Economist’ brows furrow when they note that midst the generally positive economic data emerging in the UK and the US, wage growth continues to be absent.
On the surface the answer is simple – the participation rate in both economies has fallen. For some, particularly those anxious to play Cassandra to the next crisis, this is a sign that economic growth is a mirage.
In the UK context, wild and dangerous theories are granted fertile ground by some determined that coalition economic policy can’t possibly have achieved growth; suggestions that benefit sanctions are forcing the number claiming jobseekers down, but not wages up, has much traction, but scandalously little merit.
It is nonsense because people who are sanctioned continue to be counted as unemployed. While our own Vince Cable highlighted in his majesterial response to the budget, the majority of workers on zero hours contracts are happy that they are receiving enough hours and claim to have a better work life balance. He was citing data from the Institute for Personnel and Development.
To blame those issues for the big, era defining problem of the productivity puzzle is snide politics and infantile economics.
Demographics may have a much greater role to play. Both Britain and the US experienced a baby boom in the years after the second world war. This resulted in a much larger battalion than normal of workers in their 50s and early 60s were around in 2007 and the crisis years that followed. As governments, and companies cut costs during recession, many of those workers were prime candidates, some happy to take redundancy and pension, while the employer was able to save on the salary of a long-serving employee.
That helps to explain why, even at the height of the recession, unemployment didn’t reach the 3 million mark which has been the nadir of recessions past. The older worker often didn’t need to claim benefits. Many workers in their 50s and 60s, whether private or public sector, also benefitted from generous pension provision. Couple this with the redundancy cheque, and the fact that houses were much more affordable when those workers were younger, and perhaps it is not surprising that they were ambivalent about redundancy, and not eager to re-enter the workforce.
Those workers jobs are likely to have been filled by junior staff at the start of their career (technological advances make this more possible) on lower wages. Many of those workers who retired and are less well off, have chosen to work part-time; again looking at the data darkly makes it look as though a full-time role has been replaced by a part-time one, the real story is slightly, but significantly different.
Many more workers than before are self-employed, yet official wage data doesn’t count the self employed, making it look as though huge numbers of people are earning zero, and dragging the average of wages down.
One reason there is a ‘cost of living crisis’ is that no one’s income has really with the rise in asset prices. This is the consequence of Quantitative Easing (QE), a policy that the Bank of England itself acknowledges inflates the price of assets and benefits the better off, notably the stock market and the housing market. This was eminently predictable, indeed it is the very purpose of QE.
QE stops in the US this Autumn, and the Bank of England hasn’t added any more liquidity to its own £375 billion QE programme for some time. The housing market has started to moderate.
So there are plenty of reasons to assume that the stark rise in asset prices, is on the wain, the challenge for policy makers is to ensure that the end of the stimulus that is QE is not also the end of growth in the ‘real economy’. If it isn’t, and I have long had my concerns about that, then the productivity puzzle will even out as the demographic data does. The worst thing any policy maker could do now is panic.
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
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10 Comments
Labour’s “Cost of living crisis” has traction on the doorstep but its political success goes hand in hand with its revelation of their economic illiteracy and the cowardice of most senior politicians (of all parties).
Labour ended their period of rule in 2010 with a shrunken economy and swollen public sector debt. Disposable income was not going to return to pre-crisis levels until the economy grew again and the debt issue had been tackled. The economy is now growing and exceeds pre-crisis levels [although not necessarily pre-crisis levels of GDP/head] but so much of the economic growth has to be used to abate the rate of borrowing and in paying interest to those living overseas who lent us money to keep us going during the crisis that it will probably be another Parliamentary term before people can expect to see significant improvements in their standard of living. Even this assumes there are no more oil price shocks, global economic collapses, huge transitional costs associated with a YES vote etc etc.
Very astute analysis David, thanks for sharing your thoughts. It will indeed be very interesting to see what happens to UK growth in the post-QE era.
It should also be considered that we have a large service sector, much of which wins contracts via competitive tendering resulting in fairly lengthy contracts. In my own industry there is a highly competitive market with most tenders judged on a 50 – 70% cost basis (leaving sometimes just 30% regard to quality of provision. This has led margins to be tightened year on year and contracts having to be based upon a tightly controlled cost base. In practice this means that the biggest cost (wages) has to be constrained.
The cost of running a tender process means that many public sector organisations (or those required to use competitive tenders via EU regulations) avoid re-tendering and seek to extend contracts as long as possible. This means that contracts negotiated up to 5 years ago are still in force with companies forced to make a decision between retaining the work at a depressed payment rate or risking losing the contract (and often the corresponding jobs) through refusing the extension.
The worst part is that this always affects the lowest paid most markedly. Professional staff tend to have fairly standard wage levels and these rise across the entire marketplace. Wage restraint in reality therefore means stagnation for those in the lower paid roles such as administration. I rarely get to pay people what they are worth or deserve, if I did we would lose contracts at re-tender and they would be out of work. They should of course be protected by TUPE on a change of service providers, but in my experience once the professionals are transferred the administrative element is often managed out of the receiving business through redundancy (or worse).
My own view is that we will need a period of some 5 years of growth, coupled with a change in the approach of public and pseudo public sector contracts before wages start to properly recover, across the skills base, in many service industries.
David Thorpe, I think I have highlighted your articles in the past as one of the only Lib Dems who has come out against more QE. I actually think we do need to kind of panic and introduce an emergency budget. If we just continue with our heads in the clouds then the market will panic first. The status quo is not sustainable.
Even if not an emergency budget, we can’t continue offering tax cuts and spending pledges and talking like all the hard work is nearly done. Above all, the vested interests who influence the IMF and the world’s central banks need challenging.
Regards
I guess, that to understand what happens when the QE ‘music’ stops, we have to identify where it went?
Using very rough percentages, I suspect about 90% of the QE went to support the financial system (read economic growth?), , and about 10% was used to keep the welfare system functioning (even if only just?)
When the QE does finally end, the (90%), QE pumped up growth’, will be seen for what it is,(a mirage),.. as will, the financial emperor with no clothes. When the (10%), QE that was supporting welfare stops, we are going to have a lot more austerity and a lot more angry people.
And the squeezed middle, will not be productive enough, or be willing to be taxed further enough, to make up the loss of the stopped QE. The question is, can they really dare to stop QE? I think we’re all becoming Japanese now?
QE went to buying bonds-this reduced the yield (interest rate) on UK government debt-reducing the costs of that debt to the government-meaning the government had more cash for spending-no QE would probably have meant far far far deeper cuts.
QE did help the banks borrow cheaply-which kept mortgage interest rates low, it has really helped the economy to stand still-which was the point-but it dopesnt help growth and helps the owner of assets, including house prices.
Eddie-
the bank of england are not proposing mnore QE-indeed they are ending QE-lets see what happens-and not panic..
Good article. Very thought provoking.
A few years back at the height of the financial crisis someone was asked how the derivative market had become so enormous when it obviously represented a major source of risk. He said something like “as long as the music’s playing you’ve gotta get up and dance”. The same situation now applies post-QE where all that money is looking for return with less and less regard to the risk of the underlying asset. Consider the fact that Spain has just launched a 50 year bond with a 4% coupon. That is only possible based on the market’s faith in the Draghi put. Risk is not being properly factored in the hunt for alpha.
So what happens if and when QE is unwound?
What if a lot of people who are counted as self employed are earning zero or close to it. There is a notion that a lot of people are encouraged to register as self employed to avoid benefit squeezes.
As for QE it’s just devolution a way of avoiding stagflation or worse deflation. If you factor out QE and low interest rates how does the economy really look?. Does anyone one have the stomach for the collapse in asset value if QE was stopped? At the moment first time home ownership falling, yet housing costs are rising rather than stabilising or dropping, wage freezes at the same time the pound is devalued. No wonder there’s a “cost of Living crisis.”. I’m not blaming the Lib Dems and The conservatives for this but nor am going to blame Labour. It’s just the way things have been headed for years.
“Many more workers than before are self-employed, yet official wage data doesn’t count the self employed, making it look as though huge numbers of people are earning zero, and dragging the average of wages down.”
You’re right that our usual earnings data doesn’t count the self-employed (something that needs to be addressed), but they’re also excluded from the denominator. The number of the self-employed or level of their earnings don’t have any direct effect on the average wages of employees.
The ‘productivity puzzle’ in the title is not explained by the author in the article.
For those interested, it is summarised, with suggested answers, in an FT article at
http://blogs.ft.com/money-supply/2014/06/16/uk-productivity-puzzle-the-bank-of-englands-answers/
My own view is different to the B of E. Value added per employee is very much higher in financial services than other industries. So the reduction in UK financial services activity since the crisis means that the resulting fall in UK value added has not been replaced by the increase in people employed in restaurant and other low value added services.
Far more people are now employed in occupations with low value added. As finacial services pick up again, just a few extra bankers and insurance employees will make a disproportionate increase in total UK value added and productivity measures will consequently rise sharply.