Record lows but now wage inflation

Britain has, quite famously, the most flexible labour market in Europe. That means, to put it the other way, fewer protections for those in jobs, easier firings, lower commitments to stability from employers and so on. We might even say the deliberate creation of the precariat. All stemming from Maggie Thatcher’s destruction of the unions and the grinding of the workers’ faces into the dust thereby.

Good, it’s working.

This is not some error, this is not a mistake, it’s all quite deliberate:

The slowest economic growth in more than five years has failed to dent Britain’s jobs market, with the latest official figures showing a record employment rate in the first three months of 2018.

The Office for National Statistics said there were 32.34 million people in work in the first quarter of the year, an increase of 197,000 on the previous quarter and up by 396,000 on the first three months of 2017.

Although initial estimates suggest the economy grew by just 0.1% in the the first quarter of 2018 – its weakest since 2012 – the UK’s employment rate rose by 0.4 points to 75.6% in the latest quarter, the highest since modern records began in 1971. A majority of jobs created were full-time posts.

No, really, this is exactly what all those reforms were intended to achieve:

So, we can officially say the year-long incomes squeeze is over.

Comparing the three-month average, as we should to ensure the figures are robust and less affected by monthly volatility, wages are now growing more quickly than prices.

That is the first time this has happened for a year and – at 2.9% – it is the highest wage growth figure since August 2015.

Inflation has eased after the spike that was caused largely by the fall in the value of the pound after the Brexit referendum, which made imports of things like food and fuel more expensive.

Alongside the strong employment figures, improved wage growth means there is certainly plenty of better news in the latest Office for National Statistics figures.

So, to explain. The background analysis here comes from Richard Layard. Not, by any means, some ghastly neoliberal like myself. Rather, someone proudly of the left even if the centre of that.

His point being that unemployment is right shite. So, let’s try to design things so that we don’t get lots of it. Seems fair enough, as a goal at least.

But then we run into the problem that we do have a business cycle and we really don’t think that we’re going to get rid of it any time soon. G. Brown Esq was wrong in claiming to have abolished boom and bust that is.

A boom is when GDP rises strongly, a bust is when it falls. GDP is, as we all know, all incomes – GDP falls then aggregate incomes must, by definition fall. Say we’ve a 10% fall in GDP (not far off what did happen), how is that fall in incomes to be distributed? Some of it happens quite naturally, profits fall in recessions faster than GDP does so the capitalists are first up against the wall when the revolution comes. Great, we’re fine there. Just to keep the maths simple ignore that for a moment.

A 10% fall in GDP means a 10% fall in incomes. We could have 10% of the people lose all their incomes. Say, 10% unemployment. We could also have everyone lose 10% of their incomes. Now, Layard’s point is that unemployment for anything more than a month or two is such a shattering event that we really must avoid that. Believe him or not but I’m entirely happy to run with it.

So, what we want to engineer is that it is wages which are flexible in a recessions, not employment. And that’s something we’ve largely done. Unemployment rose very much less in this past recession than we would have expected historically from the UK economy. Very, very, much less. That’s our evidence that labour market reforms worked – all that neoliberalism and union bashing. It was wages which took the strain. That’s what was intended and that’s what happened.

Note that this is nothing about why the recession, or even that a recession, we know that something’s going to cause them sometimes. What we want is the best reaction to them we can. It’s also nothing to do with austerity, or Keynesian demand management to end a recession. It’s about how the pain is distributed.

The other side of this flexible labour market is that when unemployment is low, as now, we’re not going to see much wage growth. That’s not so good, that’s true. But it also means that NAIRU is lower than it would have been without the reforms. NAIRU being, as all know, non-accelerating inflation rate of unemployment. We obviously cannot employ 103% of all people, and there’s always going to be frictional unemployment, the time taken between leaving one job and starting another. So, unemployment will always be some positive number. The natural rate, the frictional rate, not exactly the same thing but close enough to NAIRU. Aspects of the same point perhaps.

The importance being, how low can unemployment go before the Bank of England has to slam the brakes on the expansion by raising interest rates? The more flexible our labour market, the more efficient job matching etc, quite possibly the lower unemployment benefits are, the lower that natural/frictional/NAIRU rate will be. So, the lower unemployment can go before we end the boom.

And that’s working too, isn’t it? We’re at employment levels not seen since 1971, we’ve got trivial non-Brexit inflation, real but not much wage growth and the BoE is only muttering about interest rate rises.

No, really, all that cutting and slashing of job protections, that gutting of the British labour market. This is what it was supposed to achieve. And ain’t it great that it’s actually worked?

No, really, that Thatcherism was all worth it.

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jgh
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jgh

That’s an interesting graph. Drawing some lines on it I see that, when an adult, any time unemployment was less that 7% two or three years ago I had a job, and any time it was greater I was unemployed. I’ll have to dig out the last few years to see how far the correlation holds.

Spike
Member

Yet both the UK and US labor markets retain aspects that make it harder to adapt to changing conditions: mandated minimum wages, mandated benefits, and lucrative payments for being unemployed that compete with employment.