To Explain How Unemployment Can Be Very Low, Wage Growth Also Low – Immigration

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There’s a standard piece of economics, so standard that even Karl Marx got it right, concerning the unemployment rate and wage growth. The lower that unemployment rate then the higher will be wage growth – the higher the unemployment rate then the lower wage growth. This has held since whenever and yet it seems not to right now. That’s something that needs to be explained of course.

A possible, possibly even a correct and possible, solution to the conundrum being immigration. No, not in the sense of hordes of brown people coming and taking our jobs. Rather, given European mobility these days, the unemployed aren’t here to be counted as unemployed.

The FT has the basic numbers:

The UK’s jobless rate has fallen to a four-decade low, official figures published on Tuesday said.

Only 4 per cent of those active in the labour market were out of work during the three months to the end of June, the lowest rate since the winter of 1974-75. The record low was 3.4 per cent in 1973.

However, the fall in unemployment failed to lift wage growth. Growth in average weekly earnings fell to 2.4 per cent during the period, down from 2.5 per cent in the three months to the end of May. Analysts had expected the rate to remain steady.

This means that real wages have not grown at all in the past year. Inflation in June was also 2.4 per cent.

That’s just not what we expect to happen. As Marx pointed out wages don’t have to rise when there’s the reserve army of the unemployed. People need more workers, go get some of those starvelings. Your own workers demand more? Fire them and hire starvelings. But when there’s no such reserve army then the capitalists are in competition with each other for the labour they can exploit. Competition, as ever, pushes up the price of that scarce resource – wages rise when there’s little unemployment.

Except, of course. when they don’t. To which a possible answer is immigration.

There’re tens of millions out there across the EU – well, OK, Romania, Poland, Bulgaria perhaps – who could quite happily turn up here and work. Indeed people run employment agencies tempting such people to get on the plane and do so.

If this were true, if our reserve army is over there, then what would the effect be upon our figures? We’d see a low unemployment rate for people actually in the country (you don’t get benefits as an economic migrant you know, can’t hang around hoping work will turn up. It’s only after you have worked that you qualify) but also low wage growth as a result of the reserve army still existing.

This is one of those things which is definitively true, the question being well, how true is it? Enough to explain all those numbers? Potentially so but I’d not be able to prove it. We’ve a low recorded unemployment rate along with low wage growth because the unemployed looking for a job, hose who keep wage growth low, aren’t in the country as yet.

This explanation also neatly steps around the usual finding that immigrants don’t change pay rates. For they bring their own demands and desires with them, so while they increase labour supply they also increase labour demand. That’s not the same thing as the existence of the reserve army which just hasn’t arrived here yet.

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