How does Abenomics solve low wage growth?

The last day or two has seen a flurry of economic news on Japan. If we look back it does share a similarity with yesterday’s subject Italy as economic growth in Japan has disappointed there too for a sustained period. The concept of the “lost decade” developed into “lost decades” after the boom of the 1980s turned to bust in the early 1990s. This is why Japan was the first country to formally start a programme of Quantitative Easing as explained by the St. Louis Fed in 2014.

An earlier program (QE1) began in March 2001. Within just two years, the BOJ increased its monetary base by roughly 60 percent. That program came to a sudden halt in March 2006 and was, in fact, mostly reversed.

This is what other western central banks copied when the credit crunch hit ( except of course overall they are still expanding ) which is really rather odd when you look at what it was supposed to achieve.

Inflation expectations in Japan have recently risen above their historical average. The Japanese consumer price index (CPI) in October 2013 was roughly the same as in October 1993. While Japan’s CPI has had its ups and downs over the past 20 years, the average inflation rate has been roughly zero.

The author David Andolfatto seems to have been a QE supporter and hints at being an Abenomics supporter as that was the time it was beginning.

However, some evidence relating to inflation expectations suggests that this time could be different.

We also see something familiar from QE supporters.

Essentially, the argument is that the BOJ was not really committed to increasing the inflation rate…………More generally, it suggests that QE policies can have their desired effect on inflation if central banks are sufficiently committed to achieving their goal. Whether this will in fact eventually be the case in Japan remains to be seen.

In other words the plan is fine any failure is due to a lack of enthusiasm in implementing it or as Luther Vandross would sing.

Oh, my love
A thousand kisses from you is never too much
I just don’t wanna stop

As the CPI index is at 101.1 compared to 2015 being 100 you can see that the plan has not worked as the current inflation rate of 1% is basically the inflation since then. Extrapolating a trend is always dangerous but we see that if the Bank of Japan bought the whole Japanese Government Bond or JGB market it might get the CPI index up to say 103. Presumably that is why QE became QQE in Japan in the same fashion that the leaky UK Windscale nuclear reprocessing plant became the leak-free Sellafield.

Economic growth

The good news is that Japan has had a period of this as the lost decades have been something of a stutter on this front.

But it is still the country’s eighth consecutive quarter of growth – the longest streak since the late 1980s.

Indeed if you read the headline you might think things are going fairly solidly.

Japan GDP slows to 0.5% in final quarter of 2017.

But if we switch to Japan Macro Advisers we find out something that regular readers may well have guessed.

According to Cabinet Office, the Japanese economy grew by 0.1% quarter on quarter (QoQ), or at an annualized rate of 0.5%.

Not much is it and I note these features from the Nikkei Asian Review.

 Private consumption grew 0.5%, expanding for the first time in six months……….Capital expenditures by the private sector also showed an expansion of 0.7%, the fifth consecutive quarter of growth, as production activities recovered and demand for machine tools increased.

Whilst it may not be much Japan is keen on any consumption increase as unlike us this has been a problem in the lost decades. But if we note how strong production was from this morning’s update we see that there cannot have been much growth elsewhere at all.  The monthly growth rate in December was revised up to 2.9% and the annual growth rate to 4.4%.

Troublingly for a nation with a large national debt there was this issue to note.

Nominal GDP remained almost unchanged from the previous quarter, but decreased 0.1% on annualized rate, the first negative growth since the July-September quarter of 2016.

Yes another sign of disinflation in Japan as at the national accounts level prices as measured by the deflator fell whereas of course the nominal amount of the debt does not except for as few index-linked bonds.


There was rather a grand claim in the BBC article as shown below.

Tokyo-based economist Jesper Koll told the BBC that for the first time in 30 years, the country’s economy was in a positive position.

“You’ve got wages improving, and the quality of jobs is improving, so the overall environment for consumption is now a positive one, while over the last 30 years it was a negative one,” said Mr Koll, from WisdomTree asset management company.

One may begin to question the wisdom of Koll san when you note wage growth in December was a mere 0.7% for regular wages and even more so if you note that overall real wages fell by 0.5% on a year before. So his “improving” goes into my financial lexicon for these times. You see each year we get a “spring offensive” where there is a barrage of rhetoric about shunto wage increases but so far they do not happen. Indeed if this development is any guide Japanese companies seem to be heading in another direction.

Travel agency H.I.S Co., for instance, is turning to robotics to boost efficiency and save labor. At a hotel that recently opened in Tokyo’s glitzy Ginza district, two humanoid robots serve as receptionists at the front desk. The use of advanced technology such as robotics enables the hotel, called Henn Na Hotel (strange hotel), to manage with roughly a fourth of the manpower needed to operate a hotel of a similar size, a company official said. ( Japan Times)


As we look at the situation we see that there is something foreign exchange markets seem to be telling us. The Japanese Yen has been strengthening again against the US Dollar and is at 106.5 as I type this. It is not just US Dollar weakness as it has pushed the UK Pound £ below 150 as well. Yet the Bank of Japan continues with its QE of around 80 trillion Yen a year and was presumably shipping in quite a few equity ETFs in the recent Nikkei 225 declines. So we learn that at least some think that the recent volatility in world equity markets is not over and that yet again such thoughts can swamp even QE at these levels. Some of the numbers are extraordinary as here are the equity holdings from the latest Bank of Japan balance sheet, 18,852,570,740,000 Yen.

So the aggregate position poses questions as we note than in spite of all the effort Japan’s potential growth rate is considered to be 1%. However things are better at the individual level as the population shrank again in the latest figures ( 96,000 in 5 months) so per capita Japan is doing better than the headline. If we note the news on robotics we see that it must be a factor in this as we wonder who will benefit? After all wage growth has been just around the corner on a straight road for some time now. Yet we have unemployment levels which are very low (2.8%).

As to the “more,more,more” view of QE ( QQE) we see that some limits are being approached because of the scale of the purchases.

Me on Core Finance TV





How does UK employment rise but hours worked fall?

This week has brought with it news of a surge in UK wages but sadly for the rest of us it is only for one person. From the Guardian.

Sánchez’s four-and-a-half-year contract ties him to United until the summer of 2022. It is understood his salary is closer to a basic £300,000 a week than the reported £500,000. This means he is, with Zlatan Ibrahimovic, the club’s highest remunerated player.

We are of course looking at the wages of Alexis Sanchez which are supposed to be too high even for Manchester City but not for their neighbours. Actually if we add in the agent of Alexis Sanchez and any other hangers-on we do at least have more than one person benefiting from this. Whatever you might think of the economics of premiership football and it is easy to make a case for it being more inflated than even the modern era football itself it is providing a boost for the UK economy as this from the BBC this week highlights.

Manchester United have topped the table of the world’s 20 richest football clubs for the second year in a row, and 10th time overall, says Deloitte…….Manchester United’s €676m revenues were boosted by €44.5m from Uefa after winning the Europa League against Ajax…..There were a record 10 English Premier League clubs in the top 20. The number in the top 30 was up from 12 to 14.

Maybe it is the performance so far this season influencing me but I was surprised by this part.

Southampton are the only debutant in the top 20 after broadcast revenues soared.

That makes you wonder why they are always selling players doesn’t it?

Changes over time

According to the Resolution Foundation there has been something going on and it started well before the credit crunch hit.

A change in working hours is driving this change, but there are two factors at play. The first is the large increase in the number of male employees working part-time, which has risen from 8.1 per cent in 1997 to 11.7 per cent in 2017. The second driver of the ‘hollowing out’ of male pay over the last two decades is the reduction in average hours worked by the lower-paid (in terms of hourly pay) – over and above the shifting balance between full-time and part-time working. The average number of hours worked by full-time men earning around two-thirds of male median hourly earnings fell from 44.3 hours in 1997 to 42.2 hours in 2016. At the same time hours worked increased for higher paid men. As a result of this change lower-paid men no longer work more hours than their higher-paid counterparts.

As we mull the illogic in those who are at the bottom end of the pay spectrum working fewer hours we are left wondering one more time how much underemployment there is.

 Among part-time employees in the bottom fifth of the male weekly earnings distribution, 27 per cent would like full-time work compared to 8 per cent of those in the top fifth. Under-employment (people wanting more hours) is also concentrated amongst lower earners.

Sadly the official UK data releases tell us much less about underemployment than we would like to know.

Pressure pressure

We get regular reports of pay pressure but this so far has not filtered into the headline official data. An example of this was provided by The Independent yesterday.

The FMB, in its quarterly report on the state of the industry, found that companies are particularly struggling to recruit bricklayers and carpenters. Demand for skilled plumbers, electricians and plasterers is also outstripping supply……As a result of the skills gap, the FMB said that wages are rising sharply for skilled tradespeople.

So there is evidence for some wage pressure in that sector which must be awkward for a news source which regularly assures us immigration does not affect wages. “Without skilled labour from the EU, the skills shortages we face would be considerably worse” seems to tell a different story.

What was especially interesting about the CBI ( Confederation of British Industry) manufacturing survey yesterday was the absence of a mention of wage pressure.

Employment grew at the fastest pace since July 2014 over the last three months, with further growth expected next quarter. However, skill shortages are high on firms’ agendas, with the number of firms citing skilled labour as a factor likely to limit output over the next three months the highest for more than four decades.

Today’s data

What we saw was a continuation of what over the past few years has been a strength of the UK economy.

For September to November 2017, there were 32.21 million people in work, 102,000 more than for June to August 2017 and 415,000 more than for a year earlier.

The previous concerns over new employment/ work being part-time ( and hence likely to be lower paid) has reduced considerably as you can see.

The annual increase in the number of people in employment (415,000) was mainly due to more people in full-time employment (401,000).

Yet if we switch to wages we see little sign of change in yet another disappointment for the Bank of England with its “output gap” style thinking.

Between September to November 2016 and September to November 2017, in nominal terms, regular pay increased by 2.4%, little changed compared with the growth rate between August to October 2016 and August to October 2017 (2.3%)……….Between September to November 2016 and September to November 2017, in nominal terms, total pay increased by 2.5%, unchanged.

This means that the picture for real wages was pretty much unchanged as well with a small fall if you use the official CPIH series but something which is over 1% per annum higher if you use the Retail Price Index or RPI.

We get a different perspective if we look at hours worked as you can see below.

Between June to August 2017 and September to November 2017, total hours worked per week decreased by 4.9 million to 1.03 billion..

Only a small fall but much more significant if we remind ourselves that an extra 102,000 people were contributing to the hours worked. We will have to see how this plays out because one version could argue that underemployment is rising the other is that as the economy is growing we are improving productivity and thus should (hopefully) see higher wages going forwards. I suppose as this is the credit crunch era we should not be too amazed if we end up seeing elements of both! At least we will not be like Reuters who always present good UK economic news like this.

 The number of people in work in Britain surged unexpectedly in the three months to November


If we look at the recent UK economic experience we see that there have been gains since around 2012 particularly in employment. Yet to the chagrin of economics 101 the wage growth so confidently predicted by it 101 is still missing and we have moderate wage growth and falling real wages with employment at record highs. Maybe a partial reason is that many individual experiences are different to the collective as seen by averages as this from Sarah Connor in the Financial Times hints at.

When I hear about “continuous change”, I think of the husband of a woman I interviewed last year: a British man who lost his job more than a decade ago after the car factory where he worked closed down. Since then, he has been hired and made redundant 10 times. Is he resilient and willing to learn? Yes. Has it been enough? No.

Perhaps the official surveys miss his like in the same way that the official wages data still shamefully excludes the self-employed and small-size employers. That omission has got worse as the number of self-employed has grown in recent years and now totals 4.77 million. Somehow on that road we find ourselves noting that real wages are still some 6% below the previous peak.

average total pay (including bonuses) for employees in Great Britain was £489 per week before tax and other deductions from pay, £33 lower than the pre-downturn peak of £522 per week recorded for February 2008

Maybe another factor is another even longer-term trend seen by the UK economy.

Looking at a longer-term comparison, between June 1978 (when comparable records began) and September 2017: the proportion of jobs accounted for by the manufacturing and mining and quarrying sectors fell from 26.4% to 7.8%…….the proportion of jobs accounted for by the services sector increased from 63.2% to 83.4%.





UK productivity rises as real wages and employment fall

After yesterday’s inflation paradox where we in the UK were told it was rising ( CPI), falling ( RPI) and also staying the same ( CPIH) there has been a couple of bits of good news. First not only for inflation prospects but the prospect of having reliable heating this winter and for the latter Italy will be even more grateful after having to declare a state of emergency. From Reuters.

All main arteries that supply neighbouring countries from Austria’s main gas pipeline hub were back online before midnight after a deadly explosion there shut it down on Tuesday, the co-head of Gas Connect Austria said on ORF Radio on Wednesday.

Also looking ahead UK consumers can expect lower water bills as the regulator has announced this already today.

Our initial view of the cost of capital – based on market evidence – is 3.4% (on a real CPIH basis). In RPI terms it is 2.4%, which is a reduction of 1.3% from the 2014 price review. The effect of this change alone should lower bills of an average water and wastewater customer by about £15 to £25.

It is hard not to have a wry smile in that they are in line with the UK establishment by using CPIH but also reference RPI! Oh and whilst the news is welcome we should not ignore the fact that Ofwat has looked the other way as UK water bills have risen year after year.

Real Wages

Whilst the news above is welcome sadly inflation has been higher than wage growth in the credit crunch era as shown by the chart below.

The one area where a little cheer is provided is clothing. They do not compare with house prices so let me help out. Yesterday’s data release is very unwieldy but if we pick the middle of 2007 as June the house price index was 97.7 and as of October this year it was 117.4. Plenty of food for thought there as against nominal wages may be not so bad but there is a catch which is that we are comparing to the previous peak. Of course the picture in terms of real wages is worse as they have fallen.

As to the more recent trend then housing costs are depressing real wages still. The establishment try to hide this as we see here.

Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.9% in Quarter 3 (July to Sept) 2017 compared with the corresponding quarter of the previous year.

In their fantasy world ( remember they use Imputed Rents which are never paid) you might think that housing costs are rising more slowly than other inflation. But if you switch to actual and real prices of which house prices are one then you get this.

OOH according to the net acquisitions approach have grown by 3.9% in Quarter 3 2017 compared with the corresponding quarter of the previous year.

As you can see the impact of housing costs on the ordinary person’s budget over the past year looks very different if you use real numbers as opposed to made up ones from the fake news registry. On this road the UK real wages situation looks different as a rough calculation shows that CPIH would have been 3.1% just like CPI in October.

The end of “overtime”?

Just for clarity this in the UK involves working beyond your contracted hours and the state of play according to the Resolution Foundation is this.

The typical premium has gone from over 25 per cent in the 1990s to under 15 per cent today. Only one in five workers now get traditional time and a half rates. Most women get absolutely no pay premium at all, possibly because they are more likely to work in sectors without unions.

We can see that as time has passed the reduction in the premium for overtime has put downwards pressure on pay measures. The scale of the issue is shown here.

This is a big deal because a lot of us do paid overtime – 2.6 million people do over 1 billion hours of it a year (and that’s before we even start on the 1.5bn hours of unpaid overtime). Men and those doing manufacturing or transport jobs are most likely to be doing some, but amongst those that do overtime it is a bigger deal financially for part timers and women.

So it has a solid impact which if we look at the trends has negative. The problem is what to do about it? Invariably the Resolution Foundation aligns itself with the central planners but sadly I doubt we can simply wish the problem away by legislation. After all we have an employment success story and some of that seems likely to be due to lower wages at the margin. You could argue employers are being more efficient in allocating hours and work which is a good thing. However it is an alloyed good thing as this time period is one where we have seen the growth of zero hours contracts which presumably have taken up some of the slack. Some types of work ( most of my career for example) are defined around performing tasks not how long it takes to do them so perhaps this definition of work has expanded. More research is welcome though especially into why women seem much less likely to benefit from overtime.

Today’s data

There was slightly better news on wages driven mostly by higher bonuses.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.5% including bonuses and by 2.3% excluding bonuses, compared with a year earlier.

Still a fair way below the hopes and expectations of the Bank of England and this is what it does to real wages.

In the three months to October 2017, real earnings decreased by 0.2% (including bonuses) and by 0.4% (excluding bonuses) compared with a year earlier.

That is using the CPIH measure so if you want it with house prices add around 0.3% to the decline.

Adding to the welcome news was another fall in unemployment.

There were 1.43 million unemployed people (people not in work but seeking and available to work), 26,000 fewer than for May to July 2017 and 182,000 fewer than for a year earlier.

However for perhaps the first time there is a hint of a change ( 2 months data now) in what up until now has been an employment success story.

The UK employment rate fell by 0.2 percentage points to 75.1% in the three months to October 2017 compared with the previous quarter.The level of employment fell by 50,000 for men and by 6,000 for women.


We see a complex picture in today’s data. Wage growth is up on a three monthly basis but this is not because October was an especially good month ( 2.3%) it was that July which dropped out of the data was a particularly weak one (1.7%). Ironically the weaker employment data may offer a little hope as rising output with lower employment will be good for the productivity data and this is confirmed by the hours worked numbers.

Between May to July 2017 and August to October 2017, total hours worked per week decreased by 5.9 million to 1.03 billion.

However on the other side of the coin the employment data is simultaneously troubling as the success saga has at best reached a soggy patch. Mostly it seems that it was the self-employed who saw a change.

 The employment level decreased by 50,000 for men and by 6,000 for women………..The total number of self-employed decreased by 41,000 in the three months to October 2017 compared with the three previous months.


What does the Bank of England think about UK wage growth prospects?

A sense of perspective can give us also a direction of travel so here is this from Sir Jon Cunliffe of the Bank of England yesterday.

The unemployment rate in the UK today is 4.3%. The last time it was that low was 1975 – the year I
graduated from university.
That year, average wages grew by 24%. 42 years later, with unemployment at the same level, whole
economy average weekly earnings grew by 2.2%

Oh and just as a reminder as Sir Jon omitted this bit the wage rises were not a sign of economic triumph as inflation ( measured by the Retail Price Index or RPI) rose to 26.9% in August of that year. Also this is an innovative way of describing a period when RPI inflation went over 5% for a while as the Bank of England sat on its hands.

 energy price inflation between 2010 to 2013;

Actually innovative ( for newer readers this word was twisted in the Irish banking crisis and now in my financial lexicon for this times has an ominous portent to it) move was to claim this.

That is why the Bank of England has a clear primary objective of price stability and a forward-looking inflation
targeting remit. We have an objective to support the government’s economic policy but it is a secondary
objective and subject to the first.

The truth is that it is the other way around as the inflation surge in 2011 that I pointed out earlier or the current phase where the Bank of England cut Bank Rate and expanded QE into an inflation target overshoot proves. In terms of Yes Prime Minister being willing to state things like that would be a qualification for a knighthood or as it described it a K. Indeed another potential qualification for a K might be to write and say this.

Central bank credibility is crucial to anchoring inflation expectations………. Arguably we are only now discovering the impact at very low levels of unemployment of the Bank of England’s credibility as an inflation anchor.

Apparently it is doing this right now while inflation is overshooting! Quite how this triumph fits with the credit crunch era is another fantasy which skips reality.

Wage Growth

There is reality expressed here.

Equally strikingly, that 2.2% is about the same rate of wage growth as in 2011 when unemployment rose
above 8% for the first time since the mid-1990s. Over the following 6 years unemployment has fallen quickly
and continuously but nominal pay growth has largely remained bound between 1 and 3%.

If you think this through logically then this is a basis for my argument that rather than aiming for an inflation rate of 2% per annum you should go lower and then we should find some real wage growth. Also it is sad to see a policymaker skip what are the major issues and causes of what is happening.

I noted above that changes in the world of work have very possibly changed the pricing power of labour and
workers’ appetite for risk (i.e. job insecurity). This is in itself a large area of current debate and I do not want
here to go into these in great detail.

The theme seems to be why look at relevant issues when you can continue to chew over the continuing failure of the Phillips Curve which gets pages and pages as opposed to this one paragraph below.

Some of these important changes in the structure of the labour market, such as the rise in self-employment
and decline in union membership, predated the financial crisis. Others, like the rise in temporary work and
zero hours contracts, are more recent. Technology – and the rise of the gig economy – has further
increased what my colleague Andy Haldane has called the ‘divisibility’ of labour.

Real Wages

It is simply astonishing that a man who voted for the monetary policy easing in August 2016 ignores its role in this.

Inflation is currently above target as a result of the post referendum depreciation of sterling and forecast, for
that reason, to remain so over the next three years.

I find it odd that they forecast the fall in the Pound will keep inflation above target for the next three years because as I explained yesterday the major effects are pretty much behind us now. The inflation Forward Guidance gets odder and indeed somewhat bizarre when you read this.

Domestically generated inflation pressure, however, appears low……..Bank staff calculations suggest that adjusted for this effect indicators of domestic inflation pressure are below levels consistent with the 2% target.

Oh and those who had to make calculations back when inflation was just below 27% are permitted a wry smile at this description of 4% inflation ( using the RPI index).

Measuring domestically generated
inflation when externally generated inflation pressure is high, as at present, is not straightforward.

The general Bank of England view is that wage growth is about to pick up and of course that has been true for years now but specifically it is based around this.

3 month on 3 month annualised AWE growth for regular pay is 2.9%.

As ever central bankers are cherry-picking the data as individuals will care most about total pay. However Sir Jon is less convinced by thoughts of a rise in wages although whilst he does not put it this way they are likely to be supported by lower inflation.

there is in my view a not immaterial risk that the
trade-off is not as it currently appears and that domestic inflation pressure will undershoot the Committee’s
collective expectation.

Today’s Data

This was another disappointing day for the Forward Guidance of the Bank of England.

Between July to September 2016 and July to September 2017, in nominal terms, both regular pay and total pay increased by 2.2%, little changed compared with the growth rates between June to August 2016 and June to August 2017.

This meant that real wages did this and for fans of the RPI subtract around 1%.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.4% including bonuses, and fell by 0.5% excluding bonuses, compared with a year earlier.


There is fair bit to consider here. In my view the views of the Bank of England are driven mostly by an attempt to avoid having to say that the monetary policy easing of August 2016 was a mistake. The majority in favour of this month’s Bank Rate rise do so by optimism on the wages front although of course there is a weakness there as we currently have fallen real wages. Sir Jon Cunliffe avoids it by thinking that inflation will be weak looking ahead.It remains a shame that whatever their views they continue to persist in their beliefs around the Phillips Curve. Sometimes I wonder what it would take for them to abandon it and put it in the recycling bin?

There was a hopeful sign in today’s data which is summarised below.

*U.K. 3Q OUTPUT PER HOUR RISES 0.9% Q/Q, FASTEST SINCE 2Q 2011 ( h/t @stewhampton)

Economics is not called the dismal science for nothing as we note a possible trajectory change as there were fewer hours worked  ( and indeed a 14000 fall in employment). But we have been looking for a productivity rise and this is one of the first signs of it and any continuation would be welcome. Also my first rule of OBR Club may well be in play as of course it ( and the Bank of England) have just downgraded the UK productivity outlook. Sometimes you really couldn’t make it up!







What does the lack of wage growth in Japan tell us about our future?

As the credit crunch era has developed we have seen many countries discover that past relationships between the level of unemployment and the rate of wage growth no longer exists. Actually if we look back we see that there had been changes before the credit crunch but it has both exacerbated them and brought them into focus. This issue is particularly pronounced in Japan where the unemployment and employment numbers are very strong. From Japan Macro Advisers.

The Japanese economy keeps adding jobs. 200K new jobs were added in August 2017. The unemployment rate was unchanged at 2.8% in August, remaining at the lowest rate in 23 years.

The stand out number is an unemployment rate of a mere 2.8% which is rather extraordinary especially if we recall estimates of full employment from the past as it is below them! How can this be? Well as even economic concepts do not mean what they say as for example central bankers talk of “price stability” when they mean inflation stability usually at 2% per annum. The concept of full employment was and indeed is like that as it does not mean everyone has a job. It always assumed some frictional unemployment or people temporarily out of work and that implied a higher unemployment rate than Japan now has. If we look at other measures the numbers are also strong.

Japan’s job offers to applicant ratio also remained constant in August at 1.52, the highest ratio since February 1974. The new job offers to applicant ratio slightly declined to 2.21 from 2.27 in July, but it is still close to its historical high and continues to show there are more than two vacant jobs to one applicant.

However we also need to note that there is a particularly Japanese feature to this which is on its way to other countries with demographics issues.

The work age population in Japan, defined as the population of the age between 15 and 64, has been shrinking rapidly. In 2016, it fell by 0.7 million people. In 2017, it is projected to shrink further by 0.8 million in 2017. While the Japanese economy is making ends meet by higher labor participation from its senior citizens, the labor resource limitation is an issue Japan needs to address soon.

Work till you drop is perhaps the new theme here.

What about wages?

The story of my time online covering Japan is that since the Abe government came to power there has been prediction after prediction that wage growth will pick up. Regular readers will be aware that some news organisations such as Bloomberg have regularly reported that wage growth has picked up but the truth is that so far there has been no real sign. If we move from the past hype to reality we see that according to the official data real wages fell by 0.9% in 2013, 2.8% in 2014 and 0.9% in 2015 before rising by 0.7% in 2016. Putting it another way the real wage index which was 103.9 in 2013 was 100.7 in 2016.

If we return to Japan Macro Advisers we see this.

The wage report for August was encouraging. Total wages rose by 0.9% year on year (YoY), the highest increase in the last 12 months. Basic and overtime wages rose by 0.6% YoY, the highest rise since April 2016.

We learn a lot there as growth of a mere 0.9% is “encouraging”?! If we switch to real wages the picture is not because they were 0.1% lower than a year before. They are optimistic because of what is essentially a challenge to the unemployment data as they hint at a change in underemployment.

The report shows that 30.5% of workers covered in the survey were part-time workers, a decline of 0.2% point from a year ago. The government does not publish a seasonally adjusted series, but in our own estimation, we see a clear sign that the part-time ratio is starting to decline.

This matters because.

Part-time workers receive one-third of wages that regular workers receive. There are other important benefits such as social security, and the job security is far stronger for regular workers.

Why might wages growth remain weak?

An interesting facet of the issue was highlighted yesterday by the Wall Street Journal.

Facing the tightest labor market in Japan in 43 years, Gatten Sushi recently hired two Chinese kitchen workers and a Filipino waitress who calls out “Welcome” to customers, each for about $10 an hour.

For a country which in many respects prides itself on being homogenous the situation below represents quite a change.

Japan added 400,000 foreign workers in the four years through 2016, surpassing one million for the first time, or nearly 2% of the workforce, labor ministry data show. That is still low compared with the U.S.’s 17% of foreign-born workers but enough to sway the labor market in urban centers like Tokyo.

This is something familiar these days where countries in effect import immigrants to help cope with poor demographics such as an ageing population but there is a catch.

RDC’s Mr. Fukui said foreign workers help the company keep prices flat, especially at budget places like a conveyer-belt sushi restaurant where Vietnamese workers in masks and plastic gloves place fish atop small rice balls formed by a robot. They are useful in other ways too: Sometimes they help out by serving foreign tourists in their own languages, and Mr. Fukui hopes they will continue working with the company even when they go back home to help it expand overseas.

There is a clear implication here that foreign workers are being used as a way of keeper wages lower. This can work because whilst the wages are low for Japan they are high for elsewhere.

Minimum wage in Japan, too low to attract many native-born workers, is still generous for many other Asians. In 2015, Japan’s minimum wage was 21 times higher than that of Vietnam, 12 times higher than in Nepal, and triple that of China, data from Dai-Ichi Research Institute show.

As to this being a permanent situation well maybe not.

Most foreign workers cannot stay permanently owing to immigration rules. Mr. Abe has repeatedly said he doesn’t want large numbers of immigrants in low-paying jobs coming to Japan for the long term.

Government policy

This has been announced since last weekend’s election according to Reuters.

Japan’s government is considering expanding tax incentives for companies to encourage them to raise wages, three people involved in discussions told Reuters, as many firms remain hesitant to spend their cash reserves on salary increases.

As the existing tax breaks are not working this sounds rather like the approach to QE ( QQE in Japan) where like Agent Smith in The Matrix series of films the cry always goes up for “More”


There are lessons here because Japan has for some time run a policy of declaring pretty much full employment. What I mean by that is that when I worked in Tokyo some 20 years ago people were employed to count you walking across bridges and lifts in the Ghinza shopping district had operators to save you from the arduous task of pressing a lift button! Of course many other countries are now facing up to the issue of what low levels of unemployment really mean.

The next issue is demographics where Japan is the leader of a pack you would rather not be in. Yes it is welcome people are living longer but it has a shrinking population too. Even it has accepted some immigration but as you have seen earlier on its own terms. As the Abe administration is nationalistic that could easily change, But the immigration that has taken place looks like it has affected wages in some occupations. If we look at the restaurant sector it seems clear that to attract Japanese labour wages would have had to have risen if viable.

That conclusion is not far off dynamite as we are so often told that immigration does not depress wages as this from Noah Smith of Bloomberg reminds us.

Normally immigrants don’t depress native wages, but in Japan, given investment constraints, they actually might. Still…skeptical.

If you have workers coming in from much poorer countries to work in particular sectors then surely it must depress wages in them or make them rise more slowly. I can see that there are areas it is unlikely to affect as for example Eastern European construction workers in the UK or Vietnamese/Chinese restaurant workers in Japan may have no impact at all on many other skills but to say they have no impact in their areas seems strange. Also what happens in their home country?

But if we return to the pattern of Japan upon which immigration has been only a recent thin screen then we see that for all the media and Ivory Tower hype the road on what it has been on for 2 “lost decades” now poses a question for our future.

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

But we cannot just simply assume we will be “Turning Japanese” in every respect as this from the UK Office for National Statistics has reminded us today.

UK population projected to grow from 65.6 million in 2016 to 72.9 million in 2041


Me on Core Finance TV


UK wage and employment growth has been remarkably stable overall

Today brings new data on what is the most important economic number in the UK right now. This has been added to by the way that some Bank of England policymakers has plugged what some might call a bigly improvement in UK wage growth. Although of course you could say there is an element of deja vu all over again in that. But the issue did come up yesterday at the Treasury Select Committee interviews. This is the new policymaker Silvana Tenreyro quoted in the Guardian.

My position now is that if the data outturns are consistent with the picture i’ve just described, of an output gap going towards zero, then i would be minded to vote for a bank rate increase in the coming months.

The “output gap going towards zero” would be signalled by a sustained increase in wage growth. It used to be signalled also by the unemployment rate but the Bank of England has been in disarray on that subject since its Forward Guidance highlighted a 7% unemployment rate as significant. It is also very disappointing to see a policymaker continuing with the “output gap” theory which has failed so utterly in the credit crunch era but I guess that is simply a consequence of recruiting from an Ivory Tower. Also it seems that she knows better than the Bank of England’s own research on the subject of QE.

It’s far from evident that QE has contributed to higher inequality ( h/t Positive Money).

And whilst some loved it as it suited their particular views this was none too bright. Her words from the Financial Times about her suitability for the role.

I grew up in a developing country, subject to many crises

The pay squeeze

There is a nice chart showing the position from the Resolution Foundation albeit that it underplays the situation by being one of the few places that takes the CPIH ( H = Imputed Rents) inflation measure seriously.

There is the obvious issue that real wages have fallen according to the official data but there are two other consequences which pose problems for both the Bank of England and the Ivory Towers. Firstly as we have had nearly five years of economic growth the last shaded area should simply not exist as the claimed “output gap” seems to be operating both inversely and perversely. Also real wage growth did best in the period when inflation was low suggesting that it would be better to keep inflation low rather than aiming at a target of 2% annual growth in the Consumer Prices Index or CPI. Even worse of course the Bank of England helped to drive current inflation higher with its promises of “muscular” monetary easing post the EU leave vote which it acted upon in August 2016.


These do not matter for the official wages series as they are simply ignored as are smaller businesses. If I remember correctly the cut-off point is twenty employees. This has been an issue of increasing significance in the credit crunch era as the number of self-employed has risen especially as it approaches the same number as those who work in the public-sector.

self-employed people increased by 70,000 to 4.86 million (15.1% of all people in work)

There has been some potentially better news for self-employed earnings in the latest revisions to the UK economic data set. From Monday.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

As this follows other revisions in this area we see two things. Firstly that we have no reliable up to date data on the subject and secondly we have just been through a spell where dividend income was massively underestimated. So the news for the self-employed may well have been better than it may have appeared to be. Of course such large revisions whilst signs of a welcome look into the issue also pose questions about the credibility of the data.

Today’s data


The numbers here continue to be very good.

There were 32.10 million people in work, 94,000 more than for March to May 2017 and 317,000 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%, up from 74.5% for a year earlier……..Between March to May 2017 and June to August 2017, total hours worked per week increased by 4.6 million to 1.03 billion.

This has had a consequence for those out of work too.

There were 1.44 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for March to May 2017 and 215,000 fewer than for a year earlier. The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 5.0% for a year earlier and the joint lowest since 1975.

So good news on this front with the only caveat being that we find out little about any issues with underemployment.

Average earnings or Quality

The Ivory Towers will be expecting a surge in wages as the “output gap” in the labour market continues its collapse. So let us take a look.

Between June to August 2016 and June to August 2017, in nominal terms, total pay increased by 2.2%, the same as the growth rate between May to July 2016 and May to July 2017.

So yet again they are disappointed. Actually as July was a weak month ( 1.4%) then August must have been better but I cannot say how much at this stage as the Office of National Statistics has forgotten to update the data set. Perhaps bonuses bounced back as we mull the (non)sense of monthly figures in this area.

If we move onto real wages we see this.

Comparing the three months to August 2017 with the same period in 2016, real AWE (total pay) fell by 0.3%, the same as the three months to July 2017. Nominal AWE (total pay) grew by 2.2% in the three months to August 2017, while the CPIH increased by 2.7% in the year to August 2017.

So we have seen yet another small decline in the official series for real wages with the caveat that the situation is worse if you use other inflation measures such as CPI and particularly the Retail Prices Index.


What we see yet again is quite remarkable stability in the UK labour market where employment rises but wage growth is weak considering that. For wages the summary of the Bank of England Agents continues to be accurate.

Growth in labour costs per employee had been subdued, with settlements clustered around 2% to 3%. Recruitment difficulties remained elevated, with conditions becoming very tight for some skills.

The Bank of England faces two problems here. Firstly its theoretical basis has all the stability of the Titanic and secondly there is the issue of its promised interest-rate rise. It is not the fact of one which is an issue it is the timing as why now and not before as not much has changed? On that road the monetary easing of August 2016 looks ever more a panic move.

Meanwhile the underlying picture for real wages continues on its not very merry way.

average total pay (including bonuses) for employees in Great Britain was £488 per week before tax and other deductions from pay, £34 lower than the pre-downturn peak of £522 per week recorded for February 2008



The diversity of modern employment has left the official data behind

Today has opened with the subject of wages and pay in the news ahead of the official data on the subject. The particular issue is described by the Financial Times below.


It was Mr Hammond’s predecessor, George Osborne, who first imposed pay restraint on the public sector back in 2011-12, as part of the then coalition government’s efforts to balance the state’s books after the financial crisis. He initially announced a salary freeze, and later a 1 per cent cap on pay rises.

This slipped out of the news when inflation was low but has returned as it has risen and another factor is that a minority government is much less likely to enforce such a policy than a majority one. The actual changes announced so far are below.


The government announced on Tuesday that prison officers will be given a 1.7 per cent pay increase, while the police will receive a one-off 1 per cent bonus on top of their 1 per cent rise. The settlement for the prison service is in line with an independent pay review body’s recommendations. The deal for the police is somewhat less generous than the 2 per cent recommended by another pay review body.

So far the changes seem to be fiddling at the edges but those who have read or watched the Dambusters story will know that a small crack can turn into a flood of water. It seems unlikely that teachers and nurses for example will not get such deals although I also note that the new regime remains below inflation.

As to the debate over wages in the public and private sectors the Institute for Fiscal Studies offered some perspective in May.


Public sector pay rose compared to private sector pay during and after the 2008 recession, as private sector earnings fell sharply in real terms. Public pay restraint since 2011 has led to the difference between public and private sector pay returning to its pre-crisis level.

Of course not everyone has suffered as salaries for Members of Parliament have risen from £65,768 in April 2010 when an “independent” body was appointed to £76,011thia April.

House Prices

One of the features of using a national average is that some do better and some do worse. On that vein there is this from the Yorkshire Building Society.

However, homes in 54% of local authority areas – including Edinburgh, Birmingham, Peterborough, Leeds and Harrogate – are more affordable now than they were before the financial crash due to wages increasing at a higher rate than property values over this period.

This leads to this conclusion.

At a national level, since September 2007 affordability has improved by 0.6% in Britain overall, by 18.9% in Scotland, 17.2% in Wales but has worsened by 3.3% in England.

My challenge to their calculations come from the fact that they use earnings which have of course risen as opposed to real earnings which have fallen in the credit crunch era. But it is a reminder that in some places house prices have fallen. For example if the “Burnley Lara” Jimmy Anderson was to buy a place back home with the earnings created by over 500 test wickets he would see an average house price of £77,629 as opposed to £94,174 back in 2007.

Oh and as you click on their site they announce their lowest mortgage rate of all time which is 0.89% variable for two years. I also note that it is only variable down to 0% as perhaps they too fear what the Bank of England might do in the future.

Also this morning’s data release reminds us that official UK earnings data ignores the increasing numbers of self-employed.

self-employed people increased by 88,000 to 4.85 million (15.1% of all people in work)

The UK employment miracle

It is easy to forget that the numbers below would have been seen by economists as some sort of economic miracle pre credit crunch.

For May to July 2017, 75.3% of people aged from 16 to 64 were in work, the highest employment rate since comparable records began in 1971…..For May to July 2017, there were 32.14 million people in work, 181,000 more than for February to April 2017 and 379,000 more than for a year earlier.

Some of this is likely due to changes in the state pension age for women but there is also a rise apart from that.  The overall picture is completed by the unemployment numbers.

The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 4.9% for a year earlier and the lowest since 1975…….There were 1.46 million unemployed people (people not in work but seeking and available to work), 75,000 fewer than for February to April 2017 and 175,000 fewer than for a year earlier.

The good news does leave us with several conundrums however. For example if the situation is so good ( employment rising when it is already high) why is economic activity growth weak? Or to put it another way why do we have low and sometimes no productivity growth? Last time around when we had a dichotomy between the quantity labour data and GDP it was the labour market which was the leading indicator but of course we do not know that looking ahead from now.

Average Earnings

These continued recent trends.

Between May to July 2016 and May to July 2017, in nominal terms, both regular pay and total pay increased by 2.1%, the same as the growth rates between April to June 2016 and April to June 2017.

There was a cautionary note in that if we look at the data for July alone there was a fall in bonus payments particularly to the finance sector so there is a possible slow down in pay on the way. However those numbers are erratic as we saw the same in April and then a bounce back.

Moving onto real wages we get something of a confirmation of my critique of the Yorkshire Building Society analysis above.

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 (2015 prices).

If we look at the annual rate of fall it is around 0.4% if you use the official inflation data which has switched to CPIH but around 1% higher if you use the Retail Prices Index.


This month has brought us a reminder that the credit crunch has affected people in many different ways. There was something of an economic aphorism that recessions were 80/20 in that for 80% not much changed but for 20% it did but these days more are affected. For example there are increasing numbers of self-employed about whose wages we know little. No doubt some are doing well but I fear for others. If we move to house prices some are seeing what are increasingly unaffordable values whilst others have seen price falls.

National statistics have been caused difficulties by this as for example depending on the survey used the base level is 10 employees or 20 depending on the survey. This was less of a problem when the economy moved in a more aggregate fashion but now assuming that is a mistake in my view. It also misses out ever more people.

I know the tweet below is from the United States but it covers a few of my themes including if you look closely an improvement apparently related to a methodology change.

Oh and the increases in 2015/16 came mostly as a result of the lower inflation central bankers tell us are bad for us.