Wednesday, 16 July 2008

UK real wages falling

In May real wages fell by almost 1 percent. In fact, wage growth has been stagnant for over a year.

This data exposes the foolishness of suggesting that wage restaint will reduce inflation. Over the last year, real wages have been declining but inflation is soaring.

A little clarity is needed here. Inflation is caused by excess monetary growth. Wage growth in excess of productivity causes unemployment. Wage restraint will limit to some extent employment loss. It will do nothing to reduce inflationary pressures.

Recent wage settlements were based on expectations of lower inflation. Now that inflation is picking up, the UK is drifting towards a wage-price spiral. In January, a new round of wage negotiations begin. Then, the Bank of England will have some tough choices: will it accomodate higher wage settlements with lax monetary policy, or will it finally wake up to the inflationary dangers and crack down on price expectations?

The signs so far are not good. The MPC have repeatedly capitulated when confronted with worsening inflation numbers.


Anonymous said...

I think the nuance is that workers are TRYING to get a wage price spiral. They'll fail.

Unless the money supply increases, a pound spent in one place is a pound not spent somewhere else. If workers negotiate higher pay, then either higher prices or unemployment follows. But if no new money is created those higher prices result in lower volumnes. The price rise will be noted and lots of handwringing will follow, but the total amounts transacted will not rise.


Alice Cook said...


There is timing issue. Most wage settlements were secured Jan-April. Since then, inflation has surged (May and June data were terrible). Hence, the fall in real wages.

Still, you might be right. We will know next spring.


Anonymous said...

Oh, I agree "real wages" as measured are going down. There's the point that it only matters if you are tied to long term debt. If not, real wages are up because the assets they buy are down.


Anonymous said...

I assume these figures refer to a mean average, rather than a median. I note that some ONS documents are working with the median now to avoid the influence of 'extremes'; the reason for that is a little opaque, but it does not sound helpful...

B. in C.

powerman said...

Workers can secure higher real wages without increasing unemployment without an increase in money supply by being more productive (this doesn't necessarily mean 'work harder peons' it could mean 'the stuff you build or sell is now more valuable to global markets because of technical/creative innovation').

Nothing Labour has done in the last ten years has made much improvement here, and there's a lot of evidence to suggest it's setting back advances in the supply side of our economy.

Illusionary nominal increases in wealth have come about through a debt based bubble which is now collapsing.

Hence, however you juggle the various metrics, this situation, allowed to continue as long as it was, was bound to make us poorer in real terms.

You cannot legislate real wealth into existence, or spout it from a printing press. It only comes into existence through innovation and effort guided in the service of meeting the economic demands of others. We haven't been busy printing new credit, creating jobs of questionable if not downright obvious uselessness (i.e. burdens on wealth creation) and gambling on the value of each other's homes instead.

It was never going to work.

Woody Finch said...

Mmm, looks familiar...

If monetary growth is the cause of inflation then we are going to have deflation because the money supply is contracting.

One the other hand if its caused by demand outstripping supply then we ought to see this in the growth of wages. But we don't. And rising unemployment will reduce inflationary pressures by reducing consumption.

Either way you look at it price inflation is not about to take off.

Anonymous said...

The New Labour theory of 'education, education, education' was a good one - more and better trained engineers and scientists would have helped improve design and production engineering, leading to greater efficiency and competitiveness...

But the plethora of weakish A-levels (witness the popularity of psychology and sociology) and the large number of soft degrees (Barbasian studies, social psychology, and endless numbers of social studies graduates, who have no hard skills at all) means all that has happened is hidden unemployment and then tranches of weak graduates, many of whom have only the public sector to look to for something which used their supposed 'skills'.

So yes, a bubble, with much of the employment growth based on low quality services offered for unaffordable credit, and a burgeoning, burdensome public sector.

B. in C.

Anonymous said...

"You cannot legislate real wealth into existence, or spout it from a printing press"

Oh hell, powerman, does this mean I have to stop being socialist?


peterthepainter said...

"I've been going along for a long time now, hoping help will come from above...."

Well... we are all wet with excitement here in the loft. The unfinished magnum opus is collecting dust on the easel as we sit glued to the screens. The stock market is spiraling down ...
"its a f***ing waterfall". "look out below". "May Day, May Day" SOS.

The Wizard of Oz has been found out and ... BREAKING NEWS ...Financial rocket scientists have diplomas instead of brains... Medals instead of courage... and worst of all No hearts! - just tickers!

"What does it all mean Peter?" asks Opkins (the mouse)
"looks like it's back to the 70's.
- Unions are bringing their members out on strike - their pay is failing to keep up with inflation.
- Oil is rocketing in price.
- House prices are going through the roof.
- There's a banking crisis.
- Pay rises are running into double digits.
- Interest rates reach 15%. "

"Yo! - painter dude, slow down man. House prices aint risin, they fallin man!" - (its Spider) he's been on the web checkin out Nouriel Roubini.

Seems like this time it's different!
Pay aint rising for the workin stiffs, real estate sucks, interest rates is low.
It aint inflation man! - it's deflation, comin to get ya from Japan. seems like they've had it for yonks and yonks.

They had a property boom/bust and then Zombie banks. It was all covered up...swep under the carpet instead of bein busted out and started over. Looks like thats wot they tryin here now.

"Spider yo full o shit man. yo aint nuthin but a poxy spider anyway.
And that web o yorn is just bollocks dude."

Wait a minute guys (it's the mouse!) This swot in America (Rogof) has got a interestin take on this...

THE global economy is a runaway train that is slowing, but not quickly enough. That is what the extraordinary run-up in prices for oil, metals, and food is screaming at us.

The spectacular and historic global economic boom of the past six years is
about to hit a wall. Unfortunately, no one, certainly not in Asia or the US, seems willing to bite the bullet and help engineer the necessary co-ordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.

Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policy makers in most regions have to start pressing hard on the brakes, not the accelerator.

Don’t look to the US for leadership in a presidential election year. On the contrary, the US government has been handing out tax-rebate cheques so that Americans will shop until they drop .....

Get the rest @

Shit man! I don't geddit! is they is or is they aint no deflation comin?

Is they is or is they aint no inflation comin?
Seems like up here in the loft us chickins got to dig a little deeper.

dearieme said...

Point of detail: did you use RPI or CPI?

Anonymous said...

It would be interesting to know how the graph was created. The vertical axis gives very few clues as to what it actually is.

Anonymous said...

A "wage/price spiral" is a throwback that should have been left in the seventies. The UK economy has changed beyond measure.

You could double the wages of everyone in the country, and *both* of the British-made things you'll buy this year will rise in price because of it. A little. Because even British-made stuff is made with imported raw materials.

What we currently have is a "real earnings" price crisis. Basically, the rest of the world are more productive than we are, and so earn more than us (as a country). This is causing our currency to sink, and theirs to rise. Things that are imported, become cheaper in rising currencies, and more expensive in falling ones.

We could all be unemployed overnight, and Canadian wheat will get no cheaper. In fact it will get more expensive - for obvious reasons.

electro-kevin said...

Striking Unison workers are being threatened with redundancy, "There will need to be job cuts if we raise wages."

So what ? So bloody what ?

A very good life can be had on the dole in chav UK.

Work is such a con in Brown's Britain.

Alice Cook said...


Good question - I used the RPI. Having said that, the CPI has been "catching up" with the RPI.


dearieme said...

Thanks, A. I had been thinking of opening a regular savings account at the Halifax that pays 10% p.a. Now I'm hesitating: is 10% enough? Is HBOS in trouble? Should I buy gold? How do you buy gold? Will the government steal my entirely hypothetical gold? Would I be wiser to stock up on NZ Sauvignon Blanc? Or food for the cats? I blame that Tony Blair.

Mark Wadsworth said...

Real wages have been falling for at least a year.