When will UK wages respond positively to the recovery?

16th July 2014 by The Harried House Hunter

One of the features of the credit crunch era in the UK has been the way that the output (Gross Domestic Product or GDP) numbers have told a different story to the employment ones. As we stand we have just exceeded the pre-credit crunch peak in terms of output but if we look at the 981.4 million hours per week worked in the spring of 2014 we see this.

up 69.4 million (7.6%) on five years previously.

So according to these figures we are working longer hours to produce what is the same amount. This, in essence, is the productivity issue for the UK economy which begs all sorts of questions. For a start how did we become less efficient and productive over a period when you might logically think that the pressure would be strong to be more productive? Another is the issue of whether part of it was something which UK economists were crying out for pre-credit crunch which was a change of behaviour from companies in downturns where they in effect hoard labour rather than making mass redundancies. The logic behind this was that there are costs in re-hiring a skilled workforce. Should the latter be true companies right now may well be rueing taking the economic advice given as they find themselves criticised for a “productivity puzzle” which is at least in part a consequence of taking the precribed medicine.

The “productivity puzzle” may be worse than we thought

The Office for National Statistics has been researching the skill and ability levels of the UK workforce. However that relatively simple concept as ever needs to be hidden behind an acronym? Here QALI means Quality Adjusted Labour Input.

At the end of 2013 QALI was over 8 percentage points higher than before the start of the economic downturn, compared with a cumulative increase of around 3 percentage points in hours worked.

The difference in hours worked compared to the numbers earlier in this article is I hope due to the dip in the UK economy in early 2009. However if we move forwards with this research we see that the “productivity puzzle” has just got worse by some 5%. The ONS puts it this way.

For example, the Bank of England has recently estimated that the whole economy output per hour is some 16% below the level implies by the pre-downturn trend. This shortfall would increase to 21% including QALI.

What about wages and real wages?

If we take such numbers forwards we should not be surprised at the weak path for UK wages. This has continued in this morning’s data.

Pay including bonuses for employees in Great Britain for March to May 2014 was 0.3% higher than a year earlier, with pay excluding bonuses 0.7% higher.

Some care is needed as wages fell by 1.7% in April as 2013 saw a lot of bonuses being paid at a time which escaped the 50% income tax rate. However at a time of supposed recovery wage growth is very weak. If we move to regular pay to escape a potential one-off bonus impact we see that in May alone it was an anaemic 0.6% or if you prefer £3 per week higher than a year before. Putting it another way the £446 per week of May 2013 has become £449 a year later.

If we switch to real wages we see that real regular pay fell by 0.9% in May (CPI) or 1.8% (RPI). We know from yesterday’s inflation numbers that inflation rose last month by 0.4% and 0.2% respectively in June so to maintain even such a rate of  fall just got harder. Hardly a recovery theme is it?

There are many different ways of estimating how much real wages have fallen in the credit crunch era. The Institute for Fiscal Studies looked at incomes since 2009-10 and come to this conclusion.

As a result, real median income in 2012–13 was 5.8% below its 2009–10 peak and mean income was 8.5% lower.

In this context replacing average with mean somehow seems appropriate. Also I note that they pointed out that the period preceding the credit crunch was not so great either.

weak growth between 2002 and 2007

One thought which immediately comes to mind is the rise in UK house prices since 2002. It looks even more unbalanced when we see that real wages did little and then fell. So the current 10.5% annual rate of house price growth looks even worse.

If we look to sweep up the productivity and wages data we do have the beginnings of a consistent narrative. The issues with productivity can be seen as holding back wage growth and as an explanation of why it has been so weak. Actually the estimate of a 21% fall in productivity though gives a guide to the problems of this sort of analysis. After all if it was exactly true wages would be falling in nominal terms I am taking the broad sweep of the analysis.

Something has changed

If we move back to what in many respects we now consider to be greener pastures this was the state of play.

Median household net income has grown by an annual average of 1.3% since 1961.

I suspect I am not the only person reading those numbers wondering if we will increasingly look back on that as a type of golden era. So far economic recovery has not led to a wage growth recovery.

What about the self-employed?

I ask this question because they are excluded from the official statistics. As the rate of growth in their numbers over the past year below shows this is an increasingly important omission.

The number of self-employed people increased by 404,000 to reach 4.58 million.

The Resolution Foundation published some research on this subject with an eye-catching if misleading headline.

Including the self-employed in our most timely earnings barometer would have worsened our view of the fall in earnings since the pre-recession peak by between 20 and 30 per cent.

The implication that earnings had fallen by 20% was misleading and a shame,what they meant was that the mean income fall discussed above would increase from 8.5% to somewhere between 10% and 11%.

They pointed out that in the recovery they would expect self-employed incomes to pick up more quickly than overall earnings quoting the example of construction workers. So we are perhaps missing quite wide swings in wages here.

Also virtually everybody I can think of is forecasting a future where wages pick-up but so far we are experiencing a situation where according to the official figures they have not. Actually you can make a case for wage growth falling in the recovery! Due to the distortions in the data the picture is somewhat foggy but where are the signs of growth?

Quantity measures are very strong

I have already look at the hours worked figures but these are backed up by other ones.

The employment rate last reached 73.1% in December 2004 to February 2005 and, since records began in 1971, it has never been higher.

If we move to the unemployment numbers we see that the unemployment rate fell to 6.2% in the single month of May.

Comment

If we look at economic output in the UK we see that the NIESR (National Institute for Economic and Social Research) estimates that GDP growth is running at a quarterly rate of 0.9%. This follows official data telling us that the economy had expanded by 3% in the year to the end of March. So as we look for wage growth in response we are starting to ask, if not now when? In fact if we try to avoid the distortions caused by tax-minimising bonus payments we are left with the troubling conclusion that wage growth has in fact slowed.

So the glass half-full view is to look at employment and unemployment trends whilst the glass half-empty one for the UK is to look at wages. If you are really hopeful you might dream that a chorus of “are you Germany in disguise?” will influence our football!

22 thoughts on “When will UK wages respond positively to the recovery?”

  1. Joe says:

    Do we not have to consider that the ‘pre credit-crunch peak’ was actually a lie, based on incorrect data and assumptions, containing numbers effectively borrowed from the future?

    1. Dave Holden says:

      Hi Joe, this has occurred to me. Isn’t the denominator of productivity some form of GDP? If so wasn’t this elevated considerably by the credit binge?

      1. Anonymous says:

        Hi Guys

        I agree with your point that some of the 2008 GDP was an illusion. Now who in out political class is going to tell everyone that?

        Putting it another way the boost to UK GDP that will come from September from the changes (coke&hookers, R&D double counting etc) is a way of hiding that. Of course reality remains more of a problem..

  2. JW says:

    Hi Shaun
    Well widening inequality and low wages is certainly Germanic, but alas that is probably as far as the analogy goes. House prices have been driven by ‘investment’ not ordinary people buying and selling. Except for some odd bright spots, the UK economic indicators are driven by ( generally) unproductive investments from elsewhere. Monetisation and financialisation continues, the ‘real’ economy drifts. Employment stats really are ‘mickey mouse’.
    I guess our three kids , 25-30yrs could be said to have started in ‘top 5-10%. One is employed and is doing OK financially ( eldest), the middle one is ‘self employed’ and just about keeping level., the youngest is ‘self employed’ and struggling. They are all well educated motivated. The spread is probably fairly typical and is definitely not represented in any published stats.
    You know where I think we are heading, the question is , will it be a fairly benign fuedal world, or will it disintegrate viciously under internal pressures?

    1. Anonymous says:

      Hi JW

      Yes the Germanic link disappears quite quickly when one starts looking at the trade balance if nothing else! As to the feudal world I both fear and believe it will be a troubled one. There will be a shortage of Atreides virtues but much less of a shortage of Harkonnen like behaviour.

  3. Forbin says:

    Hello Shaun,

    a couple of points

    1, the GDP figures as given are based on what , sex and drugs ?

    yes they have a value but I wouldnt say smoking pot made you more productive …..

    2, the employment trends are exceedingly worrysome – this is the Brasillianization of the UK, lots of underpaid low profit jobs with a few elites owning everything -this is not good for a functional democracy

    ( point: in the UK we live in a parliamentary democracy , not a true democratic system)

    3, the Banks are still failing and interest rates to the public bear no resemblance to the BoE rate

    4, in the end only HMG is fooling itself if it keeps using the “doctored” CPI figure

    Still the show goes on

    Forbin

    1. therrawbuzzin says:

      I’d say our system, which has all main parties offering the same policies, is electoral dictatorship, and since this allows govt. to abdicate all responsibility for its electorate, in favour of the ruling elite, it is hardly surprising, since they are greedy b’stards, that wages are not rising.

  4. Drf says:

    “One of the features of the credit crunch era in the UK has been the way
    that the output (Gross Domestic Product or GDP) numbers have told a
    different story to the employment ones.” Surely what this shows is what has always been known; if you start manipulating and lying then it becomes very difficult to stop. Eventually you drive yourself into a corner, and this is what usuually trips up all criminals – they begin to make mistakes with their lies, and the facts do not add up !!!

    1. therrawbuzzin says:

      Are you equating our politicoes to liars, thieves and swindlers? :)

      1. Drf says:

        Now would I do that?

  5. Anonymous says:

    I’m not convinced at all that gdp is a good measure for financial services ‘output’. Financial services is more about how much of the overall cake is taken and is mightily affected by the credit cycle.

    The puzzle is that no one seems to want to turn their minds to these broader issues. Perhaps it just doesn’t suit?

    1. Anonymous says:

      Hi Hotairmail

      When you use the GDP production/output variant there are obvious problems for the financial services industry. I would have more hope for the GDP Income variant (as in adding up what everyone is paid) if the UK kept it separately. But Nigel Lawson stopped that some time ago.

      We get various official reviews (there is one currently on the deflators) but they seem to just chat to the same old crew. I did wonder if the Kate Barker review on GDP and the Balance of Payments would contact me but it did not. Apparently according to it everything is just fine!

  6. Londoner says:

    No sign of wage growth in IT sector. Self employed rates are pretty much stagnant (in nominal not real terms) over 20 years.

    1. Anonymous says:

      I suspect you’d find 1994 City IT wages & contract rates much lower than today in nominal terms.

      They jumped up 1996 – 1999 with year 2K work, and flattened post dotcom bust.

  7. Anonymous says:

    Hi Shaun. I don’t see how we can compare to 2008 wages as we have seen that 2008 was simply a debt fueled lie, pulling forward demand and calling it growth. This has a double effect as it artificially inflates 2008 wages and depresses wages after as demand drops because it was already pulled forward.

    1. Anonymous says:

      Hi Progrock

      I agree that the pre credit crunch period creates all sorts of problems. One issue is that the so-called profits of the banking sector were nothing of the sort. Also the fact that house price rises were not in the consumer inflation numbers made us think we were better off than we were.

      As you say we have been paying the price ever since.

  8. GusBmth says:

    Hi Shaun

    It’s as if the the UK ruling elites have drawn the conclusion that there are only a few high wage/ high productivity sectors in which the UK has a chance of being competitive. Hence, in their minds, the need for flexible labour markets for the rest of the economy to drive real wages down, on the basis that lower real wage rates = lower unemployment.

    It’s a way of thinking that panders to the vested interests of the wealthy elite; and in its defeatism appears to absolve the politicians of blame. Of course, they”ll encourage high value-added industries through tax incentives, but besides that, it’s as if their collective answer is ‘regrettably in a globally competitive world, that’s all we can do’.

    As an aside, it’s sadly ironic that we’re discussing falling productivity in the UK at a time of such technological change. The internet has transformed how we live our lives, but apparently has done little to improve productivity. Who would have thought that at the turn of the Century?

    1. Anonymous says:

      Hi GusBmth

      That particular economic model is also being applied to the periphery of the Euro area. It is almost as if the various establishments only have a plan A which just by chance suits them anyway!

      I agree with you on productivity where the internet should have improved things. I think that the truth is that we have little idea of services productivity partly because we are not that clear on what output is.

      1. GusBmth says:

        I’ve often wondered whether the efficient tax planning/tax dodging of large corporations has led to an under-reporting of economic activity in the UK. If that phenomenon has accelerated over the past few years, then it might account for part of the productivity puzzle. That seems particularly relevant for certain high tech services industries for example.

  9. Anonymous says:

    Excellent column, Shaun. With regard to the UK productivity
    puzzle I wonder what your opinion is regarding the views of the American
    economist Chris Martenson:

    http://rt.com/shows/boom-bust/171716-us-future-growth-bitcoin/

    He believes that the post-crisis world will be a lot different from the pre-crisis world simply because oil and other mineral fuels will be a lot more expensive going forward. On June 16 you critiqued the BoE study “The UK Productivity Puzzle”. Its authors mentioned that: “the growth of North Sea oil and gas extraction output has been in secular decline since around 2003 and this has slowed trend growth in labour productivity in this sector from a little under +1 percentage point to -2 percentage points per quarter.” However, surely more expensive energy would have productivity repercussions that extend way beyond the mining sector of the UK economy. What do you think, please? Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      Thanks for the video link which makes some interesting points. As to higher oil prices well at US $100+ per barrel that is hard to argue! But for the UK that hints at a 1970’s style environment where we did very badly….

      But yes further oil price rises would not only drive productivity lower but also give world economies another reverse. It would be quite a toxic mix so fingers crossed that someone can make cold fusion or it’s like work.

      1. therrawbuzzin says:

        Except, of course, an Independent Scotland’s

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