Posts Tagged ‘Wage’


When was the last time you had a pay rise? Many people might answer that question by saying “about five years ago.” Envy the Chinese, or Poles, or Mexicans, or Indians. According to PwC, they are likely to see their wages shoot up. This is set to be a very important development, with implications for investors and businesses seeking new opportunities. But maybe workers in the west don’t need to be too envious, the pay gap will still be pretty enormous. It’s a very important trend all the same.

Between now (2013) and 2030, real wages in the US and the UK are expected to rise by about a third. Let’s hope that’s right – relative to what we have seen over the last half decade that would be a result. But over that same time frame, average wages in India could more than quadruple in real dollar terms and more than triple in the Philippines and China.

Let this chart do the talking:


So what are the implications? First of all see the expected rise in wages across these countries in the context of re-shoring. See: Is manufacturing coming home? It will clearly provide the impetus for companies re-shoring their manufacturing closer to where most of their customers are.

What we may see, as wages rise in China, is not only more manufacturing in home territories, but nearby too. Opportunity, as they say, knocks for Poland and Mexico.

Looking further ahead, PwC says places such as Turkey, Poland, China, and Mexico will therefore become more valuable as consumer markets, while low cost production could shift to other locations such as the Philippines. India could also gain from this shift, but only if it improves its infrastructure and female education levels and cuts red tape.

From a corporate/investment point of view, who will be the winners and losers? PwC reckons western companies who may emerge as winners will include retailers with strong franchise models, global brand owners, business and financial services, creative industries, healthcare and education providers, and niche high value added manufacturers.

As for losers: well, watch mass market manufacturers, financial services companies exposed in their domestic markets, and for companies that over-commit to emerging markets without the right local partners and business strategies.

© Investment & Business News 2013


Re-shoring. If the last decade or so has been characterised by off-shoring, then maybe we are set to enter a new era in which manufacturing returns to home markets, or, failing that, to countries much closer to home. Re-shoring: if it proves to be real, it may provide real, underlying strength to economic recovery. If it proves to be real, then real hope can be added to economic commentary; hope that this time recovery can last. And now we have evidence that it may indeed be happening, right now.

Sometimes predictions can become descriptions. You can forecast what the weather is going to be like. It is much easier and more credible, although perhaps less interesting, to describe what the weather is like. But Boston Consulting has moved from forecaster to describer in one very crucial area. A couple of years ago it made headlines for forecasting a new trend in manufacturing, as companies opt to make their products nearer to their home markets. Now it reckons it has evidence that this is actually happening.

Being one of the world’s largest consultancies, Boston Consulting’s surveys tend to be pretty meaningful. It asked executives at US companies with sales greater than $1 billion about their manufacturing plans. A year ago, 37 per cent said they “are planning to bring back production to the US from China or are actively considering it.” In its latest survey, the results of which were published this week, that ratio rose to 54 per cent.

So why, oh why? 43 per cent of respondents cited labour costs; 35 per cent proximity to customers; and 34 per cent product gave quality as their reason for considering re-shoring.

Michael Zinser, from the consultancy, said: “Companies are becoming more sophisticated in their understanding of all the factors that must be considered when deciding where to manufacture…When you look at the total cost of production for many goods, the US appears increasingly attractive.”

The Boston Consulting survey probably provides the most compelling evidence to date that re-shoring is occurring, but it is far from being the only evidence.

Back in July a survey from YouGov on behalf of Business Birmingham revealed that one in three companies that currently use overseas suppliers are planning to source more products in the UK. John Lewis recently said that it plans to increase the volume of made in the UK products by 15 per cent between now and 2015.

This development is good news in more ways than one; it may even be very good news in quite a profound way, but more of that in a moment.

But what about China? This is surely not such an encouraging development for the economy behind the Great Wall. Well maybe it isn’t, but maybe it actually is. What China needs is for wages to rise, and for it to see more growth on the back of rising demand. Its economy is simply out of balance. No one is predicting the end of Chinese manufacturing, merely that it may lose some of its dominance. If this loss occurs because wages in China have risen, creating more demand, this is good news for China, its suppliers and the companies that sell to its consumers. Okay, changes are never smooth. There will be short-term headaches caused by re-shoring, but the overall impact will be positive rather than negative.

But there is another perhaps more important implication.

Over the last few decades we have seen growing inequality, and company profits taking up a higher proportion of GDP, while wages take up a lower proportion. Some think this is good thing, and accuse those who criticise of being guilty of the politics of envy. They miss the point. You may or may not think inequality is morally justified, but it is clear that from an economic point of view it is inefficient. For an economy to grow it needs demand to rise, and in the long run this can only occur if the fruits of growth trickle down into wage packets. It is perhaps no coincidence that the golden age of economic growth occurred in the 25 years after the end of World War II, an era which saw much more equality than we see today.

It is possible that re-shoring is symptomatic of changes in the balance of power across the markets. For years we have seen what the IMF calls the globalisation of labour: the reward to capital rose, the reward to labour fell. The underlying cause of this may have been the one-off effect of millions of Chinese workers joining the globalised economy. As this one-off effect begins to ebb, we may see the globalisation of labour work in reverse.

See also: Wages set to rise – in emerging markets

© Investment & Business News 2013

Back in May 2010, increases in average wages were less than the rate of inflation. It has been that way every month since. Consumers may be feeling more confident, retail sales may be up, but one thing is sure, the improvements in sentiment are not down to rising wages. But in the latest data from the ONS there was a whiff of hope. Is it possible that wages are at last set to rise faster than prices?

In May 2010 inflation was 3.4 per cent. Wages (that’s including bonuses, by the way) rose by 2.5 per cent. Ever since then it has just got worse. The gap peaked in October 2011, when inflation was 5 per cent, and averages wages rose by 2 per cent, and until very recently the gap was almost as large. In March, for example, inflation was 2.8 per cent, while average wages rose by just 0.6 per cent. But since then things have begun to look better – that’s despite inflation getting worse. In May inflation was 2.9 per cent, but wages rose by 1.9 per cent. This was the highest level of annual increase in average wages since January 2012.

Looking forward, inflation may pick up over the next few months, but it is likely to fall later in the year.
So, if the rate of increase in average wages can carry on rising for a little longer, within a few months we might once again find wages are rising faster than inflation.

Many economists believe that a sustainable recovery in the UK economy can only occur once wages rise faster than inflation.

That, by the way, has been the snag with recent reports pointing to rising house prices and retail sales. How can they rise, if real wages – that is wages relative to inflation – are falling? Answer: they can only rise if household debt increases, and as it was told here the other day, UK housholds have enough debt as it is. See: What will happen to households as rates rise? 

In fact the hard data provides the evidence. UK households have been saving a lot less of late and borrowing more.


And so returning to wages and inflation, if it is the case that at last wages can rise faster than inflation then that is reason to celebrate.

It is just that in the long run, wages can only rise faster than inflation if productivity is improving. Alas there seems to be precious little evidence of that occurring at the moment.

© Investment & Business News 2013


The question is why? Why was it that not so long ago economists were confidently predicting that average wages would rise while inflation fell?

Okay, we know why they thought inflation would fall, and let’s not go over that old ground. But why did they think wages would rise?

According to the latest data from the ONS, average wages without bonuses rose by a mere 1 per cent in the three months to February. Then, if we take into account bonuses and look at what the ONS calls total pay, we find that rose by just 0.8 per cent. So why had economists previously made such bold predictions? Were they guessing?

Even – let’s emphasis this – EVEN if the most hawkish of inflation watchers had been right, and inflation had fallen below the Bank of England’s target, it is likely that right now wage increases would still be lagging behind inflation.

As it is, in February CP inflation was 2.8 per cent. Wages in the three months to February rose 0.8 per cent on the same period a year ago. That means real wages fell by 2 per cent over the period in question. It was the biggest fall in real wages since March last year.

Many economists have argued that the first sign that the UK economy is turning will occur once wage increases begin to outstrip inflation. Well, based on the latest data, all we can say is that point doesn’t look even close.

This all begs the question: why are so many predicting a pick-up for the UK later this year and next? Are they guessing again?

©2013 Investment and Business News.

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In 2008 UK average labour costs per hour, measured in euros were 20.9. In 2012 they were 21.6 euros. That’s a rise of just 3.3 per cent.

Or let’s use sterling rather than euros as the measure. In 2008 unit labour costs per hour were £16.70.In 2012 they were £17.50, which is a growth rate of 5.2 per cent. Contrast that with Germany where unit labour costs are up 9.1 per cent. They are much higher too: 30.4 euros in 2012.

In France, unit labour costs have risen 9.5 per cent to 34.2 euros. Of course, Germany has roughly half the unemployment rate of France.

The highest unit labour costs are in Sweden: 39 euros, while Denmark, Luxemburg, Finland, Belgium, the Netherlands, and Austria all have unit labour costs over 30 euros an hour.

Of the 27 counties in the EU, 15 have lower unit labour costs than the UK. They are slightly lower in Cyprus, a lot lower in Greece (14.9 euros), much higher in Ireland (29 euros), lower by the tiniest of margins in Spain, and significantly higher in Italy (27.4 euros).

In terms of growth between 2008 and 2012, only Ireland, Greece, Latvia, Lithuania, Hungary, Poland and Portugal saw a lower growth rate.

Unit labour costs contracted in Lithuania, Hungary, Poland and –most notably – in Greece, where they have fallen 11.2 per cent.

From an economic point of view, falling unit costs are good in the sense that they provide a country with improved competitiveness. But they are bad in the sense that they are a function of productivity, and wages. That Greek wages are falling so fast may be an indication that the country is gradually becoming more competitive but the resulting depression is really rather nasty.

As for the UK, falling unit labour costs is a sign of poor productivity. But why is UK productivity so low? When you factor in networked readiness it is harder to explain. See: IT readiness: does Finland lead the world for economic potential, is the UK in seventh spot?

What the UK needs is investment. Maybe Vince Cable’s plan for a business bank is the right one. More likely it does not go anyway near far enough.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here


Talk is that the government is considering decreasing, or, at the very least, holding the minimum wage where it is. Superficial analysis may suggest such a strategy is right, but look a little deeper and it may be very dangerous.

Unemployment is not the UK’s main problem at the moment. It is too high yes, but considering how lacklustre the overall performance of the economy has been, employment has been surprisingly good. No, the real problem is that at a time when corporate profits to GDP are hitting new records, real wages are falling. If there was a way to increase the average wage, demand across the economy would rise, and maybe the UK would pull out of its downturn.

Critics of such an idea say that obviously if the minimum wage rose, employers would take on fewer staff. They say it’s simple economic theory. But economic theory says no such thing. Rather economic theory says that a rise in the minimum wage may lead to a rise in unemployment, but whether this is true or not depends on the shape of the curve describing what economists call the marginal physical productivity of labour.

Is it not possible that right now employers take on the staff they need to meet customer demand. Sure if they paid staff more, profits would fall. But as this article shows, see US corporate profits to GDP at all-time high, this may not be a bad thing.

If, however, companies were forced to pay staff more, aggregate demand across the economy would rise, and companies may suddenly find they make even more profits.

The real point here is that different times call for different measures. Or, to put it another way, when we learn from history make sure we learn the right lesson. There are occasions when a rise in the minimum wage would have a catastrophic effect on unemployment. But at a time when US corporate profits to GDP are at an all-time high; at a time when UK companies sit on a massive cash pile; at a time when real wages have been falling for over two years, it is surely the case that right now is not such an occasion.

Besides as this piece suggests if you sign-up to the view that the UK has too many zombie companies, maybe a rise in the minimum wage would solve that problem. See: Will a rise in the minimum wage put an end to zombie companies?

©2013 Investment and Business News.

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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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