Declining wages spread to the rest of the West

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

In the USA, real wages for men have been declining since 1973:

Now, this tragic downward spiral is spreading to other Western nations:

Real wages continue to fall in the UK and elsewhere, yet despite this striking feature of the labour market, some commentators anticipate resurgent pay growth in the near future. This column argues that the absence of any improvement in the UK’s productivity performance – together with evidence that nominal wage growth is flatlining and real wage growth is falling – make it highly unlikely that wage growth is about to explode upwards.

On 9 September 2014, Mark Carney, the Governor of the Bank of England, gave a speech at the 146th annual Trades Union Congress in Liverpool, where he argued as follows:

“Specifically, the Bank’s latest forecast expects real wage growth to resume around the middle of next year and then to accelerate as the unemployment rate continues to fall to around 5½% over the next three years. By the end of our forecast, we see 4% nominal pay growth on average across the economy.”

The evidence for this turnaround seems entirely lacking. We would be very surprised if the Bank’s Monetary Policy Committee (MPC) does not have to reduce its forecast for wage growth once again, as it has had to do so several times in the recent past. There is no compelling evidence to suggest such a rosy scenario; it seems far more likely that nominal wage growth will once again disappoint on the downside.

We believe that the MPC’s over-optimism arises because there is more slack in the economy than the MPC estimates. Following Bell and Blanchflower (2014), we think it singularly inappropriate for the MPC to reduce the amount of slack arbitrarily as they are doing with both the level of long-term unemployment and the amount of underemployment. The UK economy appears well above the full employment level, with an unemployment rate of 6.2% and the equivalent of a further 1.8% or so on top of that because of underemployment. Furthermore, we have seen big declines in the unemployment rate with no sign of any wage response.

One point of interest is the fact that Governor Carney nowhere made mention of the fact that trade union membership has declined sharply over time. According to the Trade Union Membership 2013 Statistical Bulletin, published by the Department for Business Innovation and Skills, the proportion of employees who were union members has fallen from 29.8% in 2000 to 25.6% in 2013. The proportion of employees who were union members fell in the private sector from 18.8% in 2000 to 14.4% in 2013, while in the public sector they fell from 60.3% to 55.4%.

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