Three graphs to try to convince you why slow wage growth is a “good thing” for the UK, given the path of aggregate demand.
Graph one: the change in nominal gross value added since 2008. This is nominal GDP at basic prices not market prices, so factors out changes in indirect taxes such as VAT.
This is very similar for France and the UK.
Graph two: the change in nominal hourly wages since 2008.
The fact that nominal wages increased in both countries between 2008 and 2009 despite sharp falls in nominal demand is a good illustration that nominal wages are indeed sticky. But there is “sticky” and there is “gravity-defying”. French wages are up nearly 12% since 2008 despite a 7% rise in national income over this period.
What’s the result? The “hard-working families” of the UK are actually working hard (relatively speaking; not to deny there is slack in the labour market). In France, not so much.
A little poetic license there… but I think there is an important point here.
In the long run all that matters is productivity. Yes, it would be fantastic if Britain can turn into Switzerland. But Keynesians have a nice turn of phrase about the long run… let’s forget about the long run for a minute.
In the short run, coming out of recession, the biggest difference the government (and I mean you, Carney et al) can make to British “living standards” is to deal with the problem of unemployment and under-employment. In that short run, the growth of real hourly wages is inversely correlated with rising employment and hours worked. Hence I think it is reasonable to argue that falling real wages are a good sign that British living standards are rising because it will be a good sign that employment and hours are rising.
And note again that real wages are not real incomes. Consider a part-timer who goes from 10hrs/week to 20hrs/week at the same time their real hourly wage drops 2%; their real income rises 96%. And then consider the unemployed person who goes from the dole queue to a job. The “real hourly wages” data does not capture a change in either person’s “standard of living”.
This inverse correlation is obviously not generally true. Outside of recessions any supply-side issue which lowers real wages (because productivity falls) is unambiguously bad. But recessions are special.
I couldn’t find a source for historic UK hourly wages, but I did find a couple of studies which imputed hourly wages from the compensation of employees data in the national accounts divided by total hours worked in the labour market stats. Here is the 1990s recession; hourly wages are deflated by the GVA deflator, the best measure of whole-economy inflation:
Now where do you want to argue that British “living standards” were rising? When real hourly wages were soaring in 1991, or when real hourly wages were stagnating in 1994/5?
Maybe this argument is uncontroversial. But if so then why the focus on falling real hourly wages from opponents of current UK macro policy? That is exactly the wrong focus from the perspective of macro policy. If the (political) focus is now purely on the supply-side, on productivity, then Osborne is surely right to claim he has won the argument on macro policy, merely because his opponents have abandoned the debate at the first whiff of positive real GDP growth. Oh, and forget about the unemployed, forget about the labour market… that is the ultimate victory of the inflation hawks.
[Inspired by, and see also: old Sumner posts on real wages in the Great Depression.]
A follow-up on a post from last month; I managed to replicate the data on House of Commons research on changes in real hourly wages across Europe. What I wanted to check is whether the UK is an outlier in terms of hours worked.
The research commissioned by Labour looks at changes between 2010Q2 and 2012Q4, so I’ve done the same. The Eurostat data I’m using has had one quarter of revisions since the HoC report was written, so the results have minor differences; Germany has real wages growing +2% over this period rather than the cited +2.7%.
Real hourly wages are found using nominal hourly labour costs from the Labour Cost Index series, and deflated using the all-items HICP. This isn’t necessarily the best definition of real hourly wages; using the GDP deflator might be more interesting, but I’ve stuck with the HICP.
The table below compares the change in real hourly wages and the change in actual hours worked from the quarterly national accounts, between 2010Q2 and 2012Q4. It is sorted by the change in real wages, and I’ve included only countries with population >1m, sorry Malta et al, you are just not that interesting. The averages for the EU27 and Eurozone are also included. All figures non-annualized.
|Country||Change in real
|Change in total
|European Union (27 countries)||-1.9||-0.3|
|Euro area (17 countries)||-1.5||-0.7|
What does this say? The most astonishing aspect is surely the collapse of hours worked in Greece, Portugal and Spain. Remember this data looks at just an 18 month period, and yet hours worked fell nearly 17% in Greece.
Against all that, the UK does look like something of an outlier. In this group, of countries with falling real hourly wages, only the UK and the Netherlands had rising hours worked. The UK in fact has the fourth highest rise in total hours worked of the group, after Estonia, Germany and Hungary.
I’m genuinely confused by Simon Wren-Lewis’ post on “Behaving Like Luddites” and wanted to offer a decent response. A reasonable but condensed version of Simon’s argument, is, I hope:
Bad demand-side policy has caused UK output to stagnate. Due to a supply-side problem of falling productivity, employment has risen strongly – but this is not something we should celebrate.
I have a few problems with this:
1) I could apply exactly the same logic to the early 1980s, and I don’t think Simon would endorse that view. i.e. “In the initial recovery from the 1979-81 recession, real GDP grew fast. It’s true that unemployment carried on rising until 1984, but this was due to a huge rise in productivity, not bad demand-side policy.” That argument seems completely consistent with using “changes in productivity” as an “excuse” for the employment data post 2010. (Yes, this comparison is over-simplified.)
2) Is it not fair to distinguish demand-side shocks which impact employment from other shocks which impact output – and isn’t it fair to consider exactly what shocks are hitting the UK? Supply shocks such as the 1973 oil shock did not impact employment; the lowest recorded point on the ONS series for the unemployment rate is in late 1973 when the UK had been in recession for two quarters. That was a supply-side recession with low output and very high inflation.
3) If you look at the breakdown of GDP by income in the national accounts, it is not quite so obvious that rising employment is really a “mystery”. Here’s one view:
% Annual growth. Source: ONS.
This is derived from Scott Sumner’s “musical chairs” model as in earlier posts, and I am merely ripping off Scott’s many posts on this subject as usual in this post. What is surprising in the above table is that since 2010, even on a per capita basis, we’ve see a rising growth rate of “labour income” – defined as total wage income for employees plus mixed income, albeit still at low rates. It seems possible based on that data to claim that:
a) flexible nominal hourly wages plus rising nominal incomes is a sufficient demand-side explanation for rising employment and actual hours worked,
b) hence, the stagnation of output, and particularly output per hour worked, is at least partly the real mystery with the UK macro data (pun intended)
For many countries in the Eurozone I’m sure you could make the claim that fiscal austerity has caused people to do less work, and find confirmation in the macro data. At least for 2012 in the UK, you’d have to claim that fiscal austerity has caused people to do much more work producing the same amount of stuff. That sounds like a supply-side effect, not demand-side.
My bias is that there’s probably a measurement problem with the price indices, i.e. the NGDP figures are roughly right but we are getting the real/inflation split badly wrong. I see deflationary trends wherever I look. But the supply-side pessimists have an argument which must be attacked analytically rather than idly dismissed.
This was a rambling post already, but, lastly, 2012 was a weird year if you believe all the current data. Hours worked soared; the last time hours worked rose that fast on an annual basis was during the Lawson boom. Yet in 2012 output rose only 0.2% rather than the 4-5% seen under Lawson. That’s just really, really strange; dismissing such evidence because “Luddism is bad” seems much too hasty.
In March 2011, MPC dove-in-chief Adam Posen explained to the Guardian why he was concerned about weak demand, and not concerned about a wage/price spiral:
Consumers, he said, were unlikely to run down their savings in an attempt to maintain spending patterns, while the weakness of trade unions meant it would be hard for wage bargainers to push up pay settlements in response to higher inflation.
“Wages will be the dog that doesn’t bark,” he said.
That was an understatement. The Labour Market Statistics covering the three months to January 2012 show that despite CPI peaking above 5% in September 2011, nominal wage rises were muted through 2011. The growth rate of total pay has fallen to a mere 1.4% for the three months to January 2012 vs the same period a year earlier:
These figures are confused by the reclassification of half the British banking system as part of the Public Sector in late 2008, and distorted somewhat from attempts to smooth out the financial sector bonus season through seasonal adjustment. Those bankers do make things complicated.
With that caveat in mind, here are the levels, using the monthly figures now rather than the three-month average to show the downtick over the last quarter:
(The ONS figures for the public sector “ex financial services” show a smaller disparity with the private sector earnings.)
Looking at these figures, it is really hard to believe the MPC came close to tightening monetary policy in early 2011.