Posts Tagged ‘employment’

In April wages, including bonuses, fell by 0.3 per cent. This was a staggeringly awful piece of economic data, but was it just a one-off?

This morning data for May was out, and it was much better, with average wages rising 3.3 per cent in the year to May. During the same period, inflation was 2.4 per cent, so for the first time in a very long while, average wages rose faster than prices, meaning that average workers were better off.

There are some buts, however.

Firstly, it appears that the figures were distorted by the end of the tax year. Bonus payments were delayed until after April to take advantage of lower income tax rate. So that at least partially explains why the data for April looked so awful, but so good for May.

The ONS prefers to look at a three month periods. And in the three months to April, average wages rose by 1.3 per cent compared to a year ago. That was better than April when they rose by 0.6 per cent, but still at the lower end of what we have seen over the last few years. In other words, once again, the average worker was worse off in the three months to May, after taking into account inflation compared to the same period in 2012.

Secondly, because the end of the tax year distorted bonus payments, maybe on this occasion we should consider wages before bonuses – or regular pay as the ONS calls it. In May regular pay rose by 1.3 per cent, but in the three months to May it rose by just 0.9 per cent, which was the second lowest increase in the last 12 months.

Inflation is expected to rise over the next few months, so there is little reason to believe wages will grow faster than inflation meaning that there will be no positive growth in real wagesfor many months.

This is the flip side to better data on the jobs front. At 1.51 million, the unemployment rate in the three months to January (the latest period for which we have data) was at a two year low.

But relatively low unemployment – that is to say low considering where the economy is at – is being paid for by low wage growth. So the economy is still in a downturn, unemployment is surprisingly high given this, but look to wages for a partial explanation. This is why some say we have a problem of zombie companies in the UK, maybe even a zombie workforce, keeping low paid jobs, with low levels of productivity growth.

© Investment & Business News 2013

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Of course the headlines may be a little misleading. Union members may look at it and say: “We never went away.” But you know what it means. Time was when unions seemed to be holding the real power in the UK, and their control was too much. In the 1970s Ted Heath’s government went to the electorate and asked the simple question: ‘Who runs the country: the government or the unions?’ Since Heath lost the election one assumes the country chose the unions. There then followed a period in which the UK went into very sharp decline. Then Thatcher was elected, and while the unions were not exactly destroyed, it did seem as though they were disembowelled. And from that moment on unions were relegated to the back seat.

These days the old union ways seem to be so very, well…, so very post war years, so old fashioned, so completely inappropriate in today’s age. And maybe that is right. But ask yourself this question: Why is it that when the union power was at its height, the UK economy enjoyed its best ever 25 year period of growth?

It may be a coincidence, of course, correlation does not mean causation. If there are a lot of doctors in an area where there has been a disease outbreak, it does not mean the doctors caused the disease. Maybe the growth we enjoyed in the post war years led to the rise in unions. Maybe unions were a luxury during this era that the country could afford, and when it could no longer afford them, it elected Thatcher.

But here is a controversial idea for you. For a country to grow on the back of internal demand it needs wages to rise; it needs its workforce to feel confident. Under certain circumstances – note that the following statement does not apply all the time, just occasionally – the country’s best interests are served by ceding more power to the work force, and taking power from employers.

Take wages. With good reason, employers want the wage bill to be as low as possible. Some might reason that in order to attract the best staff a company needs to pay more, but the principle is right: the lower the cost, the better for companies. But apply that policy across the economy and the result can be disastrous. The economy needs wages to rise in order to enjoy sustainable rises in demand.

Take two pieces of news that have broken over the last few days. According to the ‘FT’, government ministers are considering freezing or even reducing the minimum wage. Their logic is simple: reduce the minimum wage, and employers will take on more staff. But think about that. If the minimum wage is cut, won’t that mean some workers will see their wage fall, and won’t that mean less demand? It surely depends on the circumstances of a particular moment, on the nature of the labour market, and on productivity. Economic theory says that a fall in the minimum wage will led to higher employment, but this does rather depend on what an economist calls the marginal productivity of labour, and how sharply the curve representing marginal productivity of labour is falling.

Right now, the UK’s main problem is not employment – in fact employment is at record levels – rather the UK’s main challenge is productivity. How will a cut in the minimum wage help that?

Then take flexibility of labour. According to the 2011 Workplace Employment Relations Study published earlier this year, the proportion of workers on what is called zero hours contracts has risen from 11 per cent in 2004 to 23 per cent in 2011. That means more employers are taking on staff, but only making use of them from time to time.

Once again, we can see the benefits to employers, but step back and look at the macro economy and the picture looks different. When that many workers are on uncertain job contracts, how can they possibly justify spending more money than they absolutely need to spend?

A concept described here before is the paradox of flexibility and, related to that, the paradox of toil. The two theories suggest that under certain circumstances – namely with zero interest rates and a higher output gap – if we all start working harder, or the labour market becomes more flexible the result can be higher unemployment.

This is a bigger problem that it seems. New technology has changed the nature of the labour market. Power has drifted from workers, and the unions who once represented them, to employers.

In a world of increasing automation, and highly competitive global labour markets, the balance of power is likely to shift even further in favour of employers. Paradoxically, from a macro point of view, and very much from the point of view of the collective interests of employers, it may be well be that we need to find ways to re-redress that balance.

©2013 Investment and Business News.

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Whether you believe the UK downturn is slowly ending does to an extent depend on what you believe caused its problems in the first place.

Let’s look at the data, the theories, and the policies and ask: do they stack up?

First there’s data on employment. It has improved and that’s good, of course it is. But the quarter also saw a 24,000 rise in the number of part time workers. There are now 1.42 million people working part-time in the UK, which is the highest number ever recorded – and records go back to 1992. So maybe the improvement in employment is not quite as impressive as it seems.

The jump in industrial production in July, the highest in 25 years, is to be celebrated, but to an extent this occurred as producers made up for lost production in the previous month due to the Jubilee celebrations.

What about forecasts that real wages are set to rise in the UK? Here the news is more encouraging but it hinges on an ‘if’.

The CEBR reckons average real disposable income for households will rise by 0.5 per cent in 2013. If it is right, then it will be the first such rise since 2009. Incidentally, average wages in the year to June increased by 1.5 per cent, according to stats out last week. In the year to June, inflation – as measured by the retail price index – was 3.2 per cent. So during the 12 months to the end of June the average worker became a lot worse off.

The CEBR also forecast that the households who will benefit the most from rises in real disposable income will be those on lower incomes. It reckons households whose disposable income is less than £26,000 will see their income rise by 1.5 per cent next year, after inflation. Middle income earning households will see real disposable income rise by 1 per cent. And those receiving more than £50,000 are expected to see a rise of 0.7 per cent.

So what assumption did the CEBR make to draw these predictions? Firstly, the improvement for lower incomes is down to falls in bonuses. (In the year to June bonus pay fell by 4.7 per cent.) Secondly, the CEBR assumed that inflation is set to fall. It may be right about that, but the question mark here relates to the price of food. Droughts in Russia and the US are hitting crop yields. At the same time, too much arable land is being used to grow bio-fuels, a policy that seems pretty mad. As for the euro area, ECB President Mario Draghi said he will do whatever it takes to save the euro, and now he has delivered – or tried to anyway. The ECB is engaging in its own form of quantitative easing. It is not outright QE, it is not creating new money; rather it is taking deposits from commercial banks to match its bond buying. See: It’s QE Jim, but not as we know it.

But Mario’s scheme is complicated. It is really aimed at Italy and Spain, but for either of these countries to take part, they must first ask the European Stability Mechanism for help. And they must sign a memorandum of understanding, relating to the austerity cuts they must make. In other words, in order to avail themselves of ECB money, Italy and Spain must agree to cuts.

“Don’t do it,” says Nobel Laureate Joseph Stiglitz. In an interview with a Spanish paper he said that for Spain to sign on the dotted line, to ask the ESM for help and agree to Germany’s insistence on austerity, would be tantamount to economic suicide.

As for the US, something pretty interesting is happening across the pond. While some of the Christian fundamentalists that seem to be gaining more sway over the US political scene seem hell bent on enacting policies designed to pretty much terrify the rest of the world, amongst economists the QE debate has reached a new level. Professor Michael Woodford is a big cheese at Columbia University. He also happens to be the most respected academic on monetary economics in the world.

He reckons that when the Fed sets its monetary policy, it should take into account what’s called nominal US GDP – that is to say GDP measured in dollars, not adjusted for inflation. He is also a big fan of the Bank of England’s big idea: funding for lending, in which the central bank lends to banks if they agree to lend this money on to businesses and for mortgages.

But what all this really means is that the thinking at the Fed and among its advisors is slowly coming round to the view that that a little bit of inflation may be a good thing. Let’s face it, when you are in debt and inflation is quite high, and your income is rising with inflation, then the value of your debt relative to income is falling.

So that’s just a hint that the Fed is relaxing its inflation intentions. Bear in mind that the CEBR’s forecast for the UK economy is based on the assumption that inflation will fall, you can see how the whole thing is based on contradictory ideas.

But this still leaves the questions: is the UK on the mend?

Markets have overreacted to the latest news on QE. The UK has plenty of problems and challenges ahead, but yes, the outlook right now is more positive than a week ago.

The real snag is that neither central bankers nor indeed many governments are fixing the underlying problem. And to find out about that, read on.