wages

UK wage growth

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Wage growth is a key factor in determining living standards, aggregate demand and inflation. If wages increase faster than inflation, then households will be able to afford more goods and services. Real wage growth = nominal wage growth – inflation.

In the post-war period, apart from short-lived recessions, real wage growth has been positive, growing at a trend rate of roughly 2%

2008-14

This period was one of the longest periods of falling real wages. It was due to:

  • Great recession
  • Depreciation in Pound Sterling, raising price of imported goods
  • Rise in cost of living through rising energy/food prices.
  • Period of low-wage growth/low productivity

Research from the ONS stated that in 2012 real wages have fallen back to 2003 levels. (real wages fall)

Between 2014 and 2016, inflation fell and wage growth picked up. This led to positive real wage growth. The first sustained growth in real wages since pre-2007.

However, this is being over-turned by the depreciation of the Pound post-Brexit referendum and continued low-growth in nominal wages.

2020 onwards

The covid shock to the economy has led to volatile wage growth. With wages falling at the start of the crisis. Though the UK recovery has seen a shortage of some workers and rapid rise in wages.

Recent wage growth in UK

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Source: wages KAC3 – ONS (average weekly earnings) – | CPI inflation (D7G7) ONS

Until May 2008, wage growth was above inflation, causing positive real wage growth. But, since 2008, the UK has seen periods of negative real wage growth.

Wage growth since 2000

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During the great moderation, we saw a steady period of rising real wages. This has been reversed since the prolonged recession of 2008 onwards.

Real disposable income per head

Real disposable income per head is income households have to spend after taxes and benefits. It is closely related to real wage growth but takes into account changes in taxes.

real-disposable-income-per-head Real Household income per head IHXZ at ONS

real-disposable-income-per-head-1999
Real disposable income per head since 1999.

Economic implications of recent wage trends

1. Muted inflationary potential. Some economists have worried that there is a risk of inflation from ultra-low-interest rates. During the great depression, we saw cost-push inflation, but this has evaporated because they were just temporary factors, such as rising oil prices, higher taxes e.t.c.

This shows the importance of wage growth for determining underlying inflationary trends. While wage growth remains low, there is muted potential for any long-term inflation.

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Effect of minimum wage on economic growth, inflation and AD/AS

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minimum-wage

How does the minimum wage affect aggregate demand/aggregate supply and macroeconomic factors such as inflation, unemployment and economic growth? A minimum wage is the statutory minimum wage that employers can pay per hour. In 2019, the UK minimum wage was set at £8.21 an hour for workers over 25. In the US, the federal min …

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Economic growth with falling real wages

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The UK recovery paints an unusual situation. We have both positive economic growth and falling real wages. How can we have economic growth with falling real wages?

Real wages are not the only source of economic growth. We can see growth from other components of AD –

I (Investment), G (Government spending) plus net exports (X-M)

Also, it is possible for consumer spending to rise despite falling real wages (at least in the short term). For example, if spending is financed by borrowing or declining savings ratio. Consumer spending could also be financed through re mortgaging houses (equity withdrawal) against the backdrop of rising house prices.

Economic growth in the UK

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Since 2013 Q1, we have seen a decent rate of economic recovery. In the past 12 months – between Q2 2013 and Q2 2014, GDP in volume terms increased by 3.2%

Real wages

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Real wages have been falling since the start of the great recession in mid 2008. In a recessing falling real wages are to be expected, but since the recovery, we might have expected real wages to match the growth in real GDP.

Why are real wages falling despite economic growth?

1. Flexible labour markets creating low paid employment. In this recovery, unemployment has fallen more rapidly than previous recessions. Evidence suggests the economy has been successful in creating new employment (often temporary / part-time/ self-employment). These new jobs are not particularly well paid. The recovery is good for job-seekers, but less good for those already in work. The relatively elastic supply of labour willing to take low paid jobs is keeping any wage growth low.

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Wages Declining as a Share of National Income

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The ILO recently produced their growth and wages report for 2012/13. This suggested that across the developing world, labour markets are being characterised by falling real wages and a decline in labour’s share of national income. In particular:

  • Real wage growth has been flat – even negative in the past few years.
  • There is an increasing gap between productivity growth and wage growth. Wages are not rising along with productivity.
  • Wages are becoming a smaller share of national income.
  •  In 16 developed economies, labour took a 75% share of national income in the mid-1970s, but this has dropped to 65% in 2007.  It rose in 2008 and 2009 – but only because national income itself shrank in those years – before resuming its downward course. (Wages in developed world shrink at Guardian)

Real Wage Growth

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It is common to refer to the low wages of China, but wages in China have roughly tripled in the past decade – meaning China has one of best wage growth rates in the world.

However, if we look at just developed economies, we see even lower wage growth.

Real Wage Growth – developed economies

real-wage-growth-developed-economies

The global credit crisis has also resulted in increased inequality. Wage income is declining as a share of overall national output. Improvements in labour productivity are not being matched by real wage growth. This graph below shows the increased divergence between wage growth and productivity.

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