Academic journal article National Institute Economic Review

Underemployment and the Lack of Wage Pressure in the Uk

Academic journal article National Institute Economic Review

Underemployment and the Lack of Wage Pressure in the Uk

Article excerpt

In this note, we focus on underemployment as a potential cause of lower wage growth, which itself may have deeper causes, but which has, we would argue, demonstrably changed since the 2008 recession. The gap between our measures of the number of additional hours required by those who want more hours and the number who want less has narrowed recently. Neither have returned to their pre-recession levels. In our view, underemployment remains a major factor in explaining the 2 per cent wage norm that continues to exist in the UK.

Keywords: unemployment; underemployment; wage inflation; hours; anchoring; heuristics. JEL Codes: J31, J42, J22, E3I.

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A major puzzle across OECD countries is why nominal wage growth has been so weak given the rapid declines in the unemployment rate in the years since its peak. In the United States the peak unemployment rate was 10 per cent in October 2009 while in the UK it was 8.5 per cent in October 2011. At the time of writing, the unemployment rate in the US is 4.1 per cent and in the UK is 4.3 per cent. But there is little sign of any pick-up in wage pressure, as occurred in previous recoveries. The drop in the unemployment rate from 6.5 per cent to around 4 per cent in the past would have generated a burst of wage inflation, but not this time around, in any country, including the US and the UK. A wage norm of around 2 per cent wage growth appears to have become embedded around the world. Nominal wage settlements appear to have become 'anchored' around this level. Real wage growth, post-recession, has been especially weak in the UK but less so in the US.

As shown in figure 1, from March 2001 to March 2008, at the beginning of the Great Recession, average nominal annual wage growth in the UK, as measured by the national statistic Average Weekly Earnings (AWE) was around 4.3 per cent. For the period from March 2008 to March 2017, the equivalent rate was 1.9 percent, less than half of the pre-recession growth rate. In the earlier period, the average unemployment rate was 5.2 per cent. In the period from March 2008 to March 2017, the average unemployment rate was 4.9 per cent. The latest data point available to us, for October 2017, shows AWE total pay growth was 2.3 per cent with an unemployment rate for August to October 2017 of 4.3 per cent. In January 2007, wage growth was 6.9 per cent and the unemployment rate was 5.5 per cent.

Recent data from the pay experts XpertHR show that the pay norm of 2 per cent that they have observed for years in pay settlements continues. "Despite unemployment falling and inflation rising through the year, employers have refused to budge from the muted pay increases they have favoured for a large part of the past five years", they said. This inertia that employers' wage offers reflect is an anchoring-and-adjustment heuristic. Unable to generate fully informed expectations, they try to behave rationally, but fall back on norms if the costs of forming these expectations appear prohibitive (Roos and Luhan, 2008).

Figure 1 also plots UK real wage growth, which has been negative for the seven months from April-October 2017. Real weekly wages at constant 2015 prices were 490 [pounds sterling] per week in October 2017, down from 522 [pounds sterling] per week in February 2008, just before the Great Recession started. So, real earnings are about 7 per cent below what they were nearly a decade ago.

In the US monthly average weekly earnings of private sector production and non-supervisory workers, who are about 80 per cent of all private sector workers and around 70 per cent of the total workforce, averaged 4.0 per cent in 2006 and 2007 in the two years before the start of the Great Recession, when the unemployment rate averaged 4.6 per cent. Over the two-year period December 2015 to November 2017, monthly wage growth averaged 2.4 per cent while the unemployment rate over the same period averaged 4. …

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