Tag: poverty

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

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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?

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

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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.

Five minutes with Thomas Piketty: “We don’t need 19th century-style inequality to generate growth in the 21st century”

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In an interview with EUROPP’s editor Stuart Brown and British Politics and Policy at LSE’s editor Joel Suss, Thomas Piketty discusses the rise in income and wealth inequality outlined in his book, Capital in the Twenty-First Century, and what policies should be adopted to prevent us returning to the kind of extreme levels of inequality experienced in Europe prior to the First World War. Professor Piketty recently gave a lecture at the LSE, the video of which can be seen online here.

Your research shows that inequality is rising and that without government action this trend is likely to continue. However, are we correct to assume that inequality is a fundamentally negative development in terms of its consequences on society?

There is no problem with inequality per se. In actual fact, up to a point inequality is fine and perhaps even useful with respect to innovation and growth. The problem is when inequality becomes so extreme that it no longer becomes useful for growth. When inequality reaches a certain point it often leads to the perpetuation of inequality over time across generations, as well as to a lack of mobility within society. Moreover, extreme inequality can be problematic for democratic institutions because it has the potential to lead to extremely unequal access to political power and the ability for citizens to make their voice heard.

There is no mathematical formula that tells you the point at which inequality becomes excessive. All we have is historical experience, and all I have tried to do through my research is to put together a large body of historical experience from over twenty countries across two centuries. We can only take imperfect lessons from this work, but it’s the best that we have. One lesson, for instance, is that the kind of extreme concentration of wealth that we experienced in most European countries up until World War One was excessive in the sense that it was not useful for growth, and probably even reduced growth and mobility overall.

This situation was destroyed by World War One, the Great Depression, and World War Two, as well as by the welfare state and progressive taxation policies which came after these shocks. As a consequence, wealth concentration was much lower in the 1950s and 1960s than it was in 1910, but this did not prevent growth from happening. If anything, this probably contributed to the inclusion of new social groups into the economic process and therefore to higher growth. So one important historical lesson from the 20th century is that we don’t need 19th century-style inequality to generate growth in the 21st century, and we therefore don’t want to return to that level of inequality in Europe.

How would you respond to those who doubt whether there is sufficient evidence to draw this kind of conclusion?

This will always be an imperfect inference because we are in the social sciences and we should not have any illusions about what is possible. We can’t run a controlled experiment across the 20th century or replay the century as if World War One and progressive taxation never occurred. All we have is our common historical experience, but I think this is enough to reach a number of fairly strong conclusions.

The lesson we have already mentioned – that we don’t need the kind of extreme inequality of the 19th century in order to have economic growth – is simply one imperfect lesson, but there are other important lessons if you look at, for instance, the rise of inequality in the United States over the past 30 years. For example, is it useful to pay managers a ten million dollar salary rather than only one million dollars? You really don’t see this in the data: the extra performance and job creation in companies which pay managers ten million dollars rather than one. In the United States over the past 30 years almost 75 per cent of the aggregate primary income growth has gone to the top of the distribution. Given the relatively mediocre productivity performance and the per capita GDP growth rate of 1.5 per cent per year, having nearly three quarters of that going to the top isn’t a very good deal for the rest of the population.

This will always be a complicated and passionate debate. Social science research is not going to transform the political conflict over the issue of inequality with some kind of mathematical certainty, but at least we can have a more informed debate using this historical cross-country evidence. Ultimately that is all my research is aiming to do.

What specific policies can be used to prevent us returning to the kind of extreme levels of inequality you have discussed?

There are a large number of policies which can be used in combination to regulate inequality. Historically the main mechanism to reduce inequality has been the diffusion of knowledge, skills and education. This is the most powerful force to reduce inequality between countries: and this is what we have today, with emerging countries catching up in terms of productivity levels with richer countries. Sometimes this can also work within countries if we have sufficiently inclusive educational and social institutions which allow large segments of the population to access the right skills and the right jobs.

However while education is tremendously important, sometimes it’s not sufficient in isolation. In order to prevent the top income groups and top wealth groups from effectively seceding from the rest of the distribution and growing much faster than the rest of society, you also need progressive taxation of income and progressive taxation of wealth – both inherited and annual wealth. Otherwise there is no natural mechanism to prevent the kind of extreme concentration of income and wealth that we’ve seen in the past from happening again.

Most of all, what we need is financial transparency. We need to monitor the dynamics of all of the different income and wealth groups more effectively so that we can adapt our policies and tax rates in line with whatever we observe. The lack of transparency is actually the biggest threat – we may end up one day in a much more unequal society than we thought we were.

Thomas Piketty is a Professor of Economics at the Paris School of Economics. He is the author of Capital in the 21st Century (Harvard University Press, March 2014).

Minimum wages: the economics and the politics

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Minimum wages are increasingly popular with politicians and the public; even most economists now agree that they have little or no negative effect on employment. Alan Manning discusses this newfound enthusiasm – and the likelihood that it will lead to much higher minimum wages in some parts of the world.

There was a time when the minimum wage was seen as a backwater of labour market policy, an appendix for which the best one could hope would be that it did not cause any problems. But no longer: in many countries, there is now a strong movement to raise minimum wages.

In November last year, Angela Merkel finally announced that Germany would be introducing a minimum wage, replacing or supplementing the current system that sets minima in a small number of lowpaying sectors and collective bargaining that sets minima in some other industries. In May this year, Swiss voters will be asked to vote on the world’s highest minimum wage – 22 Swiss francs an hour (about £15) – with one canton already having voted for that rate in principle though another has rejected it. And in 2011, the free market redoubt of Hong Kong introduced a national minimum wage.

In the United States, President Obama seems to have given up hope of his proposal to raise the federal minimum wage to $10 per hour in the face of an impasse in Congress. But he has recently used his executive power to impose a $10.10 minimum wage on the few hundred thousand people who work on federal contracts.

The president is also actively encouraging states and cities to raise their local minimum wages, thus bypassing the obstacles in Washington. Increasing numbers of them are doing so, and some are going further: Seattle’s mayor, for example, proposes a $15 minimum wage. Minimum wages at this level – about 60% of median hourly earnings – are pushing the envelope of what has ever before been attempted with the minimum wage.

The UK is not immune from this newfound enthusiasm for the minimum wage, with all the main political parties seemingly falling over themselves to find some way to inject new vigour into the National Minimum Wage. Last autumn, the business secretary Vince Cable wrote to the Low Pay Commission (LPC), asking it to consider the economic circumstances in which the minimum wage could be increased at a rate above inflation. And the Labour Party has set up a Low Pay Review to consider options.

Not to be outdone, Chancellor George Osborne in January expressed the opinion that the nascent recovery means that the minimum wage can now be increased substantially. Without quite saying it in so many words, he dropped a heavy hint that he thought £7 an hour would be reasonable within 18 months, which would be a 10% increase from the current rate of £6.31.

I was a member of an expert panel convened by the Resolution Foundation and chaired by the LPC’s first chairman George Bain to reinvigorate the National Minimum Wage. Central to our ideas was that the LPC has been very successful in doing a limited thing – setting a minimum wage to tackle extreme low pay. But the wider problem of low pay remains as serious as ever and – in spite of its name – the LPC has never attempted to develop a strategy for this bigger problem. The LPC seems to have convinced itself that the minimum wage could not be pushed much higher without threatening jobs, but the consequence is that we can never learn whether that judgment is correct.

So what explains this widespread enthusiasm for the minimum wage? In my view, both economics and politics are at play.

The economics of minimum wages

A generation ago, the vast majority of economists would have said that a rise in the minimum wage inevitably costs jobs. This has changed, with two strands of research having the biggest impact. In the United States, the work of David Card and Alan Krueger, then both at Princeton University, shattered the cosy consensus and argued that the actual evidence linking the minimum wage to job losses was weak. Although their findings were controversial (and the debates rumble on to the present day), there has been a large shift in the weight of academic opinion.

The other strand of research that has been very influential examined the UK experience, with CEP researchers playing a sizeable role, though not the only one. Some people predicted that the introduction of the National Minimum Wage in 1999 would cause hundreds of thousands of job losses, but this simply did not materialise. Any impact on employment seemed to be tiny and LPC research has reached similar conclusions for subsequent years when the minimum wage rose faster than average earnings. In spite of this accumulating empirical evidence, it is still common to find economists fall ing back on the argument that a minimum wage must cost jobs because demand curves for labour inevitably slope downwards. Faced with a conflict between the evidence and twentieth century economic models, they reject the evidence rather than the theory – not an ideal template for scientific endeavour. But there are, in fact, uncomplicated theoretical reasons why the minimum wage set at modest levels has little or no effect on employment.

First, the increase in total labour costs associated with a given increase in the legal minimum wage is often considerably smaller than the numbers suggest. As the minimum wage rises and work becomes more attractive, labour turnover rates and absenteeism tend to decline. Moreover, the cost associated with losing a job rises; so, arguably, workers are inclined to work a bit harder and need less monitoring. Of course, an employer could voluntarily choose to pay higher wages if net labour costs actually fell, so a reasonable guess here is that these offsetting economies reduce, but do not eliminate, the impact of a rise in wage rates.

Then there’s the gap between employer perception and reality. Individual employers often view a rise in wages with horror, assuming it will drive them out of business. But all too often, they are implicitly assuming that they alone will suffer the cost inflation when it affects their competitors as well. Prices rise a bit and the effect on employment is only through the effect of a fall in sales, which may well be minimal.

But there is a more fundamental reason why there is no evidence of the job losses predicted by standard economic theory. The key assumption – that labour markets are highly competitive – is often wrong. The view of the labour market that underlies ‘Economics 101’ is not one that many people would recognise. For in this hypothetical world, losing a job is no big deal because finding an identical job is no harder than discovering that the local Sainsbury’s is out of milk and going to Tesco instead.

But that is not most people’s experience of labour markets. The reality is that competition for workers is not as strong as many economists would have you believe. An employer who cuts wages will find that most employees are unhappy, but that few will just walk out of the door. So it may make economic sense for employers to pay workers less than the marginal worker adds to revenues. In this more realistic world, a rise in the minimum wage will not necessarily price the marginal worker out of their job.

The politics of minimum wages

Academics might like to think their research has a big influence over public policy, but the driving force behind higher minimum wages is that they are very popular. Many people think there is something very wrong with an economic system in which someone who works hard is still unable to provide an adequate standard of living for themselves and their families. Such views have always been common, but they are much more common after the crisis when living standards are threatened and the link between growth and living standards seems to have been severed.

So in most countries of the world, voters (including right-wing voters) support rises in the minimum wage. In the UK, a poll in January 2014 found 66% favouring a substantial increase in the minimum wage – with majorities among supporters of all main political parties. In the United States, a poll in March 2013 found 71% in favour of raising the minimum wage, including 50% of Republicans. In Switzerland, voters seem to support the record-breaking minimum wage even as it is opposed by their government.

In some places, these political pressures will almost certainly lead to much higher minimum wages than we have seen in recent experience – perhaps to around the 60% of median earnings mark. This is the point at which many economists get nervous that negative effects on employment must surely kick in, but we do not have many studies to know whether these concerns are valid. There are only a few countries around this level currently – Australia and New Zealand (with low current unemployment rates) and France (with a more dysfunctional labour market) – so this is hardly conclusive one way or the other. But it seems likely we may be about to find out.

Note:  This article was originally published in the Spring issue of the Centrepiece magazine and gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics.

About the Author

Alan Manning is professor of economics at LSE and director of CEP’s community research programme. His 2003 book, Monopsony in Motion: Imperfect Competition in Labour Markets (Princeton University Press), explains the theory behind minimum wages; and his 2009 CentrePiece article ‘The UK’s National Minimum Wage’ describes CEP’s role in providing the intellectual context for the policy, advising on its implementation and evaluating its impact.

‘More than a Minimum: The Resolution Foundation Review of the Future of the National Minimum Wage’, was published in March 2014.

Britain’s housing crisis risks turning into catastrophe unless urgent action is taken

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We have an endemic crisis of housing supply – caused primarily by policies, like Greenbelt, that constrain the supply of housing land precisely where it is most wanted. Paul Cheshire argues that nothing short of radical reform will improve housing affordability. But radical reform, like intelligently loosening restrictions on Greenbelt building, is frightening.  

The housing crisis – worst in London, but bad across Britain – is fundamentally driven by lack of supply. For the past five years, we have been building fewer houses than in any peacetime period since before World War One. But house building has been on a downwards trend since the 1960s. Reasonable estimates suggest the shortfall in England has been 1.6m to 2.3m houses between 1994 and 2012. Moreover, too many of those we have built have not been in locations where demand is highest. We persistently build houses where they are relatively least unaffordable and job prospects are relatively worst.

This is true from Lancashire (compare Preston with Ribble Valley) to Northants (Corby to Daventry), but is perfectly encapsulated in London. In the four biggest building boroughs; Tower Hamlets, Islington, Hackney, and Southwark, unemployment in 2012-13 averaged 11.35 per cent and the affordability ratio (median house prices to median earnings) was 9.98, we added an average of 14.57 per cent to the housing stock in 2004-2012. In the four slowest building borough; Merton, Bexley, Sutton, and Kensington & Chelsea, where the unemployment rate averaged 6.75 per cent and the affordability ratio 15.07, we added an average of just 2.11 per cent to the stock over the same period.

We may have 32,500 hectares of Greenbelt land within the GLA – including around at least two Tube stations – but we have concentrated new supply where prices relative to earnings are least unaffordable and job prospects worst. And we are not just building too few houses; those we have been building do not satisfy demand. We have an endemic crisis of housing supply – caused primarily by policies, like Greenbelt, that constrain the supply of housing land precisely where it is most wanted. No wonder house prices are rising at over 10 per cent a year.

Fundamental reform is needed, but this has to be informed by a clear understanding of how markets work. Land markets certainly suffer from problems of market failure, but they still provide vital information about where there are shortages and what there are shortages of. So while we ignore price distortions at our peril, we need to be guided by them, not blindly obey them. But what do our political parties offer? Grandstanding and baby kissing. From the Conservatives, we have Help to Buy; from Labour, policies to control rents and increase security of tenure. Neither addresses the fundamental problem of supply. Both will probably make housing just a tad less affordable.

Following the watering down of the coalition’s draft National Planning Policy Framework, the Tory policy for the housing market morphed into cynical electioneering with Help to Buy, announced in the 2013 Budget. There are two schemes, but even the less toxic Help to Buy 1 – restricted to buyers of new build – may be making housing less affordable. Remember (as the OBR told the Treasury Select Committee within days of the Budget) that the underlying problem is almost perfectly inelastic supply. Anything that increases demand mainly adds to pressure on prices. While a proportion of Help to Buy 1’s financial help will increase supply, there will be a displacement effect. Given how inelastic the supply of houses is because of constraints on land supply, it is possible that the adverse effects of the good scheme on affordability will more than offset any positive effects via increased supply. Help to Buy 2 – the purely bad one – just makes access to mortgages for housing easier. Insofar as it has any effect, it will be almost entirely to increase house prices. Oh – and help us, the taxpayers, take on some housing risk banks did not want to shoulder.

Labour has announced its own version of baby kissing: partial controls on rents, increased security of tenure, and elimination of agent’s fees for finding housing for renters. The best that can be said for these proposals are that there effects will be modest. If these policies have any effect, it would be to modestly decrease rental supply, since it would become less attractive to be a landlord. The abolition of fees to agents will, of course, just get transferred into rents (because costs to landlords will increase). All forms of tenure are in the end substitutes for each other, so the net adverse impact on housing affordability will be small – perhaps negligible. It will just reduce the rate of growth of the rental sector and maybe frighten a few institutional investors who might be considering entering the market.

As I explain in the book I have just co-authored, nothing short of radical reform will improve housing affordability. But radical reform, like intelligently loosening restrictions on Greenbelt building, is frightening. Even excellent reforms will probably only make a real difference over a period longer than five years. But if people were convinced that prices of land and housing were going to behave as they do in Germany in the future, not as they have in England in the past, there could be a step change in prices relative to incomes, because expectations are built into current prices.

But the other frightening thing is that radical reform will have to come because the present system is building up pressures that, over time, will cause more and more damage. The issue is not will we reform, but will we reform in time to avoid something like a catastrophic collapse? In the meantime, kissing babies is sadly much more attractive for politicians.

Paul Cheshire is co-author, with Max Nathan and Henry Overman, of Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom (Edward Elgar, 2014). The  LSE/ Radio 4 debate “Where will we all live” , featuring Paul Cheshire will be broadcast on BBC Radio 4 on Wednesday 11 June at 8pm. A Storify of this event is available here.

Note: This article first appeared in City AM on Wednesday 4 June 2014 and gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics.

About the Author

Paul Cheshire – London School of Economics

Paul Cheshire is Professor of Economic Geography at the London School of Economics. He is co-author, with Max Nathan and Henry Overman, of Urban Economics and Urban Policy: Challenging Conventional Policy Wisdom (Edward Elgar, 2014).