Home > Bank of England, Data, Inflation, Wages > 2015 Q1 wages update (or, there is not much inflation)

2015 Q1 wages update (or, there is not much inflation)

What do you expect to happen with a 2% inflation target, if productivity growth falls from 2% per annum to 0% per annum?  You expect tight money.  Nominal wage growth must be pushed down from 4% to 2%.  If nominal wages are sticky you’ll need a nasty blast of unemployment to achieve this.  But the labour market will adjust eventually to the new equilibrium.  This is the EARN08 table which tracks one measure of nominal hourly wages, updated today, steadily tracking below 2% average growth since 2009.

ONS Nominal Hourly Wages, "EARN08" table.

ONS Nominal Hourly Wages, “EARN08” table.

Alternative view using nominal weekly wages, with the arrow highlighting that dangerous inflection point in Britain’s inflationary wage/price spiral which prompted Carney and other MPC members to insist last year that Bank Rate would soon rise:

Nominal Private Sector Average Weekly Wages.  Source: ONS

Nominal Private Sector Regular Weekly Wages. Source: ONS KAI7

Of course everybody knows that productivity growth will pick up to 2% per annum again, slash return to the pre-crisis trend, and then wages will rise 4% per annum again, slash soar into the heavens, and everything will be just fine.  See also, Bank of England productivity forecasts today.

Welcome to Britain, have a nice day!

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  1. jamesxinxlondon
    May 13, 2015 at 22:58

    Excellent to have you back, again.

    I think “productivity growth” in a modern service sector economy essentially equates to wages rising faster than inflation. That is all that can be measured as there is no meaningful physical “output” at service sector firms, just sales revenues.

    We could speculate about the quality and quantity of knowledge produced in our “knowledge economy” but would it really help? Does the internet improve our productivity, probably, but how exactly? Does super-fast broadband, probably, but how? 4G? The Apple Watch?

    The macro stuff I read from Keynesians wringing their hands about the UK productivity challenge is ignorant Luddism in the face of these profound, probably unanswerable, questions. Shovel-ready physical infrastructure projects are so 20th Century.

    • May 14, 2015 at 07:44

      I will keep trying to balance being a productivity optimist with being a productivity realist :)

      The Luddite-Fiscalist Business Cycle Theory, where fiscal policy fixes the path of output and shocks to productivity only affect the level of employment… yes, that seems silly.

  2. jamesxinxlondon
    May 14, 2015 at 21:53

    You need to come over and join the productivity sceptics.

    https://www.nomisweb.co.uk/reports/lmp/gor/2092957698/report.aspx#tabempocc
    Looking at this breakdown of the UK labour market, I’d like to hear a Keynesian tell me how they’d measure the productivity of the various categories.

    This is good too. No easy answers.
    http://www.kingsfund.org.uk/publications/nhs-productivity-challenge

  3. ChrisA
    May 16, 2015 at 13:40

    BM – welcome back.

    I agree with James on the productivity of services, I posted this recently on Stumbling and Mumbling recently –

    “Graph trends are dangerous things Chris as you should well know from your day job (Chartism anyone?) – this GDP trend graph that has been going around is a particularly dangerous version. Anton Howes had a good post on this recently;

    Tricksy Trend-lines and UK Economic Growth

    The simple story is that whether or not we have a deviation from trend all depends on where you start and what data you include in the trend.

    My view is that productivity statistics are extremely hard to calculate, especially in the “new economy”. Productivity is a concept that works very well for commodities like steel, it completely breaks down for a service economy where quality is just as important as the quantity. Let’s take my favorite example of a hotel that gets dinged by Trip Advisor so they increase their number of cleaners. Measured productivity goes down (same number of rooms, more people) but quality goes up.

    I think Scott Sumner has the right approach on this – look to the employment numbers not the GDP or productivity ones if you want to see how an economy is doing.”

    I would go so far as to say objective measurement of most service quality is impossible so hedonic adjustment is also impossible for services. I might actually value a cleaner room, you might value free internet more. Which of us is correct? Its not a meaningful question.

  4. May 18, 2015 at 12:34

    OK, I wrote up a sceptical take on productivity. I’m a bit sceptical about the scepticism, how about that?

  5. ChrisA
    August 27, 2015 at 11:34

    Probably time for you to come out of hibernation again BM. Seeing the latest immigration figures into the UK from Europe prompted me to revisit this discussion. Seems like the recent low wage growth was simply good old supply and demand as we suspected.

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