Despite record rates of unemployment, wage growth has slowed and underemployment remains high – workers are ultimately bearing the cost of labour market power imbalances and underinvestment.
This morning (14 August 2018) the ONS released their latest data on UK labour markets. Unemployment is down, as expected, from 4.2% in Jan-Mar 2018 to 4% in Apr-Jun 2018.
Initially this might seem like good news, but low unemployment hasn’t translated into wage growth. Average weekly earnings in real terms still haven’t recovered to their pre-crisis levels, making this the worst period of wage stagnation in the past 200 years. Before the crisis in 2008, workers earned an average weekly wage of over £500. Now, they earn on average £489 per week.
The more recent deceleration in wage growth is particularly worrying. Nominal wage growth has slowed (see Figure 8 below), and so average weekly earnings have fallen slightly since March in real terms. In the past, low unemployment has led to growth in wages. The idea is that when there is little ‘slack’ in the labour market, firms have to compete more for workers and wages rise as a result.
Bank of England’s misjudgement
The Bank of England’s Monetary Policy Committee (MPC) used the supposed ‘tightness’ of labour markets to justify their recent hike in interest rates; at any moment now, wage inflation is supposed to rise thanks to the UK’s low levels of unemployment. A rise in interest rates is necessary, the MPC argues, to constrain any resulting inflation.
Unfortunately for the Bank, they’ve made many a similar prediction in the past and have been proven wrong. Today’s figures contradict the Bank’s predictions in this year’s February Inflation Report that wage growth would pick up to 3%. Indeed, former MPC member David Blanchflower notes that the Bank have wrongly forecast that wage growth was going to return to its pre-recession levels the last 18 forecasts in a row. (This calls into question the Bank’s decision to raise interest rates this month: see PEF Council member Ann Pettifor’s critique here.)
The issue is that “the unemployment rate no longer predicts… wage pressure. It seems to severely overestimate it.” In his research with David Bell, Blanchflower proposes underemployment as an alternative measure of slack in labour markets. Someone is underemployed if they are currently in employment but would like to work more hours at their set wage.
On this measure, the UK is still clearly quite far away from ‘full employment’. Between 2002 and 2008, the average number of extra hours demanded by workers was 25.6 million hours per week. In 2017, by contrast, the average was 37.7m. (N.B. the ONS measure underemployment in the number of people who want more hours, and not in the total number of extra hours demanded. This gives a different picture, and arguably underestimates the extent of underemployment as it fails to take into account changes in intensity.)
But one might also note that the number of people who want to work fewer hours at their current wage rate has also increased. We can add the two figures in the graph above together to find a total measure of workers’ dissatisfaction with their hours. This ‘dissatisfaction index’ increased from 57m hours per week in 2002Q1 – 2008Q1 to 74m per week between 2014Q1 and 2017Q3.
Monopsony – when employers dictate wages
We might expect this increase in dissatisfaction to lead to more people looking for other jobs, which in turn would encourage competition for workers and a much needed rise in wages. But this isn’t happening, and Blanchflower and Bell argue that this because employers are monopsonistic.
Monopsony – a term coined by the Keynesian economist Joan Robinson – describes a situation in which there is a single buyer of a good, and as a result this buyer can exercise complete control over the sellers of the good; it is the counterpart to the concept of monopoly. If employers – the buyers of labour – are monopsonistic, this means they can exercise a monopsony-like power over the sellers of labour: workers.
Recent research from the US suggests an increase in the monopsony power of employers over recent years, as summarised in a fantastic Vox article here. The reasons behind this imbalance of power are plenty. Deunionisation is one factor, as is the fact that employees feel a greater sense of economic insecurity, making them less likely to quit their job for a ‘better match’. The harsh reforms to the UK’s welfare system have disempowered workers in a similar way. Ultimately, increasing worker power is needed to boost wage growth.
Productivity and investment
We also need to look at labour productivity. The Bank of England is pessimistic about the UK’s productivity growth, and thus ultimately about the potential of the UK economy. In Governor Mark Carney’s language, the UK has to adjust to a new ‘speed limit’ and accept slower wage and output growth.
However, we needn’t accept this as a fundamental and insurmountable limit on our economic prospects. Rather, we ought to examine whether our current malaise is a function of current policy – policy that can be changed. PEF Council member Simon Wren-Lewis argues that there currently exists an ‘innovation gap’ in the UK economy, and that higher levels of investment could help us break Carney’s ‘speed limit’. The only roadblock is the present government’s obsession with the ‘deficit’ and unwillingness to use the power of the state to raise finance and expand investment, which will raise wages and productivity.
Photo credit from previous page: Flickr / Rob Albright.
