Duncan’s Economic Blog

I agree with Nick…

Posted in Uncategorized by duncanseconomicblog on March 28, 2011

… Nick Pearce that is.

The IPPR director has a superb post up at the IPPR blog on real wages and profits since the start of the recovery.

In Germany and the United States, real wages have grown. But in the UK they have fallen. The favourable performance in Germany is largely explained by its strong employment levels, both during the recession and into recovery, compared to high levels of slack in the UK and United States. German policymakers subsidised their employers to keep people in work during the recession, while labour market reforms have improved service sector employment overall. German and US inflation has been lower than in the UK, which also helps to explain the disparity. But as important, perhaps, in explaining the gap between Germany and the UK/US is that the European Central Bank did not have to resort anything like the same levels of quantitative easing (QE) as the Bank of England and the Fed. As BCA points out, the bulk of the cash in QE ended up in profits, rather than wages.
With hindsight, should the UK therefore have eschewed fiscal stimulus, loose monetary policy and QE? No – that would simply have deepened the recession and increased unemployment still further. Nor, given the fragile state of the recovery, is there a strong case for jacking up interest rates now.

But there is a strong case for ensuring that the inevitable pain of deficit reduction is more fairly shared and that policymakers spend more time worrying about how to increase real wages in the future. That is one of the biggest intellectual challenges faced by progressives in British politics. (my emphasis).

Regular readers will know that I agree with all of this. The real wage squeeze is become something of a theme for this blog over the past six months, while Nick’s (and BCA’s) views on how QE worked are in line with my own.

The only change I’d make is to say that QE could have been made more effective if it had directly focussed on supporting investment (possibly by capitalising a National Investment Fund).

The extent of the real wage squeeze was vividly demonstrated by James Plunkett over at the Resolution Foundation blog last week.

But the really bad news for living standards yesterday didn’t come from the Chancellor; it came from the OBR. Its revised projections for wages and inflation confirm that the squeeze on living standards is about to get a whole lot worse. As the charts below show, the OBR’s revisions since their November 2010 projections are striking and almost uniformly negative. Wages are set to rise much more slowly than previously thought. Inflation is set to be much higher, all the way through to 2015.

These figures put things into stark perspective when you consider that a 1 percent decline in real wages hurts the average worker by around £250. This year, average wage-growth is now forecast to be 2.0 percent and RPI inflation 5.1 percent – in other words, inflation is set to outpace wages by more than 3 percent. As the below chart shows, that’s a much worse scenario for living standards than was envisaged in November.

Nick Pierce is right that a focus on real wages is vital for Progressives in the coming months.

When discussing the wage squeeze it is worth bearing in mind the link between this and Britain’s over major economic problem – the lack of investment. As Chris Dillow has pointed out:

In recent years – before the crisis as well as after – firms invested less than they made in profits. I – P was negative. This tended to depress wages, by creating unemployment.

Policies designed to increase investment, should have the knock on effect of increasing employment and hence wages. Our two major problems – low investment and stagnating wages – are more closlely related than many seem to think.

To re-plug an old post: there is an alternative.


5 Responses

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  1. Tim Worstall said, on March 28, 2011 at 2:30 pm

    But Duncan, you’ve just got done telling us that Germany’s success has been built on the past two decades of wage restraint: even the past decade of falling real wages.

    If that bit was true then aren’t we going to be ready for decent wage growth sometime around 2021?

    • duncanseconomicblog said, on March 28, 2011 at 2:35 pm

      Germany: And also (and this was sort of the point of the post) on active intervention, a large stimulus, etc….

      But anyway – Germany is an export-led economy. I’m looking for a model which isn’t export dependent. As you know.

  2. Dave Holden said, on March 28, 2011 at 5:52 pm

    BOE using QE to monetize government debt, inflation takes off. Coincidence? If wages follow so will interest rates. So how do we square this circle?

  3. Tanweer Ali said, on March 28, 2011 at 7:40 pm

    I agree wholeheartedly that QE could have been made more effective, and that a National Investment Fund would have been one good way to achieve that. That is something that we should continue to highlight. I would also add that QE could support a job guarantee scheme to ensure that the cyclical shortfalls in labour demand are met, and that people (especially the young) are not trapped in long-term unemployment. The amounts that would be involved are significantly less that the hundreds of billions that were ploughed into QE.

  4. john said, on March 29, 2011 at 10:18 am

    Of course, it is because of this that Osborne has to gamble on an export led recovery – domestic demand is being depressed in a vicious cycle with under-investment – and so the chancellor looks to Germany. However Germany’s export driven economy is underpinned by decades of substantial investment and restraint in profiteering, a consequence of which is more bouyant real wages.

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