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Are We Nearly There Yet?

UK Loss of Output vs Trend, Decomposition

UK Loss of Output vs Trend, Decomposition. Source: ONS, Own Calculations

It’s the boom which isn’t quite a boom.  The labour market data today is far more significant than the arbitrary benchmark of a return to the pre-crisis level of output… in aggregate, if not per capita.

The chart above attempts to decompose the loss of UK output versus trend growth into a demand-side and a supply-side component.  The demand-side is represented by per capita hours worked.  The supply-side is output per hour worked.  Both are benchmarked as the deviation from 1997-2008 trend, and on that benchmark the demand-side recovery is now complete.  The supply-side, however… not so much.

That is in no way sophisticated; it is fairly primitive.  But however you cut the data, the labour market is doing astonishingly well.  Which means that the real GDP figures look relatively pathetic – and that has been true since early 2012; the recent weakness of output has been partly or mostly a supply-side not a demand-side phenomenon.

There is really only one hope left for supply-side optimists in my view.  Maybe there is still, somewhere, hiding under a bush, some pockets of highly productive but currently idle labour ready to spring into action.  Set against that we have seen a massive surge in labour supply from low-skilled workers, which is pulling down average productivity.  Maybe that surge is because of welfare reform, migration from the empty deserts which used to be called Spain, Greece, etc; maybe it is because MTRs on low incomes have been slashed and the retirement age hiked.  Maybe the data is wrong, and rising numbers of self-employed are lying about their hours in the LFS responses.  Then we must also turn a blind eye to the rise in MTRs further up the income scale, and pretend that doesn’t matter.  (Check out Figure 2a and 2b in Paul Johnson’s excellent dissection of UK taxation.)

The one data point optimists can cling to is that nominal wage growth is dead dead dead.  Completely totally dead.  This is growth rate of nominal regular pay divided by average weekly hours, rolling 12m total, used as a proxy for nominal hourly wages (perhaps a poor one):

Nominal Hourly Wage Growth: Still Dead.  Source: ONS KAI7, YBUV

Nominal Hourly Wage Growth: Still Dead. Source: ONS KAI7, YBUV

With a tight labour market and strong nominal GDP growth, we should expect to see nominal wages rising at around the same rate as NGDP, 4-5%, as they did before 2008.  That is not happening.  Despite amazing Lawson-boom-esque growth rates of hours (or jobs); the labour market is nowhere near tight yet.  So we’ll have to wait to see what happens as that slack continues to be used up; only when nominal wages catch up with nominal GDP we will know for sure.

(Also: NO RATE RISES YET, THANKS MPC, KEEP PUMPING, THERE IS NO “INFLATION”.)

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Categories: Data
  1. james in london
    June 11, 2014 at 12:27

    Great post.

    It’s not rocket science. Ever bigger numbers in the workforce keeps the pressure off wages.

    We won’t get the productivity growth until we get the wage “inflation”. Two reasons:
    1. Why bother with labour saving investments when labour is so plentiful and cheap.
    2. And we won’t get the productivity growth until we get some wage “inflation” encouraging those job hoppers to hop from lower valued work to higher valued. When wage “inflation” is dead, dead, dead as now, the iron law of comparative advantage works a lot less well, as those comparatively disadvantaged don’t see real wage falls, and so limiting productivity growth.

    • June 11, 2014 at 13:24

      Thanks James. But this is starting to look like a long-run argument. Definitely in the long-run I am 100% an “optimist”. We have barely begun to take advantage of massive productivity leaps possible with today’s technology. No argument.

      The question is short-term: a) why have the productive people who fell out of the labour market in 2008 not returned, or (b) if they have returned, why is their productivity 20% lower?

  2. James
    June 11, 2014 at 22:01

    A) The people are back in the labour force.
    B.1) They are 20% less “productive” because nominal gdp is 20% below trend.
    B.2) Remember that productivity in a service sector economy is measured merely by nominal wages per hour. There is no measurable tangible “output”. Tons of coal means something in a way tons of academic papers written, GCSE exams passed, accounts audited, bankrupts sued, apps developed, “green” policy statements produced, strategic reviews undertaken, trading profits made. A look through the UK’s measurement of GVA per sector shows this.

    Worrying about productivity is almost as bad as worrying about inflation.

    • June 12, 2014 at 10:58

      I know where you are coming from but I am not sure I can buy into this completely. I will try to do a post on this after more thought.

  1. July 4, 2014 at 14:07

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