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Honeymoon Over

September 12, 2013 2 comments

Mark Carney tried to explain Woodfordian monetary policy to some reasonably smart MPs today and he failed completely.  “Train wreck” would be a moderate description of how badly that Select Committee meeting went.

Is the 7% unemployment rate a target? Erm, well, you see…

What will happen if the 2.5% inflation knockout triggers?  Erm, well, you see…

Are higher interest rates a sign of looser or tighter monetary policy?  Erm, well, you see…

Is forward guidance a loosening or a tightening of monetary policy?  Erm, well, you see…

That was an awful public performance and painful to watch.  Carney has an impressive grasp of the UK data, but he was struggling to explain something as simple as the stance of monetary policy when forced to rely on the language of interest rates and “state-contingent guidance”, etc.  I’m sure it would be much simpler if he could stick to money and nominal incomes!

Video here, Heather Stewart has a decent write-up at the Guardian.

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

Goodbye, Black Clouds

September 4, 2013 2 comments

I’m back from the beach… and I want you to recall the quotes from Mervyn King’s infamous “Black Clouds” speech of June 2012:

… a large black cloud of uncertainty hanging over not only the euro area but our economy too …
… Complete uncertainty means that the risks to prospective investments … are simply impossible to quantify …
… the black cloud of uncertainty and higher bank funding costs …
… The paralysing effect of uncertainty, with consumers and businesses holding back from commitments to spending …
… the black cloud of uncertainty has created extreme private sector risk aversion …
… private sector spending is depressed by extreme uncertainty …
… during the present period of heightened uncertainty …

Contrast with the quotes I can cherry-pick from Mark Carney’s first speech as Governor:

We aim to get there in part by reducing the uncertainty that has held back growth.

… First, we are giving confidence that interest rates won’t go up until jobs, incomes and spending are recovering at a sustainable pace.

… Our forward guidance provides you with the certainty …

should give greater confidence … 

Our forward guidance acts as a stabiliser, …

However much I dislike the specifics of BoE policy, it would be churlish of me not to say it: this is much, much better.  This is how a central bank Governor should talk; certainty, confidence, stability.  Mark Carney is doing his job, and that is a good thing.