What sort of economic recovery has persistently falling real wages?

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Yesterday brought some excellent news for the UK economy and it came from the monthly Gross Domestic Product (GDP) update from the National Institute for Economic and Social Research. As it represents a landmark and a significant change let us get straight to it.

The continuation of robust economic performance implied by these estimates suggests that the level of UK GDP has now surpassed it pre-recession peak (January 2008), by approximately 0.2 per cent.

So finally we have scaled or rather re-scaled that peak, at least according to the NIESR, and very welcome it is! A bit like today’s warm sunny weather in London we can bask in it for at least a little while. Added to this the current rate of growth remains strong.

Our monthly estimates of GDP suggest that output grew by 0.9 per cent in the three months ending in May after growth of 1.1 per cent in the three months ending in April 2014.

The glass half-full element here is that this is strong growth and I note that April was revised upwards from an already strong 1%. There is a minor glass half-empty element from the dip to 0.9% also. But we are left with another strong report for the UK economy which followed other positive news yesterday. Happy Days indeed.

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The Rub

The issue here is the length of time this has taken us. If we look back to previous depressions (defined as a sustained period taken to reach the preceding peak) from the last century we see that this has been the slowest recovery. Usually it takes around 4 years in an interesting convergence but this time it has taken more than six years.

Also as we have discussed before on here we know that the UK population has been growing over this period, although the truth is that everybody is unsure by how much it has grown! The official data shows it growing from 62.8 million in 2010 to 63.7 million in 2012 but as the 2010 numbers themselves were revised up by 497,500 I would suggest that we only really get a general clue.

The labour market

Let me start with the good part of today’s UK data and as so often we find positive news in the quantity section of our labour market report.

There were 30.54 million people in work, 345,000 more than for November 2013 to January 2014 and 780,000 more than a year earlier.

Total hours worked per week were 981.6 million for February to April 2014. This was: up 14.1 million (1.5%) from November 2013 to January 2014, and up 31.1 million (3.3%) on a year earlier.

So we can see that the quantity measures were strong. There is still a strong growth in self-employment (7.4% over the past year) which raises concerns but full-time employment rose too (1.7% over the past year). The effect of this is a continuing very welcome fall in unemployment levels.

There were 2.16 million unemployed people, 161,000 fewer than for November 2013 to January 2014 and 347,000 fewer than a year earlier.

The unemployment rate was 6.6% of the economically active population (those in work plus those seeking and available to work), down from 7.2% for November 2013 to January 2014 and down from 7.8% a year earlier.

So we have issues over the rationale behind the rise in self-employment but the quantity numbers shown here are very good. They will look even better if the single month April unemployment rate estimate of 6.4% is the harbinger of further improvements.

What about wages?

This was always going to be an awkward month for annual comparisons as April 2013 was boosted by bonus payments which were dodging the 50% income tax rate. I checked the numbers for bonuses last night and at the opening of 2013 they went £27, £25, £25 and then £47 per week. Anybody spot a blip?!

So let us take a look of today’s data in the light of that warning.

For February to April 2014, total pay for employees in Great Britain was 0.7% higher than a year earlier while regular pay was 0.9% higher.

So we find oursleves figuratively speaking back in the bad old days of very little wage growth at all. In fact April itself was much worse as I had feared. If we look back to April 2013 then total weekly earnings were £486 and this April they were £478 for a drop of 1.7%. We can try to edit this out by looking back to April 2012 but we see that total weekly earnings were £466 back then so they are now 2.6% higher which does not offer much reassurance.

Regular pay disappoints too

If one takes the view that the bonus series was distorted last year then one may look at regular pay for a clearer view of trends. The problem is that it looks as if its growth is nascent and weak which is very different to the quantity measures above. The headline growth rate was poor and if look at April alone we see that regular pay was only 0.4% above that of April 2013 so there are fears here of a slow down rather than the hoped for acceleration. This is reinforced by comparing regular pay in January -£450 per week- with April’s £449 because there is no way of avoiding that again contrary to our hopes it is lower.

Indeed the April annual growth rate for regular pay of 0.4% was the lowest in this series which goes back to January 2001. Not quite a recovery and growth mantra is it? As ever we should take care with data for a single month but the truth is that the regular pay series looks weak overall.

What about real wages?

This looks set to be something of a bloodbath as we check the inflation numbers.

The Consumer Prices Index (CPI) grew by 1.8% in the year to April 2014,

The Retail Prices Index (not a National Statistic) grew by 2.5% in the year ending April 2014,

With the decline in respect for official statistics the “(not a National Statistic)” moniker is backfiring in my opinion and is likely to be more of a badge of honour.

If we look at the regular pay series – due to the bonus distortions – we see that real wages fell against the headline rise by either 0.9% or 1.6% depending on the inflation measure. Even worse are the numbers for the single month of April showing falls of 1.4% and 2.1% respectively. Some recovery!

Comment

Can one both welcome and be worried by the same data release? It appears that we can as the divergence between quantity labour market measures and price is persisting well into what we are regarding as a recovery. I think we may have to revise how we define an economic recovery! For the moment it looks as though the employment and hours worked rises are coming without anything like the sort of wages rises that were once regarded as normal. Indeed if today’s numbers are any guide we may even be seeing wage rises declining into a recovery. Looking back if we take out the 2009 plummet the current start to the year looks as weak as any and for example is worse than 2011 and not that dissimilar to 2012.

If we wish for a more optimistic sheen we need to go to the private-sector forecasters. It was only on Friday that KPMG/REC told us this.

Further strong rise in permanent salaries, while temp pay growth accelerates.

starting salaries continue to rise,

If you want a clear contradiction to the official data they felt that April saw an 81 month high in growth rates for permanent salaries. Added to this Markit told us this was happening in the service sector last Wednesday.

Operating costs up amid reports of higher wages

several UK service providers noted an increase in their average wage costs during May.

Now the latter quote is after April but does illustrate two wildly different pictures of what is going on. As Rudyard Kipling put it.

East is East, and West is West, and never the twain shall meet,

Till Earth and Sky stand presently at God’s great Judgment Seat;

Let us hope we will not have to wait that long! But someone has to end up with egg on their face here.

As a final thought any chance of a base rate rise from the Bank of England just vanished from view until the pattern for wages looks better.

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This entry was posted in Bank of England, General Economics, Inflation, UK Inflation Prospects and Issues, Wages and tagged , , , , . Bookmark the permalink.
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  • John

    Hi Shaun,
    Great blog as always.
    Excuse my economic illiteracy but why has any chance of a base rate rise by the BoE vanished? After all Joe Public will see newspaper headlines with further fall in joblessness. I know Carney has already abandoned his 7% employment target for potential interest rates rises but holding them steady as employment continues to improve (in the headlines) will surely only erode his credibility further with the ‘man in the street’?

  • Paul C

    Hi Shaun,
    Your time today will ring a bell with the majority of employees (wage slaves). The manipulated figures tell a truth even if the margin has been massaged down, wages +0.7% versus RPI +2.5% . This is no economic recovery for the masses but obviously if you are an asset holding class then things are much rosier and frothier. This is now a year on year story and the compound nature is indeed destroying….
    The messaging from Government seeks to evade the reality for most folk and I hope there is a political voting shock next year. If I am not mistaken the past 10 years have seen “subscriber paid-up” members to either main party fall-off a cliff. The two main parties that dominate mainstream media are indeed a small group of self-interested and wealth manipulated elite.
    Economics is at the heart of the story, it is only a pity that as a science it is so maligned and impenetrable to the general public because as you point out on a daily basis it is waving BIG alert flags.
    Paul C. BSc (Econ) 1986

  • digger

    Shaun,

    Have you got a link for the wage data please?Can I ask viz the weekly regular pay data
    1) given the rise in self employed as a proportion of total employed,I presume they’re excluded from that average pay data?
    2) is it calculated from full time employees only?
    3) would an increase in part time employees possibly ruin any attempt at comparison?

  • Anonymous

    I suspect the pound is too high against the Euro. The French insisted on currency union as a trade off for supporting German reunification. French citizens have held power in the organisations preventing Greek exit and/or default.

    Germany successfully carried out an internal devaluation in the previous decade – helped by strong economies internationally. Now it is obvious that many peripheral eurozone countries have an excessively strong currency, but the single currency prevents economic adjustment by exchange rate. It also makes the euro weaker, distorting Sterling, the Swiss franc etc.

    If I remember correctly, sterling fell after ERM exit leading to the mid 1990s recovery. Is the exchange rate linked to the UK’s sluggish recovery ?

  • Anonymous

    Hi John

    Thank you and let me explain my thinking. In essence for the vast majority of the Monetary Policy Committee the issue about rising employment is fear of wage rise pressures due to capacity constraints. But as we have higher employment and lower unemployment we have also seen a dip in wage growth. So the fear goes away for a while. Or if you want it in economics speak then the NAIRU (Non-Accelerating Inflation Rate of Unemployment) looks to be lower than previously thought.

    In addition these numbers did look rather weak even if one allows for the bonus distortions. So again an excuse not to raise base rates. Then if we factor in the strong pound £ which has pushed above Euro 1.24 today…

    That is of course assuming that the official numbers are accurate as the business surveys give a very different picture.

  • Anonymous

    Hi Paul C

    In the darker days when the UK outlook was grim we wondered what would happen in better days to wages. Now we face the troubling prospect that the wage growth downtrend may be continuing into the recovery too. As ever we need more data but it poses a clear and even more worrying question for what happens at the next downturn.

    I for one hope that the more optimistic business surveys turn out to be correct. Just out of interest where did you study?

  • Anonymous

    Hi Digger

    Yes in fact all the official data I can think of on wages excludes the self employed as the annual ASHE survey and the monthly numbers do. Your other questions are answered by this bit.

    “Average Weekly Earnings for any given month is the ratio of estimated total pay for the whole economy, divided by the total number of employees.”

    Here is a link to the data

    http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/june-2014/dataset–earnings.html

  • Anonymous

    Hi ExpatInBG

    I do not incline that way as for example I was reading a report that UK manufacturing costs for example had been reduced by the rising pound. But I would worry if we pushed higher again.

    As to post-1992 the day that we were forced out of the ERM is etched on my memory as the trading floor that day was a madhouse! Following the fall in the UK £ you are right to say that the UK economy picked up but I think that was because we had driven it too high via Nigel Lawsons shadowing of the Dm pushing us back above 3 Dms. Thus we were in the ERM at the wrong rate.

    But exchange rate falls do not always help as for example via the inflationary secondary effects the 2007/08 £ devaluation hindered about as much as it helped in my view.

  • Paul C

    Hi Shaun, I studied at the University of Southampton but note I got a 3rd! I was head of the windsurfing club and did rather too much surfing. That is why i read your blog, still trying to figure out this social science. :-)

  • therrawbuzzin

    Hi Shaun, is the answer, “Fascist”?

    “Fascism operated from a Social Darwinist view of human relations. The aim was to promote superior individuals and weed out the weak In terms of economic practice, this meant promoting the interests of successful businessmen while destroying trade unions and other organizations of the working class Fascist governments encouraged the pursuit of private profit and offered many benefits to large businesses, but they demanded in return that all economic activity should serve the national interest (National Interest seems to be whatever benefits themselves)the political elite Historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because “the State pays for the blunders of private enterprise… Profit is private and individual. Loss is public and social.”

  • Anonymous

    Hi John

    I just wanted to add this from Mark Carney at Mansion House tonight on the subject of Base Rate rises.

    “It could happen sooner than markets currently expect. ”

    Quite a change and it rather destroys Forward Guidance! More tomorrow…

  • Abel

    Morning Shaun,

    Whilst this isn’t something that would be acceptable for our political parties to say, would reducing real wages for a period of time be a bad thing for our economy overall?

    The German economy (which a large proportion of the economist community look towards as being a model to aspire to) implemented a number of labour market reforms in order to restore their competitive advantage to the rest of Europe, would falling real wages in the UK not be our version of this.

    As I understand it (although I couldn’t find the figures that I had previously seen), the level of personal wealth in Germany is amongst the lowest in Europe, and some significant distance beneath the personal wealth of the Greeks.

    Before 2007 we were seeing decling levels of manufacturing, agricultiure and other ‘real’ good production areas, and I wonder how much of this was due to wages being too high compared to other economies that we compete against – would a reduction in this real wage level not allow us to increase this sector of our economy and potentially try and rebalance (slightly) away from a completely consumer led economy which inevitably would be on the back of increased levels of household debt being taken on.

    So whilst the government of the day would never admit to wanting a lower real wage level, I have a cynical suspicion that they won’t try too hard to combat it!

    Regards,

    Abel