Payback

by Ken Gibb

Policy Scotland has been co-hosting a two day workshop with the University’s Behaviour, Structures and Interventions Research Network. The event was entitled: ‘Marginalisation, Stigma and Choice? We heard papers on poverty and aspiration failures, international studies of early years interventions, human trafficking, a panel on What Works Scotland, among others. It was diverse, multidisciplinary and provocative.

There is much one could talk about after listening to these papers. I am going to focus on just one paper, that of Stephen Machin (UCL/LSE) who did an excellent keynote presentation on ‘Changes in Labour Market Inequality’. Effectively, this was an overview of recent trends in the GB labour market, real wages and inequality. I was taking handwritten notes (an increasingly lost art) in the session so excuse my lack of precision with some of the points discussed below. The main stylised facts that emerged, for me, were as follows.

First, for median real wages, the cumulative fall since 2008 has been 10%.

Second, this fall comes after a long period of annualised growth in real median wages of 2%. The downturn in real wages came well before the financial crisis of 2008. 

Third, the most recent evidence suggests that median real wages may now finally be rising but Machin cautions this may be more the effect of very low inflation that actual change in the labour market.

Fourth, if we break down the 10% fall we find that the median real wage for men fell by 12%, for women by 7% but for the 18-24 age group the reduction was fully 16%. Interestingly, the fall for those in the lowest decile was 10% almost the same (11%) for the top decile.

Fifth, Machin noted that many have argued that the fall in productivity is even worse. In fact, as he pointed out, the productivity drop is measured against the long term trend since 2008 and adds up to a 16% reduction. If you look at median real wages relative to the aforementioned annualised 2% growth trend, the overall drop relative to trend is more like 20%.

Sixth, looking across the OECD since 2008, the UK’s wage performance in real terms was 23rd out of 26 – i.e. the fourth worst.

Seventh, the pay inequality ratio (comparing the 90:10 percentiles for full time weekly earnings) grew in the long term from 2.7 in 1980 to 3.7 in 2012. Comparable respective figures were 3.6 and 5.3 in the USA, 2.0 growing to 2.4 in Sweden but going in the opposite direction (and outlier), France went from 3.4 to 3.2.

Eighth, these median wage figures refer to individuals. IFS figures for the same period (since 2008) suggested that household income fell by 4.5% over the same period but this could be disaggregated to -8% for working age households and strikingly a 4% increase for pensioner households.

Ninth, there has been a significant divergence between total compensation trends racing ahead of average wages at the same time that average wages have moved well ahead of median real wages.

What is going on? First it is increasingly clear that unemployment is no longer a good indicator of labour slack. In the recent period we have seen the rise of low income self-employment, a sharp increase in underemployment (.e. working less hours than desired) and increasing employment of older, hitherto retired, people.

Second, jobs are of course being created but productivity is not rising. Machin thinks real wages are being squeezed because of weakened trade union power, the impact of the unemployment elasticity on real wages and, albeit without a lot of evidence, the sense that benefit conditionality is driving the unemployed to take on low wage employment that help to bid down wages. Machin worries that this may be a trend and that the new normal will be flat median real wages and secular stagnation, rather than some cyclical adjustment that will pass.

All of this takes place in a context where further working age benefit cuts are being planned. Most of the emphasis when criticising these policies has stressed social justice, poverty and inequality arguments. Machin adds to this litany the idea that it may also contribute to low or flat real wage growth – a macroeconomic low growth concern.  

Scary stuff – even if these median wage patterns are not long terms trends it will take a long time to get back to trend levels of real wages. For example, looking at those in the under 25 age group their real wages are now back at 1997 levels. A further slightly depressing thought was that the productivity problem, amongst other things, will undoubtedly make it harder for employers to act on demands for introducing the living wage.

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