With strong economic growth we should be seeing wages going up, not down

Dismal pay figures have left many scratching their heads.

Dismal pay figures leave many scratching their heads

The pay figures published today show a dismal picture for many of those in work. Average weekly earnings fell by 0.2 per cent comparing the three months to June with the same three months a year ago.

Much of this fall was because bonuses were down on exceptionally high levels at this time last year. But even regular pay – which excludes the bonus element – produced growth of only 0.6 per cent.

We are also seeing a slowdown across all sectors, even in industries such as manufacturing where wage growth has been much stronger than the average.

These exceptionally weak numbers are all the more puzzling because over the past two years we have seen robust job creation, falling unemployment, and in the most recent figures the first signs of serious in-roads into under-employment (measured by the number of part time workers who say they want full time work).

With strong economic growth we should be seeing wages going up, not down.

The biggest single reason for overall weakness in wages is low productivity growth. The bottom line is that most employers will be very reluctant to increase wages until we see faster productivity increases, and no one knows how long the productivity slowdown will persist.

There is no single reason why productivity growth has been so low – the best guess is that it’s a combination of factors including the impact of the financial squeeze, the relative cheapness of labour, the lack of business confidence both domestically and globally, and some sector specific issues, notably oil and gas production: there may also be some measurement problems in capturing productivity growth in a predominantly service based economy.

Some reasons for low pay growth are more obvious – pay policy in the public sector and extensive restructuring in the finance industries are both holding pay back. But there could also be structural changes in the labour market.

Part of the employment growth looks to be coming from older people continuing in employment who would have previously dropped out of work. Such workers may be less likely to get pay rises – for example, they may be at the top of a pay scale – than younger and new workers.

Another possibility is the recent surge in self-employment. Many commentators have drawn attention to the big fall in earnings from self-employment, though in truth we have no timely or reliable figures which tell us how much the self-employed earn.

But if the new self-employed are willing to work for less than they would have done as employees this in turn may dampen the growth in employee earnings.

A third possibility is that the flexible labour market means that despite the fall in unemployment, for most employers the supply of labour is still adequate and therefore there is no great need to raise wages to get the labour they need.

Job adverts from national and big chain employers still seem to attract hundreds of applications, and the regular underemployment index constructed by Professors Bell and Blanchflower and published on The Work Foundation’s website certainly shows there is plenty of labour market slack still left in the economy.

This leaves economists scratching their heads – especially when asked about what will happen to pay. If pay is slowing down when general economic conditions are so favourable, it is hard to know what else would trigger an increase.

I still think pay will eventually recover on the back of faster productivity and higher business investment and start to grow again at 2 to 3 per cent – although that would still be pretty modest by past standards. It just looks as if it could be a longer wait than many of us had hoped.

Ian Brinkley is the chief economist at Lancaster University’s Work Foundation. He was a member of the Low Pay Commission, the body that sets the UK’s national minimum wage (NMW), from 2004–2006

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