Home > Economics, Wages > Wages: The Dog That Rolled Over and Died

Wages: The Dog That Rolled Over and Died

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:

Average Weekly Earnings

Average Weekly Earnings, Year on Year Growth Rate. (ONS Series KAC3, KAC6, KAC9)

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:

Average Weekly Earnings

Average Weekly Earnings. (ONS Series KAB9, KAC4, KAC7)

(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.

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Categories: Economics, Wages
  1. anonymous
    March 22, 2012 at 16:04

    That second graph is astonishing.

    Just as monetary policy hits the zero lower bound in Sept 2008, average earnings collapse by 5%, and only after QE is started in March 2009 does it recover.

    Clear evidence that the current weakness is due to catastrophically inept monetary policy.

    Forward to Scott Sumner at once.

    Oh also if you want more evidence of the failure of the Bank of England, download the archive of daily inflation expectations from here:

    http://www.bankofengland.co.uk/statistics/Pages/yieldcurve/archive.aspx

    Make a series of the shortest maturity inflation expectations 2005-today, (there are some maturities missing).

    Inflation expectations plummeted in September 2008, to around -4%. They did not recover until May 2010.

    Also great post on the ‘counter-intuitive’ beliefs of Dr Altmann.

    • March 22, 2012 at 20:19

      Thanks for your comment!

      Note that these are graphs of total pay so are distorted by bonuses and seasonal adjustment. I’m sure the sharp spike down in early ’09 is purely because the financial sector did NOT have a large bonus season, so the seasonally adjusted series shows a large fall. Note the corresponding small spikes up in early ’07 and ’08.

      That said, the fall off in nominal wages during ’08 does seem significant, and I hope to look at that again. I’d like to see how it was obviously different to the similar fall in ’01/’02 which did not coincide with an NGDP fall. Scott suggested that hourly pay was a useful indicator, but the ONS do not seem to have a series for that.

      Thanks for pointing to the yield curve data too, I’ll graph that too. Market inflation expectations in 2009 Q4 were certainly the clearest contemporary indicator of tight money, but also interesting that they do mirror falling NGDP from Q2 of that year, as the current ONS data does. I’m interested in finding contemporary indicators from earlier in 2009, since the UK NGDP data is so slow and unreliable.

  2. anonymous
    March 23, 2012 at 17:15

    Ahh I hadn’t figured about the bonuses.

    But the change in the rate of increase of wages is incredible, the moment we hit the zero lower bound on interest rates wages rise much more slowly.

    The other interesting point about the BoE daily data is the increase in real interest rates around Sept 08. Real interest rates rose. So as the crisis developed the monetary policy stance passively became much tighter.

    Oh do you have any theory about why the British press is so bad at discussing monetary policy?

    Academic economists are relatively united in arguing for expansionary monetary policy. Rogoff, Mankiw DeLong Krugman and Sumner are relatively diverse in terms of politics but all support more expansionary monetary policy. And they have repeatedly savaged the Fed, the ECB and the BoE.

    Yet the British press’ discussion of monetary policy gets simplified to: inflation is high, this is bad for savers but good for debtors. Which is pretty crude, especially given the volumes of decent writing that’s been written explaining monetary in pretty (to me) accessible terms.

    Oh Bagehot’s most recent post is pretty good as well:

    http://www.economist.com/blogs/bagehot/2012/03/britains-2012-budget-4

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