The high growth – low wage puzzle.

The fact that the relatively high overall growth of the UK economy has not led to a corresponding increase in wages – the  latest ONS figures now showing real wages are falling  (http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/august-2014/index.html) – has perplexed policy makers and, for the moment at least, put a brake on an interest rate hike. Wages excluding bonuses between April and June 2014 are barely 0.6% higher than a year ago (http://www.bbc.co.uk/news/business-28325361). This compares to a pre-downturn average of 2.5%. Whereas the economy has now returned to its previous level of output, regular pay has fallen 5.25% during the last four years.

Changes in wages often ‘lag’ behind other changes in the economy but there’s little sign of any catch up, with the Bank of England upgrading growth predictions but now downgrading its prediction for wage growth (http://www.bbc.co.uk/news/business-28768450) despite estimating that the level of spare capacity in the economy could be as little as 1%.  Wage increases are invariably linked to increases in productivity (output per worker) but UK productivity still remains over 15%, below both its pre-recession level as well as below that of other countries. It’s also the case that if the increase in population is taken into account and a ‘GNP per capita’ measurement is used then the economy isn’t really growing at all.

Though more people are working, the additional labour has not always been drawn from the dole queue. This also helps to explain why there’s not been the ‘trade off’ between falls in unemployment and rising wages which economic theory suggests there should be. The continued importance of part-time work, (one in four new jobs are in this category and 36% of all workers now report they are ‘part-time’), particularly in a ‘24/7’ service sector with its flexible and weekend shifts, has meant it’s easier for people who might previously have left the labour force because of family and other responsibilities, to find employment. At the same time there are also well over a million part-time workers who want to work more hours.

There’s clear evidence that people are working beyond retirement as there are more than a million workers over 65. Also, almost half of the new jobs have been ‘self-employed’ – with many of the self-employed earn up to 40% less than if they were ‘employees’ (http://www.resolutionfoundation.org/publications/just-job-or-working-compromise-changing-nature-sel/) In fact, if the earnings of all self-employed people were included in pay data, wage levels would be shown to have fallen further (www.resolutionfoundation.org/press/self-employed-earnings-measure/).

But it’s also the nature of the jobs that are being created which explains low levels of wages and low productivity instead of wages going up with productivity. According to the ONS bulletin, of the 1.1 million increase in jobs in the year to March 2014, only 189,000 have been in the ‘professional, scientific and technical’ high wage and high productivity category.  So most of this summer’s 300,000 university graduates will not get one of the 56,000 current vacancies in this sort of work but will end up being ‘over-qualified’ for the work they do, draining productivity increases still further.  For example, a  high number of low-paid women are working significantly below their skill or qualification level with over a fifth of those polled educated to degree level.. more than one in five women earning less than £7.44 per hour were educated to degree level (www.fawcettsociety.org.uk)

In comparison, low paid and low productive industries (because they are so labour intensive) have continued to expand.   Thus ‘accommodation and food services’ generated 128,000 extra jobs, likewise  ‘human health and social work’ (also one of the lowest paid) generated 89,000. Meanwhile, there are only 44,000 new manufacturing jobs – a sector where any productivity increases would be most noticeable.

With 1 in 5 workers earning less than the ‘living wage’ and new data showing that CEOs receive up to 143 times the pay  of those they employ  (www.theguardian.com/business/2014/aug/18/pay-gap-grows-ftse-bosses) it’s inequality rather than growth that’s the main issue in the economy.

                                                                                                                                                                                                                                   MA

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