Oxford Economics on the UK economy’s wage growth ‘conundrum’

No
one’s really sure what’s going on.

vhines200/Flickr
(CC)

• UK unemployment fell to a fresh record low this week,
  but wage growth is still failing to gain momentum.
• Andrew Goodwin, lead UK economist at Oxford Economics,
  calls this the “conundrum” at the heart of the British labour
  market.
• Sadly, there seems to be no end in sight to stagnant
  wage growth for British workers.

LONDON —
UK’s unemployment rate fell to just 4% this week — it’s
lowest level since comparable records began in the early 1970s —
and some commentators took it as a sign Britain’s economy is
performing solidly despite the uncertainty around Brexit.

The data, however, highlighted a conundrum that has been plaguing
the British economy for several years: if unemployment is so low,
why aren’t workers getting larger pay rises?

“The drop in unemployment was only one of an array of indicators
which suggested that the labour market is becoming increasingly
tight,” Andrew Goodwin, lead UK economist at Oxford Economics,
wrote on Friday.

A fresh low in the ratio of unemployed people to jobs available
is a key sign of this tightness, Goodwin said, as well as record
low in the number of people who have changed employment status in
the last three months.

That presents a dilemma to employers — how do they attract people
to fill vacant roles?

The two standard methods of doing so are to bring people who are
inactive into the labour force and to increase the hours of those
people already working for them. 

“The data shows some evidence of firms pursuing both options.
Flows from inactivity to employment have been much higher in
recent years, even allowing for the possibility that some of
these people may have been temporarily inactive because of
universal credit delays,” Goodwin wrote.

“Meanwhile the ONS measure of underemployment fell again in Q2,
reaching its lowest level since mid-2008,” he added.

Increasing the number of overall hours worked through these
avenues would generally need employers to offer significantly
higher wages, designed to tempt people to work more, or come out
of inactivity.

Traditional economic theory states that a tight labour market
with low unemployment should see wages increase for workers. The
logic here is simple: when there are fewer people out of work,
there are fewer candidates for jobs, meaning that those in work
and those entering the labour market are able to demand higher
wages.

In the UK, however, that is simply not happening.
Wage growth in the most recent period was just
2.7% excluding bonuses, while
the inflation rate in Britain is at 2.5%. As a result, real
wages are barely rising. Why this is happening remains something
of a mystery to economists.

“It is clear that we have not seen the sustained acceleration
that would usually be expected,” Goodwin wrote.

Several reasons have been advanced for this disconnect, the rise
of gig economy and the fall of the trade union in the UK among
them. The Bank of England has consistently maintained that it is
merely a blip that will ultimately correct itself.

Goodwin disagrees arguing that there are several compelling
reasons to suspect that wage growth won’t accelerate any time
soon.

Here’s the key extract:

“It is becoming increasingly difficult to envisage this [wage
growth rising as the Bank of England argues] happening, not just
because of recent experience but also because the structural
factors which have weighed on wage growth – namely low
productivity growth, increases in other labour costs caused by
factors such as pension auto-enrolment and, as our European
colleagues recently found, that rising activity among older
cohorts tends to depress pay growth – are not going away.”