Why do wages continue to stagnate in the UK as unemployment falls?

October 5, 2014 dnmufcLeave a comment

Geraint Johnes
The ONS released figures this week showing expanding employment while wages continue to stagnate. What is behind this puzzling picture? Geraint Johnes writes that the slack that has remained in the labour market, in the form of the underemployed and self-employed, offers one explanation for sluggish wage performance.

The latest labour market statistics show numbers in employment rising by 150,000 during the second quarter of this year while wages, rising at an annual rate of just 0.4 per cent, well below the rate of increase in prices, have continued to stagnate. The employment statistics paint a healthy picture while the data on earnings suggest all is not well. That might look like a paradox. It isn’t – it’s the fall in real wages that has allowed employers to hire more workers. But nonetheless there are aspects of the labour market that have puzzled economists for some time.

On the basis of past experience, one might have expected wage pressures to be growing at this stage in a recovery. Unemployment has fallen sharply over the last year – having been stubbornly static for a long time, it fell from 7.8 per cent in the second quarter of last year to 6.4 per cent in the space of just twelve months. In normal times, that would indicate a significant tightening of the labour market, and would lead to employers playing leapfrog with wages in order to attract a limited supply of workers.

But these haven’t been normal times. They may become more normal soon, but they aren’t normal yet. There has remained considerable slack in the economy. Data that we have published at Lancaster University’s Work Foundation suggest that the recession led to many people in work working fewer hours than they wanted to – that is, it led to a marked increase in underemployment. While these people are employed, they form an army of workers who could readily switch from part-time to full-time work as the demand for labour increases. Indeed, in the latest statistics, we are seeing that begin to happen. Over the second quarter of this year, employment rose by 0.5 per cent, but the number of hours worked increased by twice as much. And over the same period, the number of employees in part-time employment actually declined by some 19,000, while the number in full-time employment grew rapidly.

Another form that labour market slack has taken in recent years, rather unusually, is self-employment. Numbers of workers in this category have increased rapidly, and now over 15 per cent of all those in work in the UK are self-employed. Little is known about these new self-employed workers. Many are likely to have chosen self-employment whatever the weather, but it seems as though some, at least, have chosen it in the absence of other, more attractive, alternatives. Around a quarter of the new generation of self-employed workers would prefer not to be self-employed – a far higher proportion than has been observed in the past. Moreover, there is evidence to suggest that the real earnings of the typical self-employed worker have fallen faster than those of employees. But the latest data suggest that the increase in self-employment is now starting to slow – another sign that the labour market is starting to return to normal.

The slack that has remained in the labour market offers one explanation for sluggish wage performance. Another important factor has been the failure of labour productivity to pick up in the aftermath of recession. There is a plethora of reasons underpinning this so-called productivity puzzle, and we have explored these at length at a recent event at the Work Foundation.There are, however, encouraging signs. Business investment, which had been stagnant since the onset of recession, has made a spectacular recovery in the last two quarters for which data are available; in the first quarter of this year, it stood about 10 per cent higher than a year earlier. That is a quite remarkable recovery. Such investment in capital should help increase labour productivity. Once growth in labour productivity is resumed, real wages will start to rise. Just how quickly that comes about remains to be seen.

About the Author

Geraint JohnesGeraint Johnes is Director of The Work Foundation and Professor of Economics at Lancaster University.

Why do wages continue to stagnate in the UK as unemployment falls?

Cameron and Miliband are both right on the constitution – But for the wrong reasons

October 5, 2014 dnmufcLeave a comment

Posted: 27 Sep 2014 12:00 AM PDT
Stephen Barber

As the constitutional fallout from the Scottish Independence Referendum campaign continues, Stephen Barber looks at how the two main party leaders down south are addressing ‘the English Question’. Cameron and Miliband may be acting from short term partisan motivations, but this doesn’t mean they’re wrong. While any plausible constitutional settlement is complex, it must be based on devolution to ‘cities and counties’, with any proposed ‘English Parliament’ failing to offer real devolution of powers closer to the people.

Westminster leaders need to put aside short-term party advantage in a similar way that Scottish politicans did during the referendum campaign. If they did, not only might they forge a constitutional settlement that will serve England well for a generation, they might also find they can enjoy the sort of ‘apathy free’ politics that was a highlight of the independence referendum. Whether they choose to engage seriously or not, it is clear that there needs to be real devolved power to England and if new institutional layers are to be discounted, the settlement needs to be one of ‘Cities and Counties’.

What a shame it is that the Westminster party leaders have reverted to type by putting narrow electoral advantage ahead of England and the United Kingdom’s constitutional future. The contrast in England to the sort of leadership Alex Salmond and Alistair Darling showed over Scotland is stark. Westminster should take note because it is this sort of politicking which is responsible for the cynicism of voters and poor turnout at elections: something entirely absent from Scotland where 86% turned out to vote in the referendum.

David Cameron favours ‘English votes for English matters’. Ed Miliband wants to delay changes for years and until a Constitutional Convention can report. It is clear why: Labour would likely suffer from the emasculation of Scottish MPs and whatever the chaos, the Conservatives (who only secured a single Scottish MP at the last election) would more often command Commons majorities on ‘English’ votes; irrespective of who formed the government. If anyone wanted a blueprint of how not to reform a constitution, this could well be it.

Credit: UK Parliament, CC BY NC 2.0But that doesn’t mean that everything the Westminster elite have said is wrong. Cameron is surely right that new powers for Holyrood must be balanced with a fair English Settlement. And Miliband is surely right that the position we find ourselves in demands more thought than enshrining two classes of MPs. They are right, but for the wrong reasons.

A better reason would be to forge a workable and legitimate constitutional settlement in England. And here Scotland has done the service of defining powers which need to be devolved from Whitehall not only to Holyrood in the wake of the independence campaign but also to England. As such, the English need to have a direct say over education, health, transport, welfare and the environment. Not only that, this power has to be balanced by the responsibility to raise taxation used to pay for those services. This ensures the new settlement isn’t simply about Westminster throwing more money at poorer areas of the UK but is about genuinely devolving both power and accountabilities.

An English Parliament has its attractions as a replication of the sort of devolution seen in Scotland, Wales and Northern Ireland. But as home to 53 million of the 64 million population of the United Kingdom, it doesn’t devolve power much of a step closer to the people. Moreover Miliband has already ruled out new government and new layers of politicians. Of course that could be solved by the John Redwood plan of English MPs doing two jobs; an English Parliament drawn from within the Westminster Parliament and two classes of MP. But that is so very messy with potentially rival governments created from a single chamber that it needs to be dismissed out of hand.

Consequently any new settlement in England needs to be forged from existing structures outside of Westminster. My proposal would be a combination of cities and counties plus a long overdue reform of the House of Lords.

This would mean empowering the great and small metropolitan areas of England perhaps comparable to what has happened in London. It would create figures accountable to the electorate and able to make policy in areas which matter to them. Such a move could both politically invigorate those parts of the country Westminster cannot reach and boost local economies left behind by the growth of the Capital. For those who do not live in or around the cities, the settlement should be accompanied by a new enabling of the existing twenty six County Councils of England and other council areas. The prize would be a new era for local government as real power is devolved from the centre.

One other overdue reform needs to be included in this settlement: the House of Lords about which I have recently written. The upper house is an indefensible, antiquated constitutional muddle. It remains appointed by the Prime Minister, has grown too big and is full of party donors and factotums. With any new constitutional settlement, reform of the Lords should not be ignored, because it presents an opportunity for some democratic legitimacy in the upper chamber as it is slimmed down and given a role in the new constitutional arrangements of the whole of the United Kingdom.

A new positive English settlement embracing the Cities and Counties and a reformed Lords is possible, but it needs leadership from the top of our politics. Putting aside narrow party advantage might be difficult, but if it happens, not only will Britain have the constitutional arrangements it deserves, leaders might also find some of that ‘apathy free’ politics rubs off on them.

Cameron and Miliband are both right on the constitution – But for the wrong reasons

In work, but poor: barriers to sustainable growth and the need for a living wage

July 2, 2014July 2, 2014 dnmufcLeave a comment

While the UK has returned to growth, many workers continue to suffer economic hardship as real incomes have yet to recover. This means that, just as in the past, the UK economy is relying on an unsustainable growth model where workers spending more than they earn to support the economy. Setting the UK on a sustainable path and reversing the growth of in-work poverty requires policies to raise real wages, writes David Spencer.

Rejoice. The UK economy is back to where it was before the crisis. The depression is over and sunny economic uplands lie in the future. Feel good, damn it, the economy is growing again. But there is a reason why the positive growth statistics are treated sceptically. That reason relates to the fact that real incomes have fallen in the UK. Despite the restoration of growth, workers in the UK have continued to suffer cuts in their real pay. One of the arguments for growth is that it raises real incomes – in the UK at least, the reverse is proving to be true. The economy has achieved growth, while many millions of workers have suffered increasing economic hardship with little prospect of improvement.

From a growth perspective, the grim facts of the recovery provide cause for concern. The UK economy has only been able to grow by workers spending beyond their means. Workers have run down savings and borrowed more to increase their consumption and this has driven growth. But workers can only go on behaving like this for so long. Without a rise in real pay, the spending must come to an end and with it the recovery.

There is no sign yet of net exports recovering to support consumption and any rises in business investment will need to continually confound expectations to offset the further fiscal tightening to come. Again as in the past the UK economy is relying on workers spending more than they earn to support the economy. This is a growth model that cannot be sustained and will ultimately end in disaster.

Even the most ardent backers of the government’s current policy stance must harbour some concerns about the prospects for growth in the economy. Lower real wages may help firms keep a lid on their costs but from the perspective of raising demand on a sustainable basis they place restrictions on the ability of firms to grow output. Demand side barriers will bite in the end and terminate the recovery.

But beyond growth there are deeper issues here relating to work and its relation to poverty. Work has long been heralded as the best form of welfare and the route to economic success. This view – summed up in the mantra ‘work always pays’ – has been exposed as a miserable lie. Now it seems that work for many is no escape from poverty. Working hard for a living often means struggling to keep one’s head above water.

Evidence shows that in-work poverty is on the rise in the UK. Among working age adults in low income households, the number in working families has been growing and is now greater than the number in workless families. It used to be that worklessness was the prime determinant of poverty. Now it is more likely to be low waged work.

How did we get into this situation? The underlying causes are complex and multifaceted. They include the decline of unions, the deregulation of the labour market, an inadequate training system and the rise of the service sector at the expense of manufacturing. The UK has lacked the necessary modernising forces that would have otherwise led it towards a high wage economy. Instead, it has evolved an institutional structure that has favoured and entrenched low wages.

What can be done? In the short term, policies to raise real wages in the UK would help not only to sustain the recovery if that is the concern but also to address the problem of in-work poverty. The national minimum wage, although a welcome development, has not managed to address the problem of low pay and this is where calls for a living wage come in. Raising the minimum wage to the level of the living wage would be a bold but economically sensible step to take. Critics may say that this will lead to unemployment. Yet evidence shows that minimum wage hikes have not had adverse employment effects. Indeed, their effect has been to increase productivity via higher levels of worker morale and to reduce welfare spending.

Longer-term, the UK needs to break its reliance on a low wage growth model. For this, it needs a new industrial strategy that focuses on building things rather than on making money. It needs to invest in new industries via the help of the State. Challenging vested interests particularly in the world of finance and creating a model of sustainable prosperity based not on endless growth but on the promotion of human flourishing remain the ultimate goals. Whether these goals are achievable under current conditions remains a moot point. Yet they are goals that we need to keep in our sights and agitate for.

In the end, the UK cannot afford to pay workers less. Driving real wages down is a recipe for economic stagnation and human misery. For all our sakes, we should seek a rise in real wages.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Featured image credit:

About the Author

David Spencer is Professor of Economics and Political Economy at the Leeds University Business School.

Ed Miliband and the bacon sandwich: Exploring the relationship between the serious and the frivolous

June 5, 2014June 5, 2014 dnmufcLeave a comment

With a less than convincing showing for Labour in the local and European elections, criticisms of Ed Miliband’s leadership grew louder. But there is a paradox at play: while his critics emphasise the need for serious policy and direction, the criticisms of Miliband are only ever trivial; about his looks or how he eats a bacon sandwich. John Gaffney explores the complex relationship between the serious and the frivolous, between policy and personality.

In the aftermath of local and European elections, Labour party introspection began immediately: in particular, criticism of the party’s direction, its attitude to UKIP in both sets of elections, the coherence of its message, its policies and their presentation, and, last and most, criticism of Ed Miliband. From the moment he was elected leader in 2010, there has been a lot of this at regular intervals, usually by individuals rather than by organised groups. I shall come back to the significance of this below.

The criticism tends to coalesce around Ed himself, not simply as a leader making the wrong decisions, but a person doing the wrong things. The first, after polling on Thursday 22 May, was from John Mann MP (in The Guardian on 23 May). He was followed by former minister, Graham Stringer. Then the ‘Commentariat’ (e.g. Andrew Rawnsley in The Guardian on 24 May). Part of the latter’s role is to let the public know that such individual public criticisms reflect major dissension by a growing range of critics, many of them inside the shadow cabinet. And the criticisms not only coalesce around criticisms of Miliband’s leadership, but around his personality: he is not bold enough, he misjudges, he lacks ‘appeal’, he doesn’t take the fight to the enemy, he’s (personally) afraid of taking on Nigel Farage. The criticism goes round and round. He, or the team around him, fail to grasp, are cut off, and should be bolder, and so on. Others’ exemplary personal comportment is cited in contrast; for example, in Labour Uncut on 19 May: Well done Yvette Cooper. Well done David Lammy. Shame on you Ed Miliband.

There is a paradox here of great interest. His critics place great emphasis on the serious – policy, direction, message – yet the criticism of the leadership when given voice is ever only trivial – what he said, how he looked. That’s the paradox – and a clue to what is actually happening. To put it another way, you can’t have, say, Unite the Union have a debate about how to eat a sandwich. And yet how you do eat one may be important, and how you might react to being criticised for the way you do even more so.

There seem to be two worlds here: the ‘real’ issues and the trivia. Traditionally, and it remains one of the party activists’ strongest convictions, the Labour party is only interested in the former – people’s lives, national policies, taking power – but it keeps being drawn to the latter. What if the two were related in a way as yet untheorised by the left, as yet, perhaps, ‘unimaginable’ for the left?

At the Hay Festival on Sunday 25 May, Alan Johnson – there for an award for his book – found himself defending Miliband. It is interesting that – although urbane and witty in his responses – they were the classic ones: it was not about how to eat a sandwich with cameras trained on you or about the price of your grocery bill, but about the real issues. But Johnson too evokes the paradox, for his riposte and the use of humour were indeed themselves about image, experience and personality – his own – and establishing a relationship with your audience. The ‘classic’ defence was also echoed by Peter Hain in The Observer and Harriet Harman on the BBC TV on Sunday 25 May. The late Tony Benn started this dichotomy with his ‘this isn’t about personalities, it’s about politics’. Well it is about personalities (Benn knew that more than anyone), and about the complex and consequential relationship between the serious and the frivolous.

Let us try and make the connection, for it is a dynamic and highly politically consequential connection. We can make four points; they are all related:

The first concerns the nature of the criticism. Within the party it goes along certain lines: the party/leadership is not bold enough, and – usually – should be more radical; or that a wider (i.e. Third Way) coalition across the classes is the only way forward (cf. Atul Hatwal in Labour Uncut 23 May); or, finally, that it is indeed about personality, and the current leadership has the right one. So one goes around the circle again, from say Mann to Johnson to Hain and back again. By the end of the Bank Holiday weekend, criticism of the critics and further advice were offered by more figures such as John Woodcock, Alan Milburn, and even Tony Blair. A first point we can note is that no one actually knows which of these poles is correct. Many projections are made, in particular about Miliband and No 10, yet the same confusion reigns. Will he be/not be prime minister, and will he be/not be because of what he is doing or because of who he is? If the two are linked, we need to know how.

The second point is that no one knows the answer because politics is not predictive. Are quiet advances being made with the electorate? How will we know before the next election? How can we measure public allegiance to a policy and its relationship to leadership? Their actual success cannot be known until it happens. For example, when did we become sure that ‘the right to buy’ was a successful policy and that Margaret Thatcher’s personality was part of it and its success? It is always retrospective. We cannot measure anything very much, and the relationship between ‘real issues’ and ‘leadership image’ is a case in point. Politics is only ever about what might be true. But what we should start with is to see that they are in a relationship. So the question is: how and to what effect?

Third, of course it is about issues and policies etc., and of course it is about leadership performance and image. They are inextricably related. Policy grows out of a narrative as does leadership, and if these three are not aligned, then a party will not succeed. Let us, rather than develop this theoretically here, look at how this applies to the UK Labour party today.

So our fourth point is that Miliband and his team and the party generally have done most of the things that are utterly necessary for the party to win in 2015. First, he has, in great part through a particular leadership style, kept the party together. No delegates have come away from a Labour Party Conference, not since Manchester 2012 at least, saying anything other than what a great conference it was and what a great leadership speech. This view extends to all of Miliband’s meetings around the country, and even to many of his exchanges with the public. In all these scenarios (off camera) he is both popular and confident, with his own style and a pretty much ‘real’ personality to match.

Second, he has overseen the realignment of the party’s narrative from 2010 onwards. It culminated in 2012 in One Nation, where he became its ‘author’ (although there had been earlier authors and voices – Glasman, Rutherford, Cruddas, and others), and this narrative has been developed since. He has a significant One Nation cohort of support around him, and a ‘truce’ with other big hitters who never mention One Nation. Is it enough of a narrative? Almost certainly not. Other views, other ways of seeing the party and its mission have also developed and are being folded (back) in – a social democratic approach drawing on the German model, Arnie Graf’s community approach, an IPPR-related ‘joined-up’ society (and added theoretical depth), even the Third Way has made its way back (it has to, its representatives win elections). He/the party have developed/are developing an increasing number of policies which are now being shot at the public and the policy ‘targets’ with increasing firepower and accuracy, inter alia, energy, banks, rents, railways, zero-hour contracts. Their often ‘emotional’ quality means the narrative of policy elaboration – like One Nation – can be framed in a populist way. And if you are up against Nigel Farage, using populist rhetoric is not a bad idea. One could even argue that the policies are now coming too fast and need gathering together as a pre-manifesto ‘package’/vision for Britain (and endless repetition by the party).

We can see, therefore, a relatively happy party (this is why so many of the criticisms are from unhappy individuals) and a coherent team (particularly the November 2013 additions to the shadow cabinet). The Labour party is one that tries to keep narrative, leadership, the party aligned.

What about the public persona then – the ‘appeal’ of Miliband – and his relationship to the public? Well, when it is mediated (TV or radio, rather than face to face) the relationship becomes more delicate. Team Miliband should be less concerned with the written media and more with the visual. But if Farage is the leadership model of 2014, what does he demonstrate? That there are creative spaces of possibility between the necessarily aligned narrative, party, and leadership, and they can be filled creatively – as Farage does – with leadership performance and one’s ‘personal personality’, which may or may not be real but seems to be. In Farage’s case it would doubtless mean, and in Miliband’s should, that if you are being overwhelmed by a bacon sandwich you reveal your true self by doing what we all do – laugh. And while we are on such trivia, most people don’t know the accuracy of their grocery bills – and Miliband was actually pretty close. What the Labour Party wants is a country where it isn’t that we feel guilty if we don’t know our grocery bill, but a country where everyone can forget how much theirs was.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. Homepage image credit: net_efekt

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