Home > Inflation, Wages > Wages vs Employment

Wages vs Employment

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
  1. james in london
    July 18, 2014 at 10:29

    Good lesson. Thanks.

    And at least The Guardian article comes to the right conclusion at the end. No rate rises this year.

    It is strange that the robust-looking Thomson Reuters Incomes Data Services comprehensive pay deal database consistently shows higher growth rates than the ONS data. Does it mean that employers that report pay deals covering over six million employees is wrong? It correctly picked the rise and then fall in pay freezes (Chart 2.3, page 6):

    Click to access Impact_of_economic_recovery_on_pay_settlements.pdf

    I suppose it might mean that most new employees (both new new and new old) and the surging numbers of self-employed are being paid nominally less than they used to be – in order for both the IDS and ONS data to be both be correct. Which is kind of what you expect given the “slack”.

    • July 18, 2014 at 11:10

      I’ve seen that debate also from Markit on ONS pay estimates being wrong. From what I’ve read the self-employed are excluded from the ONS measures of weekly pay (because their income is more like “revenue”, not purely a return to labour). So that cannot help here.

      HMRC says PAYE receipts are slightly positive. If employee pay is surging why is it not showing up in higher PAYE? If anything that suggests that one of (employees, employee pay) is being overstated not understated.

  2. james in london
    July 18, 2014 at 12:32

    Interesting. Maybe the pay deals are more creative than shown by the headlines, from the employers point of view.

    However, I have done a quick search of primarily UK companies in various sectors employing in total over a million people and found for 2013/2013 that 2%+ is the average increase in personnel costs per employee. Maybe there is a large company vs small company thing going on, but most employees work in large companies.

    Both data sets are “right”, it’s just that the ONS data is impacted by the mix affect. Maybe all those zero hours contracts. And the labour force slack is in lower than average-pay roles, of course. See those US charts on the much higher reductions in unemployment coming from less skilled workers.

    HMRC data is no use at all. Partly due to City bonuses still falling. But primarily the fact that tax planning is essential these days given the UK’s punitive income tax + NI rates. Don’t 25% of employees pay 75% of the PAYE? http://www.dailymail.co.uk/news/article-2580074/Top-25-earners-pay-75-ALL-income-tax-half-country-contributes-10.html

    The increase in the % of the workforce that is self-employed is not unrelated to the tax issue, of course. Talk to your Personal Trainer about their tax affairs.

    • July 18, 2014 at 13:18

      Yes that definitely all makes sense James, very interesting to see that data on personnel costs.

      I looked at the distributional split in the ONS “EARN08” table in the July labour market data, and it neatly backs your argument on a compositional effect. That data (which the ONS admit is poor quality) says the lowest decile and quartile (by £/hour) are getting raises at nearly 2% whereas the top quartile and decile are flat (y/y). Although the median is well below the mean which says the opposite is true. Confusing.

      I agree on tax… have seen a lot of firms set up salary sacrifice schemes in my area over the last year. Lots of job creation there for the accountants and tax advisers too. :)

  3. james in london
    July 18, 2014 at 16:53

    And I hope we can all agree that whether wages are rising at 0% or 2%, it’s still not enough!

    For the 75% of employees paying 25% of PAYE, and tactically, I’d prefer the MPC to focus on the 0%.

  4. James
    July 23, 2014 at 20:53

    Monetary policy in the UK set almost right, judging by the market understanding, which is the policy, as you say. Hopefully, it will stay the policy for more than a few weeks!
    “Investors Find Support for U.K. Bonds in BOE Attention to Wages
    By Eshe Nelson Jul 23, 2014”

    • July 23, 2014 at 21:46

      Yes James – another no-show for the hawks cannot be bad, and the increasing emphasis on wages is encouraging. I liked the paragraph in the minutes about an increase in labour supply, that was also reasonable. Though I do not understand what Carney meant in his speech about how rising real wages “turn” into “price pressures”.

      • Alan
        July 26, 2014 at 18:38

        There may be a clue to Carney’s thinking in the following paragraph, where he talks about “consistent increases … in real wages”. If wage inflation simply lags price inflation, then a reduction in the rate of price inflation can be expected to be followed by a period of adjustment during which wage inflation is higher than price inflation. In shorthand, that might be described as “real wage growth” when it is nothing more than the (partial) reversal of previous real falls (when nominal wage increases were lower than nominal price increases).

  5. james in london
    August 20, 2014 at 12:54

    Apologies, but I sent staight to Scott about the excitng turn of events in the UK as the market seems to have learned what to really look for in economic data. Shame it’s spoiled a bit by two of the old guard voting the wrong way in the MPC. The market is trying to ignore them and focus on the remarks of the majority that seem more dove’ish than before.

    That said, the longer end of the yield curve is behaving very curiously at the moment. A real rush to buy longer dated bonds. We have even had the first ever new issue of index-linked gilts sold a negative breakeven inflation rate. If there is a liquidity squeeze it might make sense for the BoE to feed it with some of their holdings of gilts – as long as no one sees it as monetary tightening.

    • August 20, 2014 at 14:46

      Yes, a tricksy little “even” in line 3 of minute 36! If Bank Rate implied by market rates is forecast to yield below-target inflation throughout the forecast period, that implies the MPC would be acting outside its remit if it were to increase it. I wouldn’t dismiss the hawks’ case entirely, but the “lag” argument is much less valid than in normal circumstances; I’m expecting both the markets and the real economy (households especially) to overreact initially to the first increase. Hence the “unreliable boyfriend” strategy: Carney really needs the markets to run ahead of the MPC, in regard both to the timing and the quantum of the first rise. I don’t think he’s fool enough to believe he can achieve this, but the closer he can get, the happier he will be.

  6. August 21, 2014 at 09:15

    James – your commentary which Scott posted was excellent.

    The MPC minutes are painful to read, apart from that sentence from the doves which Alan notes, that the MPC is barely meeting its remit with the current stance of policy.

    The focus on wages seems like a step forward, but I think the “unreliable boyfriend strategy” is going to fail if it allows MPC members a free hand. There is no use of the word “inflation” in the paragraph from Weale and McCafferty!

  7. james in london
    September 4, 2014 at 15:43

    Broadbent is a key guy at the MPC, possibly the swing vote nowadays. His speech at Jackson Hole is a toughie, with lots of twists and turns. The key phrase seems to me to be in the second to last paragraph, “you need to consider the wage numbers too”. Good for him.

    “It also makes it harder to communicate publicly what matters for policy” … then use the wage numbers, stupid.

    We all get those, especially the ones NOT adjusted for expected inflation. Wage packets are VERY easy for the public to understand, ‘inflation’ is a nightmare to really grasp. Remember the switch from RPI to RP-xyz to CPI to CPI-xyz, and then don’t ask about the revisions, or worse, the hedonic adjustments.

    Keep it simple Ben, stick to wages, in fact, target wages!

    • September 4, 2014 at 17:29

      Agree James. I like Broadbent a lot, can you imagine Dale giving a speech like that?

  8. James
    September 4, 2014 at 19:52

    I never really knew Dale or followed the MPC that closely while King was entrenched with all the old guard. There was so little point or hope back then. Carney has changed everything. And Draghi too.

    It just takes time, quicker in the UK than Eurozone, though. Imagine if we still had Trichet. The BoE/MPC/FPC/HMT set up looks positively sleek compared with the 23(?)-man board at the ECB plus all those interfering sovereign governments of massively differing clout.

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