What are the implications of negative and falling real wages in the UK?

Today I wish to continue the UK theme by adding my analysis of the labour market situation to the analysis of the inflation situation I posted yesterday. Before I do there have been two events which illustrate the problems that enmesh the UK economics establishment. Firstly the Governor of the Bank of England Mervyn King spoke last night in New York and I wish to give you a flavour of his speech by quoting the phrase most used.

price stability

You only have to look at yesterday’s inflation numbers to query that phrase and of course the incredulity only grows when you realise that the inflation target has been exceeded in a recessionary environment for 40 months in a row. Those suffering low pay rises or subject to the benefits rise of 1% per annum will not be talking of price stability! Not everyone has an index-linked pension like the one Mervyn will be eligible for in a couple of months time.

This theme has been followed by Martin Wolf of the Financial Times who appears untroubled that he is using research from one of the failed institutions of our time which is the International Monetary Fund or IMF. If you doubt my view that it is now a failed institution then simply take a look at what it is party to in the Euro area periphery.

the impact of global inflation on inflation in individual countries has not shown any clear trend.

It appears to have shown something of a clear trend in his home country of the UK. But it would appear that Martin has not spotted this so he goes on to write about this “achievement” in a recession.

cementing inflation expectations

This of course is exactly the reverse of the evidence from the Bank of England’s own survey on this subject  and indeed the current level of the index-linked Gilt market.

Also those who are struggling to get by may wonder exactly how and indeed who this would help.

what has happened suggests that somewhat higher inflation might have been helpful

But perhaps the clearest evidence that Martin Wolf lives in a place described in the film Star Wars as a place “far,far away” is this bit.

clean up after a financial mess

Er,what clean up?


This does link into a fundamental problem for the UK economy which is that if you stick your head in the sand and impersonate an ostrich when looking at inflation you distort your view of the labour market and the rest of the economy. In short you set sail for the type of policy errors we have had. Both Mervyn and Martin have had five years of an extraordinary monetary experiment described by Governor King as.

In monetary policy, we have moved into uncharted territory

But of course both of these gentleman want us to move even further into uncharted territory as the call goes out for “More,More, More” rather than asking why what has happened has not worked?

On the scale of monetary expansion we get an idea of how Mervyn King has opened the monetary taps by looking at the numbers he has provided for the monetary base. If we take 2007 as our base of 100 then the monetary base is as follows Japan (150), Euro area (180),United States (359) and the UK (528). Spot the outlier? Surely not the one with the worst inflation performance…..

The UK unemployment situation

We see that this has taken an apparent turn for the worse according to today’s numbers.

The unemployment rate was 7.9% of the economically active population, up 0.2 percentage points from September to November 2012 but down 0.3 from a year earlier. There were 2.56 million unemployed people, up 70,000 from September to November 2012 but down 71,000 from a year earlier.

So whilst the position remains better than that of a year ago it  looks as though we have more recently engaged reverse gear. Although there is something of a nuance here as we appear to be reversing the “particpation rate” problems of the United States. There the unemployment rate has been reduced by people leaving the labour force whereas in the UK the category labelled “inactive” has dropped by 57,000 which is 81% of the unemployment change. So we have a larger labour force and an improved particpation rate both of which are on their own good things contributing to a bad thing which is rising unemployment. Sometimes economics and economic statistics are like that I am afraid.

So as we review the situation we can be sure that things are no longer getting better but much less sure that they are now getting worse. Each time an economic statistic gets scrutinised it ends up looking weaker itself does it not? Well unemployment is no different as the use of a survey and various assumptions muddies the waters.

As employment fell by 2,000 in the latest period but the employment rate remained at 71.4% we learn little about the likely path of the UK economy except to expect that our stagflationary path will continue. After all the forecasting error will be way above 2,000!

Employment and the employment rate

These are different concepts but do get confused particularly in the mainstream media.  Whilst employment is very near to a record the employment rate is not. For example in 2007 the employment rate for men was 78.8% whereas now it is 76.3% and whilst men have been disproportionately affected we see that the picture is different between the two concepts. The number which fills the gap is the labour force which has grown (732,000 over the past year) and this opens the issue of population growth and indeed immigation too. So the population,labour force and employment have grown but the employment rate has fallen.

Of course this also poses a question for (recorded) UK productivity as we know that output is unchanged so if it requires more people to make it we have an obvious conclusion for its behaviour.

Wage growth

This is something where there has been a consistent trend and it is the statistic about which there are the least doubts.

Total pay rose by 0.8% compared with December 2011 to February 2012, the lowest growth rate since September to November 2009.

So I can update the real wage growth numbers I provided yesterday as we see that using the official (CPI) measure of inflation wages are falling at an annual rate of 2% and using the retail price index (RPI) they are falling at an annual rate of 2.5%. Let me remind you again of the words of Martin Wolf.

what has happened suggests that somewhat higher inflation might have been helpful

So he thinks that a faster fall in real wages will help things! He appears unaware that it is mistakes he approves of which have led to this mess, and that excerbating them will guarantee that his plans will fail. Oh and I presume he does not mean a faster fall in real wages for himself.


Whilst it may seem that the rise in the unemployment rate in the UK is the significant number for today it is not (with apologies to those who have lost their job). We have reversed the situation of the United States which has had  participation rate and labour market moves which have flattered its unemployment rate and the UK has moved in the opposite direction. We see this from the way that employment changed so little at -2000 in the latest period and indeed has risen so much (488,000) over the past year. Although this begs the question of why so much extra employment has led to so little extra output.

If we move from the quantity arena to the price arena we do however have a dark cloud we can be sure of and it is getting darker. Wage growth is getting ever weaker and we are left wondering if it might go below zero into the negative arena. But we already know that allowing for inflation it is already negative and real wages have declined in the credit crunch period by over 8% now. If you project the economic effect of that on UK domestic demand no wonder we are in in the situation described by Taylor Swift thus.

Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

There is another issue to this and I am grateful to the Labour Markets Group at the Royal Statistical Society for highlighting it. They were presented analysis showing that those looking for work had to take sometimes quite substantial cuts in wages which begs an obvious question. Do we have a two level labour market where people like Martin Wolf can continue their “I’m all right Jack” economic analysis as their real wages are maintained whilst some take substantial pain? Perhaps many are getting by and the recorded falls are from a smaller number taking much heavier punishment…





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  • James

    Hi Shaun,

    Depressing but interesting analysis. I am really glad that you mention the reputation of the IMF and also call into question people like Martin Wolf. I am simply astonished at the way the IMF is treated with such reverence. The BBC essentially treats the IMF as being the arbiter of what is right and is clearly using the IMF pronouncements to judge Osborne’s economic strategy. Has anyone actually looked at the record of Mme Lagarde prior to her taking over the IMF?

    I would go further and suggest that the dialogue about the economy is completely skewed by:

    1. The complete absence of any mention of the deficit as being a very serious problem in all media programmes

    2. A constant barrage against the “cuts”

    3. Ridiculous deference paid to the IMF/FT journalists etc

    4. The dumbing down of the discourse to such an extent that huge arguments are held about whether to boost the economy by £1 billion or so (obviously lost in the rounding)

    5. The total lack of discussion of QE and how to reverse it.
    I would take a bet with you that, if you went into the street today and asked 500 people where they thought we were, they would:
    1. Have no idea that the whole of the NHS is no longer funded by taxation
    2. Government spending is higher than last year
    3. have no clue as to QE
    4. Think that the IMF is right.
    It is a very worrying background in which to have a sensible economic debate.

  • Justathought

    Hi James,

    You are so right that most people are completely lost into the endless data’s oceans shovelled into their throats and blinded by erroneous comments from the so the call experts diffused by the MSM (By the skilful and sustained use of propaganda, one can make a people see even heaven as hell or an extremely wretched life as paradise – A. Hitler).

  • max


    Another great analysis but I feel you have not directly answered the question that you posed in the title of the article namely “what are the implications…?”.

    I would suggest that as time goes by housing will be less and less affordable (if we have not already reached that place in London) and there will be much less spending on goods and services, hence we will go into an outright depression. Would you agree with any of that?

  • max

    what is even funnier is that IMF are prescribing LESS CUTS for UK plc but MORE CUTS for PIIGSSC (Slovenia and Cyprus added).

    How they can make such contradictory prescriptions without everyone laughing at them and deriding them is astounding.

  • forbin

    I looked up NHS funding

    “Each National Health Service is mainly funded from general taxation (with a much smaller amount from National Insurance contributions) ”

    Wikipedia – no doubt you have your sources

    as for the other questions

    2, yes I really agree on that one – but then again the public have no idea that we’ve been in debt with balance of trade for about 30-40 years – who ever is in power – be it Maggie the Mad or Bodger “gold seller” Brown ….

    3, yup indeed I’d say even most in the BoE have little idea what QE is and believe whoheartly that it ” works ” – define works ofcourse

    4, worryingly even the IMF believes its right – despite the evidence to the contrary

    sensible economic debate can be found – ie here with Shaun but as for the BBC and Mainstream Media – why should they ? its not sexy enough and they all want “entertainment” – the circus is there for a reason you know.


  • Justathought

    Hi Shaun,

    The implications are simple more pain to come … Viewing the interview from PIMCO’s Mohamed El-Erian (ZH courtesy) http://www.zerohedge.com/news/2013-04-16/virtually-every-market-trading-very-artificial-levels
    one can wonder how long it going to take before some change might happen???

  • James

    .Hi Forbin,

    I was using shorthand about the NHS not being funded by tax. I simply meant that the deficit (predicted at about £108 billion for 2012-3) is about the same size as the cost of the NHS (£106 billion in 2011-12). In other words, the gap between what we pay in tax and the amount that the government spends is roughly the equivalent of the whole NHS.

    Or, putting it another way, we are adding the annual cost of the NHS to the pile of debt every year.
    Sorry for any confusion

  • JW

    Always worth listening to is the main man from PIMCO, good interview, good questions and , within obvious constraints , good answers.

  • JW

    Hi Shaun
    I think we can safely deduce that without population growth ( immigration) change in GDP would not even be zero.

    More people doing less productive ‘work’ with less pay counterbalanced by a less people with more information with more pay. Somehow in Germany they have managed to educate the ‘plebs’ to be more productive at the same time as widening the ‘wealth gap’. In the UK they are not bothering. Why? I suggest because the German elite want to take over a continent, whilst the ‘UK elite’ are increasingly elsewhere and what happens on our particular little island is of less significance. Wasn’t it ever thus?

  • Andy Zarse

    Hi Shaun, I was reading your comment yesterday about the price rises of cauliflower. Certainly classical economics indicates an implication of falling real wages against price rises impacting on the number of cauliflowers sold.
    However, I just nipped out shopping to LIDL as it was bound to be quiet during Baroness Thatcher’s funeral (their customers being all glued to the TV). LIDL are selling cauliflowers for 99pence, about half the price of the caulis I’d seen in Sainsburys the other day. I asked the assistant if they were on special but apparently this is the normal price. One further observation though, is that the size of the caulis in both shops is flippin’ miniscule, certainly no bigger than the size of Martin Wolf’s brain, I assume on account of the terrible weather in Lincolnshire.
    So I suggest a new entry to Richard’s Financial Lexicon; ‘Non-quantifiable Cauliflation’. Defined as prices rising and falling at the same time but the item shrinking to half its previous size.

  • Andy Zarse

    I should add cauliflation is related to Wagonwheelism, whereby the item size shrinks but prices rise in inverse proportio until the item is no longer produced. Some decades later the National Statistics Office will remove the item from the ‘shopping basket of goods’ used to measure inflation.

  • forbin

    Hi James ,

    its alright , the gap is indeed a gaping hole in the budget for which I believe we are using short ermism to avoid – re whats seen with Greece , Spain and Portugal.

    in the context of dropping wages then for the reason of collected taxes on wages falling , along with the double whammy of anything purchased with said failing wages leading to lower VAT collection does lead me to wonder how or who can pay for all of this…… in a country thats 70% Services …. I really do wonder what will finally blow up

    I’ve posted before its the balance of trade that actually counts – if we were making money we’d cope better with any budget deficit ( assuming like Japan we had one )

    We’re in the worst of both worlds – and North Sea oil and gas are now seriously depleted with no signs of life in the Government other than we’re closing coal fired power stations at the time we prob need them the most….


    A front row seat with popcorn – what more could you ask ?

  • forbin

    LoL love it

    “if these levels aren’t validated by the fundamentals, then investors will get hurt.”

    no the small investors will get hurt and the stock market is in bubbble land and has been for a while – over here in the UK we’ve been urged to buy stocks and stock ISAs, I’ve avoided them because the Gove, the banks and the media are hyping them up

    The fundamentals have been skewed by QE from the Fed , UK , and Japan for sometime now – possibly in some mistaken belief that this is a “good thing” but the bubble will burst – the common man will suffer by loosing their shirts and quite possibley from another bailout…..

    Cool eh ?


    “Come, Watson, come! The game is afoot. …….”

  • Anonymous

    Hi James,

    IMF positions are likely got by who you know, not what you know. The French govt has influence on these appointments and financial interests in banks with Greek bond exposure. I’d suggest the future appointments of Lagarde are dependent on keeping the French administration happy. I suggest Lagarde has a conflict of interest. The IMF should exclude senior managers from decisions that affect their own nation’s currency.
    Failure to do this exposes the IMF to accusations of cronyism and corruption.

  • http://twitter.com/ArgaAction ka

    who provides the data of rental equivalence which is included in the calculation of CPIH?

    Do we know who provides the data? I saw a mention on the ONS website about VOA but in the VOA website I can only find a Rental Report which highlights as circa 490K properties are being rented in England. If that is the case then this is quite low ?

  • forbin

    same low price – new smaller size ……


    just checking my popcorn bag size…….

  • Anonymous

    I think current employment/unemployed figures are a minefield – real world contacts suggest most people want more pay or more hourly paid work but threatened with job loss or paycut if they try to organize to achieve it. Oversupply of cheap labour seems the constant aim in the UK with immigration the political football.
    Fuel tanker drivers currently seem to set the pace with £36k pa (£50k with overtime) as what real negotiating power might achieve?

  • James

    I totally agree. I think that I read somewhere that the French get the head of the IMF and the US gets the world bank, but maybe my memory is playing tricks.

  • Anonymous

    No, your memory is correct. It is so. Your comment about the endless barrage against cuts is also spot on. But as far as the BBC is concerned, they have an obvious grudge against this government, namely the restriction of their licence fee. While that was a good idea, there might have been less provocative ways to do it. As for QE, in plain English it is known as currency debasement. That is no way to run any country for more than a few months, not least because there is no simple way off this particular dependency. When will the man in the street stop believing that our government is fundamentally benign? When Sterling hits parity against the obviously ailing Euro? Can’t be long now!

  • Anonymous

    I think the ONS is much cuter about its basket contents than you imply. In fact, from their perspective as guiders of opinion in the direction they are told, they are doing a good job. Relevancy is another question altogether. BTW, I used to work for a confectionery company. The product would be alternately shrunk and its price raised. That way, the time between price rises was longer and people forgot the original size. Creative

  • Anonymous

    See London Underground driver pay rates. Still, it could be worse. The Spanish air traffic controllers earn, wait for it, €800,000 per year. And of course they strike at the drop of a peak travel time hat. This is where weak government gets you.

  • Rods

    Hi Shaun,

    Another excellent overview.

    Wage deflation has been happening ever since the mass migration from Eastern Europe started in the semi-skilled / unskilled service sector. A friend used to deliver to a major distribution warehouse and the above minimum wage warehouse floor staff there have all been replaced with people prepared to work for the minimum wage. A 0.8% rise over the last 12 months must mean that many staff are facing falling wages where some skilled sectors have staff shortages and high wage inflation (computer programmers in London is an example) and the Civil Service averaged 2% over the last 12 months.

    Wages are reflected by market realities. A labour surplus, will see wages fall and a shortage will make them rise. This is one of the reasons that a low tax dynamic economy, normally leads to labour shortages which leads to wage inflation which helps to increase the wealth of the 99%. South Korea as an example has major labour shortages at the moment with many Russian migrants moving there.

    I personally think that productivity is falling due to the decline of North Sea oil and gas where there is high productivity and value added per person employed and the 50% tax rate where the number paying tax on over 1 million has dropped from 16,000 to 6,000 according to HMRC figures since the 50% tax rate was introduced. Some of this will have deferred payments, but others will have left the UK and It takes many part-time minimum wage earners to replace this!

    There are parts of the UK growing at the moment, but that is being countered by the falls in other areas. I know of a London employer that can’t get experienced contract Android App developers at the moment, even though they are offering £500 per day!

    With the IMF it was a big mistake replacing the last French socialist incumbent with another one, where the Eurozone was going to be a major area of attention. Many institutions seem to start off with high ideals and intentions until they hijacked by the politicians who then use them for their own ends!

    Does Martin Wolf have any idea on what he is talking about? If not, why is he working for a financial paper?

  • Justathought

    Hi Forbin,
    The boss of the Bundesbank has just declared that it might take a decade before the growth will resume as you said “come, Watson, come! The game is afoot…”

  • ninoinoz

    “We see this from the way that employment changed so little at -2000 in
    the latest period and indeed has risen so much (488,000) over the past
    year. Although this begs the question of why so much extra employment
    has led to so little extra output.”

    As you suspect, it’s all a trick.

    It is possible to arrange your affairs (especially if you run your own business or consultancy) so that you do the minimum hours required to qualify for Tax Credits, yet be earning very little.

    I’m not too upset about this as a problem with starting your own business is you cease to qualify for benefits, but let’s not kid ourselves about start-up failure rates or some kind of employment miracle.

  • Anonymous

    Hi Max

    No problem let me explain,what I meant by the use of the Taylor Swift lyrics was the following. The continuing fall in real wages ( yet another surprise for consensus economics) will mean that UK domestic demand will remain under pressure too. So unless we export more our economy will struggle to grow and may even shrink. As we have had export growth which is weak considering the 2007/08 devaluation that seems unlikely to help out much.

    So my theme of the past couple of years of stagflation has a few legs left in it yet and to the question when will it end? There is no answer in sight.

  • Anonymous

    Hi JW

    This time around those in power in German seem to want to own the continent rather than invade it, and so far their plan seems to be progressing. I think for example that the Bundesbank has won far more victories (as it perceives them) over the ECB than many would have one believe.

    Mind you there is at least a plan whereas on this side of the Channel I see greed,incompetence and some corruption but no particular plan except muddling through. But of course as you perhaps hint at we in the UK are invariably like that until pushed… So what will push us?

  • Anonymous

    Hi Andy

    You are the cheapest so far as Shireblogger contacted me on twitter to say he pays £1.39 and there was another offer of £1.07 being the local price for a Cauliflower.

    For those wondering what this is about I tweeted this yesterday.

    “16 Apr:
    When did a Cauliflower become so expensive? £1.95 in case you were wondering..”

    I remember paying under a pound last year.

    Cauliflowers are still on the list used by the ONS.

  • Anonymous

    Hi Barncactus

    I was just replying to Andy to say that the ONS do try to capture these effects when I spotted your reply too. So how long has the quantity manipulation game been going on in your experience?

    I am reminded of the Yes Minister episode from 1983 which assumed back then that the unemployment numbers were manipulated/fiddled. I suspect that much of this was simply ignored in the “boom” years.

  • Anonymous

    Hi Ka

    I find this situation to be unsatisfactory as CPIH was brought in without a reliable measure of rents in England in particular. Yes the VOA do provide at least some of the data but I do not know if it is publicly available.

    You may find some more information here from the body which suggested this called CPAC. Here is a link to their meeting minutes http://www.ons.gov.uk/ons/guide-method/development-programmes/other-development-work/consumer-prices-advisory-committee/cpac-papers/index.html and you will find CPIH details on the July 2012 meeting in particular.

  • Anonymous

    Shaun, I think you should start a Pop chart top 10. Its pretty clear that Taylor Swift’s Trouble is on top at the moment!

    Its amazing to see the monetary base numbers, who would have thought that Japan was leading in terms of ‘sound money’? Perhaps they feel they need to catchup?

  • Anonymous

    Hi Rods

    The last two questions are the easiest to answer or one might more simply just look at the,ahem, record of the Financial Times on the big economic issues….

    I was implying today that we have several different labour markets right now and both your and Chris’s replies have been in that same vein. Was it always true? Probably, but it matters more right now as shortages of skilled workers sit very badly with over 2 million unemployed.

  • Anonymous

    Hi Ninoinoz

    The problem is that so many of the statistics are like that. So we do learn some things from the data but often much less than some would have you believe.

  • Anonymous

    Hi Brad and good morning down under

    Actually you reply has reminded me that the choice of 2007 (in itself not a bad year to choose in terms of choosing a pre credit crunch date) may not be so good for a nation who has been facing such problems since the 1990s. So Japan started from a higher base however nonetheless they seem keen to play catch-up.

    There has been plenty of talk of such new BoJ money flushing in to European bond markets has there been any such talk for NZ or Oz?

  • Anonymous

    Yes, plenty of talk about that! Lots of talking heads saying we need to print money to devalue our currency to create exporter jobs. I’ve directed a few people to evidence from the UK that it doesnt always work that way.

    And it appears that NZ banks are binging on a glut of cheap credit from abroad, fueling a property bubble (+12%pa) which will inevitably destroy them and ruin all our lives.

    Oh well, makes for interesting news.

  • Noo 2 Economics

    I don’t think it will be that straight forward. The CB’s and Governments will do everything in their power to maintain the markets because they think that’s where the growth will come from This “illusion” could continue for some years and it may be that fundamentals do indeed catch up with the illusion before they run out of printers/ideas. There’s a lot of confidence about (outside this forum) these days considering nothing has fundamentally changed in the last 5 years.

    I think everyone really liked Draghi’s “whatever it takes” speech and believes it. If they continue believing then this surge will run and run with the odd rest here and there.

  • Anonymous

    The 16 hour minimum is now 24. Others know about this problem, too!

  • Anonymous

    At least since the days of the lady in question. I lost count of the number of different sized product moulds that were available for this cunning activity.

  • max

    thanks for the reply

  • Anonymous

    The NZ residential property sector seems to be good at economic value destruction, from leaky buildings to a number of spectacular bankruptcies by large property developers.

  • Anonymous

    Its enough to make you cry. Particularly since i just bought a house. Packing to move right now, in fact. Paid a sum which i just cant bare to think about. I caught a glimpse as i signed the mortgage document today and almost threw up.

    But a family needs a home, and after fleeing property prices in London and Sydney, there’s not much further i can go!

  • Anonymous

    Good luck in your new home. Financially a home should be a good long term investment. Sensible, affordable maintenance keeps it comfortable & valuable. Getting it paid off in 25 (or whatever) years beats paying rent. The moneylenders are not your friends – pay it off and avoid “equity release” refinancing that cost so many Americans their homes. Once you’re mortgage free – the boom & bust cycle is no stress.

  • Andy Zarse

    Nice to know the tricks of the trade! :-)

  • try_skye

    Hi Max.

    I think it should be SICPIGS – the destiny of most of the Eurozone?

  • Anonymous

    The subject of real wages growth and productivity suggests that there is something else going on other than monetary policy. In the last twenty years of the twentieth century each £1 of UK GDP growth was accompanied by around 90p of median wage growth. From 2000 to 2007 that figure fell to just 43p.

    Apparently in the USA median wage growth has been flat for a generation