Archive for the ‘Wages’ Category

Wages vs Employment

July 17, 2014 11 comments

There is an interesting asymmetry in how people read the macro data.

For a given increase in aggregate nominal spending (income) I think it would be generally agreed that “what we want to see” is a higher volume of output and not much inflation.  Does anybody disagree?  Anybody out there who would prefer the trade-off shifts towards higher inflation and lower output growth?  No?

OK.  For a given increase in aggregate nominal income (spending) we can consider the same trade-off between employment and wages.  I had taken it as given that we had a depressed labour market and so “what we want to see” is that increases in aggregate income will translate primarily into higher employment.

What we have seen over the last year looks quite amazing.  Over the year to the March-May 2014 period, hours worked has risen 3.7%.  We only have nominal data for Q1, but that showed a 4.1% rise in nominal aggregate labour income.  In other words, the increase in aggregate income has translated almost entirely into a higher volume of labour employed and there is no inflation – nominal wage growth is maybe just positive.

Yet this is seen somehow as a bad thing, see, for example the Guardian here, which puzzles me.  Do you have a sticky wage model of the labour market, in which AD shocks can raise/lower employment, or not?   Is higher employment in 2014 a good thing, or not?   These questions have simple answers for this simpleton blogger.

6.5% is a good news story, and let’s hope they keep coming.

Categories: Inflation, Wages

Minimum Wage, Maximum Derp

February 27, 2014 7 comments

For me one of the most important lessons for British economic policymakers over the last six years should be to fear the interaction of micro with macro, supply-side policies with demand-side policies.

I do not think it is a merely a co-incidence that the worst fall in nominal demand since the 1920s occurred at the same time as a supply-side shock (collapse) in 2008.  All recessions in British history have been driven by tight money aimed at lowering inflation. Was this time different?  It’s not obvious why… CPI rate, September 2008?  5.2%.

And I do not think it is merely a co-incidence that the worst recovery in demand on record has occurred at the same time as inflation has sometimes hovered, sometimes soared above the inflation target.  CPI rate, September 2011?  This is during the time when the Darling/Osborne austerity drive “sucked demand out of the economy.”  That CPI rate in September 2011 was, again, 5.2%.

Here is MPC hawk Martin Weale writing this week:

If wage growth picks up more rapidly than I expect, it will be an indication of inflationary pressure in the economy and Bank rate will need to rise sooner. If wage growth remains subdued, Bank rate should rise more slowly. Because the future is uncertain, we cannot make any promises about where Bank rate will be in a year or two years.

Raising the minimum wage by 3% at a time when hourly wage inflation is 1-2% at best, and is one of the indicators preventing the Bank from screwing up the demand side again… that would surely be an incredibly foolish gamble.

What, exactly, have policymakers learnt from six years of negative supply shocks and disastrous demand-side outcomes?  Have we even learnt anything about wages, nominal shocks and employment?  It does not appear so.

So sure, let’s try another supply shock.  Maybe we’ll get “lucky” and the labour market tightens enough this year that hourly wages pick up, so that a 3% NMW raise doesn’t hurt many more people.  Maybe.

Here is the Low Employment Commission report for 2008 (before the recession):

3.18  The decline in the labour market position of young people has been general across the UK. The proportion of young people not in FTE aged 16–21 who were in employment fell in almost all regions between 1998 and 2007, unlike those aged 22 and over who saw their employment share increase in all areas of the UK except London. However, by European standards, young people’s labour market position in the UK is relatively strong.

Good one!  Our labour market may be doing badly, but just look at Spain!  Those guys are really screwed.  They continue:

Given that employment in the UK has been at record levels, it is difficult to explain why young people have not done better in the labour market. Two significant developments in the labour market in recent years have been the increase in the number of people of pension age becoming economically active and the arrival of predominantly young migrant workers from the European Union accession countries.

It’s “difficult to explain”… right.  A total mystery.  I can’t think what might have caused it, so let’s blame immigrants and old people, those are surely the most “significant developments” in the British labour market in the years to 2008.  If anybody does have any better ideas about what happened, be sure to write to Card, Krueger, Dube, etc.

A Mystery Event in the UK Labour Market.  Source: ONS YBVK

A Mystery Event in the UK Labour Market. Source: ONS YBVK

Categories: Crazy Loons, Wages

What’s Happening to UK Hourly Wages?

February 24, 2014 2 comments

In the UK the spotlight is usually on the weekly wage measure produced by the ONS, Average Weekly Earnings.  Scott Sumner tells us to focus on hourly wages.  Why?  I think the heart of the theory is that the hourly wage is a stickier price.  Weekly wages can adjust via a change in hours, or the hourly wage rate.

In this post I’ll take a look at the hourly wage data.  The ONS do not produce an “official” time series for mean hourly wages; but we can get to the data by a number of different routes:

  1. The Annual Survey of Hours and Earnings.  This survey should provide the most reliable data for employed workers, and provides the gross mean hourly earnings (amongst others) from a survey of employers.
  2. The Labour Force Survey.  Every quarter the Labour Market Statistics provide an update to a measure of mean gross hourly earnings (table “EARN08″) from the LFS.  This data is known to underestimate the mean, it excludes workers earnings more than £100/hour.
  3. The monthly labour market update provides both an estimate of Average Weekly Earnings plus average weekly hours, again from the LFS.  A simple matter of division should give us the mean hourly wage.
  4. The national accounts, combined with the Labour Force Survey.  The national accounts tell us aggregate national wage income.  The LFS data tells us total hours worked.  From these two we can calculate mean hourly wages.  I don’t know of any reason to doubt the LFS hours data.  The national accounts do of course get revised.  I am not sure how reliable this measure should be.

The ONS does also have an experimental Index of Labour Cost per Hour series.  This data is also available from Eurostat as the Labour Cost Index.  Annoyingly we are not given the underlying nominal data in either case, only the index level; I will ignore those series for this post.

This is what the four different sources of hourly wages look like:

Estimates of UK Hourly Wage Rates

Estimates of UK Hourly Wage Rates. Source: ONS, Nomis

I was pleasantly surprised that these estimates came out relatively close together; the data from the “EARN08″ table (green line) is as expected an outlier.

Comparing weekly with hourly wages it does appear that a reduction in weekly hours worked in 2009 contributed to the weakness of weekly wages.  Here I’ll stick with the LFS data using average weekly wages/hours as the hourly wage:

Year Average
% Growth

% Growth
2007 4.6 4.9 32.1
2008 3.8 3.5 32.0
2009 1.6 0.0 31.5
2010 1.6 2.3 31.7
2011 2.8 2.4 31.6
2012 0.3 1.3 31.9
2013 1.0 1.3 32.0

Similarly the recovery in average weekly hours since 2011 explains why weekly earnings have grown faster than hourly wages.

On the ASHE measure the average annual growth rate of gross hourly wages was 4.1% between 1997 and 2007, falling to 1.5% between 2008 and 2013.  Remember that 4.1% figure when you are told silly stories about how globalisation reduced wages in Britain, and remember the 1.5% figure when you are told that inflation is the “real threat”.

Categories: Data, Wages

Want Higher Wages? Move to France (and Lose Your Job)

October 17, 2013 1 comment

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.

Nominal GVA, UK vs France

Nominal GVA, UK vs France

This is very similar for France and the UK.

Graph two: the change in nominal hourly wages since 2008.

Nominal Hourly Wages, UK vs France.

Nominal Hourly Wages, UK vs France.

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.

UK vs France, Total Hours Worked

UK vs France, Total Hours Worked. Source: ONS, Eurostat


Categories: Data, Wages

British Living Standards are Rising BECAUSE Real Wages are Falling

September 12, 2013 1 comment

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:

UK Real Hourly Wages in 1990s

UK Real Hourly Wages in 1990s. Source: ONS DTWM , MGRZ, YBUS

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.]

Categories: Inflation, Wages

Real Hourly Wages in Europe

September 10, 2013 6 comments

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
hourly wages
Change in total
hours worked
Portugal -15.9 -9.2
Greece -15.8 -16.8
Spain -8.1 -8.2
United Kingdom -5.5 3.1
Italy -4.3 -0.9
Slovenia -3.5 -4.7
Netherlands -3.4 0.8
European Union (27 countries) -1.9 -0.3
Euro area (17 countries) -1.5 -0.7
Denmark -1.0 -0.9
Belgium 0.3 2.0
Slovakia 0.3 0.1
Lithuania 0.4 -4.2
Finland 0.9 -1.5
France 0.9 0.1
Poland 0.9 -2.2
Romania 1.1 -2.9
Hungary 1.3 3.4
Germany 2.0 4.6
Estonia 3.0 11.8
Czech Republic 3.9 0.7
Latvia 5.2 -3.6
Bulgaria 13.3 -3.9

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.

Categories: Data, Inflation, Wages

On the UK Labour Market “Mystery”

July 25, 2013 1 comment

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:

Year Per
2009 -1.7 0.9 -2.9 -1.6
2010 1.2 2.6 0.5 0.2
2011 1.4 1.4 0.4 0.5
2012 1.7 0.4 2.0 1.2

% 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.

Categories: Inflation, UK GDP, Wages

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