could go wrong with fantasies based on something you are unable to measure with any accuracy?

Size issues

This caught my eye as it goes against an assumption we have looked at on here which is that properties have been getting smaller ( as we get larger).

 In the last 10 years, when families have been increasingly likely to rent, owners have seen the average floor space of their homes increase by 7% compared with a 2% rise for tenants. That leaves owners with an average of 30 sq m extra floor space than tenants, which the charity suggests is the equivalent of a master bedroom and a kitchen.

I am not sure how they calculate this issue for renters as back in the day when I was saving up I rented in a shared house. This was pretty much the same house as all the others in what is called Little India in Battersea (because of the names of the streets).

It wasn’t me

This is the response of landlords who presumably need some fast PR. After all longer-term landlords have made extraordinary capital gains on their investments and now seem to have done pretty well out of the income via rent.

Landlords say they face costs, including their mortgages, insurance, maintenance and licensing, that need to be covered from rents.

“These costs are increasing as the government introduces new measures to discourage investment in property, such as the removal of mortgage interest relief and the changes to stamp duty,” said Chris Norris, director of policy at the National Landlords Association.

 

Comment

The underlying theme here is the march of the rentier society. This seems set to affect the younger generations disproportionately especially if the current trend and trajectory of real wages remains as it has been for the last/lost decade. This gives us a “back to the future” style theme as that was the life of my grandparents who owned little but rented a lot. My parents managed to escape that and started by buying a house in Dulwich in the 1970s for £9000 which seems hard to believe now. But were they and I a blip on the long-term chart? It is starting to feel like that and this line of thought is feed by this from the BBC.

The charity estimated that private tenants in England are spending £140 more in housing costs than people with a mortgage.

That has been driven by the extraordinary effort to reduce mortgage rates starting with the cutting of interest-rates to as low as 0.25%, £445 billion of QE and to top it off the credit easing via the Funding for Lending Scheme. No such help was given to renters who of course have not benefited from “Help To Buy” either. Thus renters have a genuine gripe with the Bank of England.

Let me finish on a more hopeful development which is the Amazon news.

1) This is a significant increase. Around 20% above the national living wage and 10% above the real living wage. It amounts to hundreds of £ per worker, and also raises the prospect of other warehouse operators following suit ( Benedict Dellot of the RSA )

Whilst their working conditions may still be a modern version of the dark satanic mills of William Blake at least the wages are a fair bit better.

 

 

 

 

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

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

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

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

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

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

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

Today’s data

Wages

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

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

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

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

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

Employment

The long sequence of gains may now be fading.

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

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

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

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

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

Work until you drop?

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

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

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

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

 

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

 

changes to employment laws that prohibit discrimination based on age.

 

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

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

Comment

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

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

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

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

 

 

 

 

 

 

 

 

We have a serious problem with real wages

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

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

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

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

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

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

Discovering Japan

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

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

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

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

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

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

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

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

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

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

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

The United States

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

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

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

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

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

The Euro area

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

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

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

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

Also they are not particularly optimistic looking forwards.

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

We could apply that much wider.

Comment

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

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

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

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

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

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

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

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

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

 

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

 

UK real wage growth continues to disappoint

Today brings us back to the domestic beat and in fact the heartbeat of the UK economy which is its labour market. This has in recent years seen two main developments. The first is a welcome rise in employment which has seen the unemployment rate plunge. But the second has been that wage growth has decoupled from this leaving the Ivory Towers of the establishment building what might be called castles in the sky.  In that fantasy world wage growth would now be around 5% except it is not and in fact it is nowhere near it.

Oh tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high? ( Ian Van Dahl)

Or if we look at the Bank of England Inflation Report from earlier this month.

A tightening labour market and lower unemployment is typically associated with higher pay growth  as it becomes more difficult for firms to recruit and retain staff.

This is another way of expressing the “output gap” theory which keeps needing revision as it keeps being wrong. As this from Geoff Tily shows that has been a consistent feature of Governor Carney’s term at the Bank of England.

In 2014, Bank of England Governor Mark Carney told the TUC Congress that wages should start rising in real terms “around the middle of next year” and “accelerate” afterwards” .

They did rise in the first half of 2015, but then decelerated afterwards.

Actually the Inflation Report does address the issue but only with what George Benson described as “hindsight is 20/20 vision”.

During the financial crisis, output fell and unemployment rose, as companies reduced hiring and increased redundancies. The number of additional hours people wanted to work also rose, perhaps in response to a squeeze in their real incomes. Taken together, these factors led to a substantial degree of spare capacity opening up in the labour market over this period. This, in turn, was a significant factor behind subdued wage growth during 2009–15.

It is a shame they did not figure that out at the time and looking forwards seems to be stuck on repeat.

Pay growth has risen over the past year  and tightness in the labour market is expected to push up pay growth slightly further in coming years.

At least there has been a slight winding back here but something rather familiar in concept pops up albeit that the specific number keeps changing.

This was broadly in line with the MPC’s judgement of the equilibrium rate of unemployment of 4¼%, suggesting little scope for unemployment to fall further without generating excess wage pressure.

The problem here is that an unemployment rate of 7% was supposed to be significant when Forward Guidance began although it went wrong so quickly that we then had a 6.5% equilibrium rate then 5.5% then 4.5%. The February Inflation Report gave us  “a statistical filtering model” which seems to have simply chased the actual unemployment rate lower. Along the way I spotted this.

The relationship between wage growth and
unemployment is assumed to be linear

You basically need to have lived the last decade under a stone to think that! Or of course be in an Ivory Tower.

Today’s data

This brought some excellent news so let’s get straight to it.

The unemployment rate (the number of unemployed people as a proportion of all employed and unemployed people) was 4.0%; it has not been lower since December 1974 to February 1975.

This of course has an implication for the Bank of England which has signaled an equilibrium rate of 4.25% as discussed above. Thus we can move on knowing that its improved models ( we know they are improved because they keep telling us so) will be predicting increased wage growth.

Returning to the quantity or employment situation we see that it looks good.

There were 32.39 million people in work, 42,000 more than for January to March 2018 and 313,000 more than for a year earlier.The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.6%, unchanged compared with January to March 2018 but higher than for a year earlier (75.1%).

This is good news but needs to come with some caveats. The first is that the rate of improvement looks to be slowing which is maybe not a surprise at these levels. The next issue is more theoretical which is the issue of how we record employment and the concept of underemployment where people have work but less than they want. We do get some flashes of this and this morning’s release did give a hint of some better news.

There were 780,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 104,000 fewer than for a year earlier.

But if we switch back to the unemployment rate we know from looking at Japan that it can drop to 2.2% which means that we cannot rule out that ours will go lower and maybe a fair bit lower. So there could be a fair bit of underemployment out there still which is backed up by the attempts to measure it.

By this measurement, the number of underemployed people in the three months to June 2018 stood at 2.39 million, down 121,000 when compared with the previous quarter.

This compares to under 2 million pre credit crunch although I am not clear why these numbers consider the working week to be 48 hours?

Wages

This should be a case of “the only way is up” if we look at the Bank of England analysis.

regular pay increased by 2.7%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.8%)……total pay increased by 2.4%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.5%)

There is an initial feeling of deja vu as we were told this last month so the past has seen an upwards revision but there is little or no sign of the “output gap” pulling it higher. In fact bonuses fell by 6.6% on a year ago in June meaning that total pay growth fell to 2.1%. This means that in the first half of 2018 the rate of total pay growth has gone from 2.8% to 2.1% via 2.6% (twice) and 2.5% (twice). Unless you live in an Ivory Tower that is lower and not higher.

The Bank of England response mirrors their response when inflation was a particular problem for them which is to keep breaking the numbers down until you find one that does work. In this instance it takes two steps moving first to the private-sector to eliminate the public-sector pay caps and then to regular pay eliminating the bonus weakness. On that road you can point out a 2.9% increase although attempts to say it is rising have the issue of it being 3% in February and 3.2% in March. If they want more they could point us to regular pay in construction which is rising at an annual rate of 5.6% ( which of course begs a question about the official output statistics there).

Comment

The credit crunch era has been one where we have found ourselves ripping whole chapters out of economics 101 textbooks. By contrast both the establishment and the Ivory Towers have clung  to them like a life raft in spite of the evidence to the contrary. Of course one day their persistent lottery ticker buying will likely bear fruit but there is little sign of it so far. Instead they have the Average White Band on repeat.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

For the rest of us we see that there is more work but that wage growth seems to get stuck in the 2% zone. Even at the extraordinary low-level of unemployment seen in Japan the wage position remains Definitely Maybe after plenty of real wage falls. I am not sure that the productivity data helps as much as it used to as we have switched towards services where it is much harder to measure and somewhere along the way capital productivity got abandoned and now it is just labour. Of course all of this simply ignores the self-employed as they are not in the earnings figures and nor are smaller businesses.

 

 

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.