In the wake of the Great Recession, countries around the world have been following a long and bumpy road to recovery. Over the past decade, there have been stops and starts, good news and bad news; and governments, businesses, and individuals alike have alternately been woefully anxious and blissfully optimistic about the likelihood of success in their futures. Brexit is currently complicating matters and blurring the picture of recovery in the UK, but there are still some signals about where we stand.
There are three primary indicators of the economic health of a country: one is unemployment levels, one is growth in GDP, and the third is the rate of inflation. It takes not only a healthy economy but also solid fiscal and monetary policy to maintain the delicate balance between these three indicators.
One of those indicators has suggested nothing but good news in western economies over the past few years – unemployment. In Britain, current unemployment levels of 4% are lower than at any time since 1974.
The U.S. is currently enjoying a similarly low rate of unemployment, and while most countries are experiencing decreasing levels themselves, few are quite as low as in the U.S. and Britain. This may be a function of very little government employment regulation of hiring and firing; in comparison, France, which has an unemployment rate twice as high as Britain, has strict labour laws that cause employers to think long and hard about hiring a new employee they won’t be able to get rid of easily if need be. Low unemployment in Britain may also be a function of the extra attention the government has paid to make sure the unemployed are actively seeking work.
Now for a refresher in the most basic tenet of economic theory: the laws of supply and demand. Most specifically, we are concerned here with the supposed fact, treated akin to the theory of gravity, that a decrease in supply causes an increase in prices as those in demand to compete to acquire a piece of the meager supply. In recent years, labor is that meager supply. And the price of labor is wages. In theory, therefore, a decrease in unemployment (in essence, a decrease in the supply of labor available for hire to businesses), should result in an increase in wages, the price of labor.
This is where the confusing part comes in. While the Conservative Party may attempt to claim victory over the Great Recession with a 4% unemployment rate, real wages are STILL lower than they were when the Recession began.
The same phenomenon is being seen in the U.S. and Germany, but not nearly to the same degree. Britain’s unusually low wage growth may be due to a number of factors: businesses aren’t investing much in automation to improve productivity, which in turn drives wage increases; there is a shift in labor to lower-productivity jobs (as measured by contribution to GDP); the power of unions has been severely diminished; the public-sector has been placing caps on government employee wage increases, decreasing the competition with businesses over labor; and fewer welfare benefits are being offered, making workers less likely to bargain for higher wages in fear of the alternative.
Economists in Britain used to think that inflation would push up wages as soon as unemployment dropped below the 6.5% mark. At the current level of 4%, if wages were following norms from a decade ago, Britons should be seeing 5% wage increases each year. Instead, pay raises hovered around the 2.5% mark this spring.
So, what happened? Is everything we ever learned about economics wrong? Should we continue to expect up to be down and down to be up? Maybe not. Maybe the relationship between labor supply and wage growth still holds, and we’ve just got to tweak our measurements as well as our expectations. While 4% unemployment seems low, it belies the existence of under-employed part-time workers. And wages may climb, but maybe not quite as much as we’ve grown used to, and maybe the climb will lag a bit behind the decrease in unemployment.
As a matter of fact, new figures were released in the first week of October indicating that wage growth through August not including bonuses had reached 3.1%, a new 9-year high, at least for nominal growth if not real wage growth adjusted for inflation – that still sits at a depressing 0.6%. If bonuses are included, the rate is only 2.7%, just a smidge above general price inflation. But that could just be an indicator that executive bonuses, not necessarily overall wages, are being restrained. So, maybe that’s all both good news and bad news?
As Andy Verity, economics correspondent for the BBC, sums up the most recent figures, “If you’re a half-full person, well we’re up by about £25 per week on average since the squeeze on living standards was at its tightest back in 2014. But if you’re half-empty, we’re still earning about £20 a week less than we did 10 years ago when the global financial crisis struck.”