Posts Tagged ‘wages’

Growing demand and growth in productivity are a bit like a horse and carriage. You can’t have one without the other. At least you need both, if you want sustainable economic growth.

In an ideal world, over time we want to produce more output for every hour we work, and we want our hourly pay to go up in proportion to our extra productivity. Multiply that across the economy and we get more output, and more demand to meet the extra supply.

In the UK, we have a double problem. Wages are not going up with inflation. In fact in the three months to December average pay including bonuses rose by just 1.4 per cent. Annual inflation back in December was 2.7 per cent. So once again, average workers were worse off during the period in question. If you compare wage growth with inflation as measured by the RPI index, the picture looks even worse. Inflation by this index was 3.1 per cent in December, and has, in fact, been greater than wage inflation every month since March 2010.

RPI inflation versus average wages

But that is just half of the UK’s problem. The other half relates to productivity. That too has been awful. According to the ONS, output per hour in the UK is 21 percentage points below the average for the G7. Look at the big picture. The UK economy is either in recession or very close, yet employment is rising. How can that be? Answer: because productivity is declining.

In other words, in the UK we have the precise opposite of the ideal world. We have falling wages and falling productivity. Sure employment is at a record high, unemployment at 7.8 per cent is surprisingly high considering where we are with the economy, and yet the price we seem to be paying for jobs is a declining economy.

In the troubled regions of the Eurozone, the problems at face value are quite different. But perhaps the end result is very similar. The story for the Eurozone takes a slightly different view. The focus this time is on unit labour costs. That is to say the cost of labour for every unit produced.

First let’s look at some history. From the moment the Euro was launched to the point when things went pear shaped in 2008/09 the so called peripheral economies – that’s  Portugal, Ireland, Italy, Greece and Spain – saw their growth in unit labour costs race ahead of the growth seen in France, and even more so relative to Germany.

Since 2009/09 the gap has closed. In fact with Ireland and Portugal, the gap with France has closed and gone into reverse, so much so that growth in unit labour costs in Ireland and Portugal since 1999 is now lower than the equivalent for France. Spain is not far behind. Greece has a bit more work to do. Look at the figures and official data indicates that since 2008/09 unit labour costs have fallen by 14.7 per cent in Greece, 14.1 per cent in Ireland, 7.6 per cent in Spain, and 2.4 per cent in Portugal. They have risen 1.1 per cent in Italy, however. There are doubts over the accuracy of this official data, but you get the point. The gap has been closing.

The markets are chuffed. They see falling unit labour costs in these countries as evidence that the slow march to recovery is well on its way.

But is that right? As you know, unemployment in these countries is much higher than in the UK, and indeed in Greece and Spain – where more than a quarter of the working population is out of work – this is at a level one can only call terrifying.

Sure unit labour costs are falling, but given the massive level of unemployment, is that surprising?

The Eurozone really needs exactly the same development we require in the UK: rising productivity and rising wages. Perhaps, because of their lack of competiveness with Germany, and because – unlike the UK – they are not tied into a fixed exchange rate with Germany, they need productivity growth to slightly exceed wage growth.

This is just not happening.

The markets may love the data, but just like a bad marriage, when truth dawns, things may unravel badly.

©2012 Investment and Business News.

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There is one snag with the argument that QE is set to unleash inflation, and there is one snag with the argument that today’s woes are caused by debt.

In fact the snag may be the same with both arguments, and the snag is that both arguments are probably wrong.

Certainly those who draw parallels with the 1970s, and say inflation is inevitable and we need to see a 21st century answer to Maggie may be drawing the wrong conclusions.

Back in the 1970s the problem in the UK was that wages had been rising too fast, and unions had grown too strong. Inflation was led by inflation in wages.

Now let’s take a look at November 2013. According to ONS data out on 23 January, average wages including bonuses rose by just 1.5 per cent in the three months to November. Inflation, measured by the retail price index, was 3 per cent.

Last year, many forecasters predicted that by the end of 2012 growth in average wages would have outstripped inflation, meaning  households would have become better off, and the UK could look forward to sustainable growth in demand.

Instead, growth in wages failed to move even close to inflation and in November the gap actually started to grow again.

The truth is that corporate profits and growth in GDP have barely been trickling down into wages for a very long time. The last few years have simply seen this trend become more exaggerated.

But this problem is not new. Nor is it specific to the UK. According to the US Congressional Budget Office, for the one per cent of the population with the highest income, average real after-tax household income grew by 275 per cent between 1979 and 2007. For others in the 20 per cent of the population with  the highest income (those in the 81st through 99th percentiles), average real after-tax household income  grew by 65 per cent over that period, much faster than it did for the remaining 80 per cent of the population, but not nearly as fast as for the top one per cent. For the 60 per cent of the population in the middle of the income scale (the 21st through 80th percentiles),  the growth in average real after-tax household income  was just under 40 per cent. For the 20 per cent of the population with the lowest income, average real after-tax household income was about 18 per cent higher in 2007 than it had been in 1979.

See: Trends in the Distribution of Household Income Between 1979 and 2007

This lack of trickle down should have led to falling demand creating one economic recession after another. It didn’t for this reason: The profits that were not trickling down, sloshed around the banking system eventually finding their way into more readily available credit, pushing up house prices, and encouraging households to borrow.

Household debt was not the cause of today’s crisis; it was a symptom of deeper problems.

During this era, we saw lending for mortgages rise, but business lending did not do so well. By the noughties, entrepreneurs had been transformed from innovators to buy-to-let investors.

Yet data out this week shows that the government funding for lending scheme is sort of working.  At least the Council of Mortgage Lenders reckons mortgage lending will hit its highest level since 2008 this year.

But data from the Bank of England shows that lending to business in the three months to November was £4 billion down on the previous three month period. See: House prices set for recovery as UK falls for same old illusion

In short, not much has changed.

©2012 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

Back in the day, real wages used to go up.

The days of ever rising wages may have come to an end some time ago, but during the boom years it didn’t really matter, because house prices went up. Who cared if wages only rose by a couple of per cent when our houses rose in value by a few thousand pounds every month?

But when recession bit in the UK in 2008 something odd happened. In terms of disposable income, the average Brit became better off. The average Brit, of course, had a mortgage and as interest rates headed to near zero, Brits with mortgages were laughing.

It wasn’t so funny if you lost your job, but then most Brits didn’t.

But then, as the recession came to an end, another odd thing happened. Inflation rose sharply, but wages didn’t. So to recap, during the recession most of us became better off, but during the recovery we were worse off.

And every month since April 2010, inflation – according to the retail price index – has exceeded rises in average wages.

Part of the problem is that inflation has proven to be stubborn. The other part is that wages have not been rising like they used to. In the year to April 2010, for example, wages including bonuses rose by 4.4 per cent. Alas they have increased by less than 3 per cent every month since.

Take the latest data. This morning the latest inflation numbers were out – this time for November. They were disappointing.

Another disappointment occurred a month ago too, when inflation – as measured by the CPI Index – rose from 2.2 in September to 2.7 per cent in October. Core inflation – that’s without food, energy and tobacco – rose from 2.1 to 2.6 per cent, and the RPI version of inflation rose from 2.6 to 3.2 per cent.

Never fear we were told. Next month will be better. Well this morning was next month, and it wasn’t, or not much.

Both CPI and core inflation stayed on hold, while RPI fell a smidgen to 3.0 per cent.

Last week the latest figures on wage inflation were out too. In the three months to the end of October average wages with bonuses rose by 1.8 per cent. Look at October in isolation and the numbers look even worse – average wages with bonuses were up by just 1.3 per cent in the year to October. To recap, RPI Inflation was 3.2 per cent in October.

So another month goes by and, allowing for inflation, wages fell.

The snag is that this time last year, many economists were predicting something quite different. They forecast that during the course of 2012 inflation would fall sharply, wages would rise, real wages increases would thus go positive, and UK consumers could then afford to start spending more, pushing up GDP.

It just ain‘t happening.  And now even the most doveish of economists are admitting that inflation may not fall back any time soon.

So what does it boil down to?

Quite simply we have to wait quite a while longer before wages start to create the foundations for economic recovery.

PS. As an aside, central bankers across the world – except in the euro that is – are coming around to the idea of changing the way central banks target inflation. And by the way, the Bank of England’s next governor Mark Carney is very much taking part in the debate. They are now talking about targeting what’s called nominal GDP – that’s GDP not allowing for inflation. So take the UK, up to now the Bank of England has targeted 2 per cent inflation. It hasn’t had much luck of late, but that’s been its aim. So if inflation was 2 per cent and growth 3 per cent, that meant nominal GDP growth would be 5 per cent. But in recent years growth has been nearer zero. The big idea being considered is that central banks should target nominal growth of around 5 per cent, meaning that if real growth is zero, inflation would be 5 per cent. The idea, of course, is that by doing this, GDP would rise. But here is the irony. At the moment, as was explained above, it is looking as though inflation is what’s stopping us from having sustainable growth. So it is all very well, saying let’s have a little inflation in order to create growth. The story of 2011 and 2012 is that a little inflation is what has been stopping growth.

©2012 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