Home > Inflation, Wages > British Living Standards are Rising BECAUSE Real Wages are Falling

British Living Standards are Rising BECAUSE Real Wages are Falling

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
  1. James in London
    September 12, 2013 at 21:59

    Well done for sorting that out. Very helpful. Thank you.

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