The report published this week by the Office of Budget Responsibility (OBR) to correspond with the autumn statement projected a return to wage growth in 2015. While they had revised their projections downwards from previous (more hopeful) analyses, they continue to claim that the overall outlook is positive. This analysis mirrors recent comments made by the Governor of the Bank of England, Mark Carney, who argued that economic trends pointed to the “first tentative signs of the long-awaited pickup in wage growth.”
The economists Danny Blanchflower and Stephen Machin have been working on wage growth in the UK and US for decades. They recently assessed these claims and found them to be false. Here are four reasons why your wages are not going up:
1. There is a problem with the data.
The primary source for analysis of UK wages is the Average Weekly Earnings (AWE), published regularly by the Office of National Statistics (ONS). But the AWE excludes 91% of all firms and, crucially, self-employed workers – who are highly likely to be underemployed and therefore represent a significant proportion of the slack in the economy. To try to rectify some of the problems with AWE, the ONS adjust it using another dataset called the Annual Survey of Hours and Earnings (ASHE), but this also excludes both self-employed workers and the low paid.
By not accounting for large sections of the workforce, particularly the self-employed, an upward bias is built into the AWE – it points to green shoots of wage growth where there are none. Before wages can grow, the slack in the economy – both in underemployment and unemployment – needs to fall sharply. Projections for wage growth based on data that does not properly account for the magnitude of this slack are flawed.
2. Productivity is not picking up…
Productivity in the economy is calculated through dividing our economic output by the total hours worked (input). Crudely, when labour productivity goes up, this results in higher returns for firms without additional labour costs, giving them the confidence to hire more workers, invest in technology to further drive their productive potential, or push up wages to continue to offer the workers they already have a competitive employment package vis a vis other firms.
Unfortunately, productivity in the UK continues to flatline, with little hope for a recovery. Indeed, economists remain confused by the pick-up in employment – which would not usually occur without increases in productivity – leaving them grappling with what they term the ‘productivity puzzle’. While the OBR does predict a modest upturn in productivity over the next four years, it describes this as “the most important uncertainty in our economic forecast.”
Without increases in productivity, we won’t see wages going up.
3. …and even if it was it wouldn’t necessarily lead to better pay at the low and middle end.
In his work on inequality, Stephen Machin points to how the gains from pre-recession productivity increases in the UK were captured by the highest paid, further driving the vast inequality we’re now seeing post-crash.
Machin continues by suggesting that, since recovery, we have not seen a change to the way our labour market is structured – polarised between very high paid jobs at the top and an expanding pool of low paid, insecure jobs at the bottom – or to the corporate culture of huge rewards to senior executives. This suggests that even if we did see productivity increase, itself a tentative proposition as I outline above, this would not necessarily amount to better pay trickling down the labour market.
4. Look at the US.
This depressing outlook for wage growth in the UK is not an anomaly. Indeed the US has been looking at this picture for some time. While worker productivity grew 80% there between 1973 and 2011, median hourly compensation grew by one-eighth of that amount. Now that the US is facing a similar productivity problem, this trend is only going to worsen.
This suggests that the UK is just starting out on a path well-trodden by the US, of stagnating wages restrained by flat productivity, and the capture of any increases by those at the top. This lends weight to predictions of a secular crisis in the advanced economies.
In short, without action on your part your wages aren’t going up any time soon.