The Squeeze On Real Wages -And What It Might Take To End It

Paul Gregg*, Stephen Machin** and Mariña Fernández-Salgado*

* Department of Social and Policy Sciences, University of Bath

** Department of Economics, University College London and Centre for Economic Performance, London School of Economics

Context

Three stylised facts about labour market performance during recessionary periods – all have broken down in UK since the financial crisis

1. Okun’s Law – deviations in output (from trend) associated with large movements in employment.

2. Compared to fluctuations in employment movements in real wages are small – though partly masked by composition shifts in who loses work – Bewley 1999, Elsby et al. 2013

3. Substantial nominal wage stickiness at zero - Falls in nominal wages extremely rare - Devereux and Hart 2005

Context

The UK has been experiencing unprecedented falls in real wages and living standards for working families.

It is important to carefully document this and to place it into its appropriate historical context.

It is also important to try to understand why the recent real wage falls have happened.

And to consider whether there will be a sustained real wage recovery.

Context

The UK has been experiencing :-

A deep and protracted recession in output

A shallow and short lived jobs fall

A substantial fall in productivity followed by an extended period of without productivity growth

Unprecedented falls in real wages and living standards among working age families (8-9%) – still continuing.

GDP and Employment 2008 - 14

In Jobs Terms a shallow recession • Source ONS

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Employment Levels from the start of the recession for the 1980, 1990 and 2008/09 recessions.

1980-81 recession (100 = 1979 Q4) 1990-91 recession (100 = 1990 Q2) 2008-09 recession (100 = 2008 Q1)

Number of quarters since start of the recession

Em

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yment

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Real Wage Trends 1Analysis of wage data from various sources over the twenty five year time period from 1988 to 2013 or 2014.

The start date is determined by the fact that 1988 is the first year where we have Consumer Price Inflation (CPI) data.

We look at data from:

i) New Earnings Survey/Annual Survey of Hours and Earnings;

ii) Labour Force Survey;

iii) ONS Average Weekly Earnings.

And consider various different measures of earnings (weekly, hourly, annual) across different groups of workers.

Real Wage Trends 2 – NES/ASHE

Real Wage Trends 4 – By Gender

Real Wage Trends 5 – By Age

Real Wage Trends 6 – By Age Cohort

Individual Wage Movements• 60% of workers saw real wage falls – 30%

saw real wages of over 10%

Focusing on basic pay (no bonuses etc)

• 20-25% workers employed in full-year saw nominal wage freezes (in each year)

• 15% nominal wage falls (in each year)• 30% (of those employed in all 3 years 2009-12)

had a nominal wage cut in at least one year – 20% had a nominal cut of more than 5%

Change in Individual Real Wages

Change in Individual Real Weekly Pay, ASHE 2005 to 2012

2009-2012 2005-2008

Individual Nominal Wage movements

2009-10 2010-11 2011-12

Explanations 1

Three factors are important drivers of these unprecedented real wage falls:

i) Unemployment has been exerting a larger downward pressure on wages than in previous recessions.

ii) Low wages and low investment (possible issues with capital access) driven extremely poor productivity record through the recession and recovery - restricting room for wage rises, though it has been good news for jobs.

iii) De-coupling - Wages of typical British workers are no longer keeping up with productivity gains made in the economy (the origin of this pre-dates the downturn).

Explanations 2

De-unionisation – partial explanation

Sample Split Based on Coverage of National Collective Agreements (1986-

2004) or National Collective Agreements or National Company Pay Structures (2005-2012)

1986-2004 2005-2012 Covered Uncovered Covered Uncovered ∆Log(Unemployment Rate[t]) 0.009 (0.015) 0.001 (0.018) 0.016 (0.017) -0.030 (0.020) Log(Unemployment Rate [t-1]) 0.024 (0.016) -0.021 (0.016) -0.006 (0.015) -0.075 (0.024) Region Dummies Yes Yes Yes Yes Year Dummies Yes Yes Yes Yes Regional Controls Yes Yes Yes Yes R-Squared 0.973 0.984 0.991 0.994 Sample Size 209 209 88 88

Productivity and Compensation

Labour Productivity and Annual Compensation, 1988 to 2012

Explanations 3

Explanations 4

Thus Britain’s Productivity record has been desperately poor since 2008 and the gains from productivity have not been shared out equally.

There are two main dimensions to this:

i)The gap between average wages and total compensation per hour suggests that non-wage labour costs, mostly pensions, have taken a growing share of the productivity growth that has been achieved.

ii)The opening of the gap between mean and median wages is because of rising wage inequality. As top earners had faster wage growth that pulled the average (mean) wages up at a faster rate then the median wages (of the middle or typical worker).

Prospects for Future Real Wage Growth 1

What are the prospects for real wage growth to return?

i) Falling unemployment in a recovery will generate real wage gains (for a while). But unemployment has not risen by so much this time around.

ii) Productivity growth will generate real wage gains, but so far productivity has been very sluggish (no ‘springboard’ as in previous recessions).

iii) Productivity growth is necessary, but not sufficient. If productivity gains continue their (pre-recession) trend of not being shared out, then there is no reason why the median worker will gain.

Prospects for Future Real Wage Growth 2 – A Warning Sign?

Real Wage Growth at the 50th Percentile and 1.6% pa trend, Weekly Wages, UK, ASHE

Prospects for Future Real Wage Growth 3 – A Warning Sign?

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1988 1993 1998 2003 2008 2013Year

Median, UK Median, US

Growth in Median Real Full-Time Weekly Earnings (CPI)

Real Wage Growth at the 50th Percentile, Weekly Wages, UK and US 1988-2013

Conclusions 1

From 2008-14 real wages have fallen by around 8 percent (with different measures and sources showing falls in the range of 4 to 11 percent). This equates to a fall of around £2000 for the typical (median) British worker.

Real wages falls have been widespread and have occurred right across the wage distribution. Some groups have been particularly hard hit, most notably the young.

Conclusions 2

The real wage falls have come about for a number of reasons: 1. An increased sensitivity of real wages to unemployment (which probably reflects increased labour market flexibility); 2. Poor productivity performance;

3. A decoupling of median real wages from productivity growth - due to rising wage inequality and pension costs.

Real wage growth for the typical worker is now rising due largely to exceptionally low inflation (fall in commodity prices), but even so recovering the lost ground getting let alone that predicted by normal trends will require a considerable turnaround, and with the structural problems that have emerged (productivity and de-coupling) needing to be tackled.

Backup Slides

Real Wage Trends 3 – Different Data Sources

GDP/HOUR ACROSS COUNTRIES – US THE OUTLIER

Unemployment Rates

ILO Unemployment Rates, 1988-2013

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1988 1993 1998 2003 2008 2013Quarter

ILO Unemployment Rates

Price Inflation Measures

Alternative Price Inflation Measures, 1988-2013

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.4.6

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Pric

e In

dex

1988 1993 1998 2003 2008 2013Year

GDP Deflator CPI

Price Indices

OBR ForecastsOffice of Budget Responsibility Forecasts of Average Earnings Growth

Wages in 1990s Recession and Recovery

Wage Gap 2008-14

Q&A

If you have any questions please contact Paul on pg344@bath.ac.uk