Academic journal article National Institute Economic Review

The Lack of Wage Growth and the Falling Nairu

Academic journal article National Institute Economic Review

The Lack of Wage Growth and the Falling Nairu

Article excerpt

In this note, we argue that a considerable part of the explanation for the benign wage growth in the advanced world is the rise in underemployment. In the years after 2008 the unemployment rate understates labour market slack. Underemployment is more important than unemployment in explaining the weakness of wage growth in the UK. The Phillips curve in the UK has now to be rewritten into wage underemployment space. Underemployment now enters wage equations while the unemployment rate does not. There is every reason to believe that the NAIRU has fallen sharply since the Great Recession. In our view the NAIRU in the UK may well be nearer to 3 per cent, and even below it, than around 5 per cent, which other commentators including the MPC and the OBR believe.

Keywords: unemployment; underemployment; wage inflation; hours;

JEL Codes: J31, J42, J22, E31.

**********

There remains a puzzle around the world over why wage growth is so benign given the low levels of unemployment. In the US, the unemployment rate at the time of writing is 4.1 per cent and in the UK 4.3 per cent. The wage growth of production and non-supervisory workers in the US, which accounts for 82 per cent of private sector workers, has remained flat at around 2.5 per cent for twenty-four months in a row as the unemployment rate fell from 4.9 per cent to 3.8 per cent. In the UK wage growth in April 2018 was 2.5 per cent.

There has also been little wage growth across the OECD. Table 1 reports real wage growth in the period 2000-8 and then from 2008 through 2016 using data from the OECD on annual earnings in local currencies at 2016 prices. Real wage growth across the OECD has been benign in the years since 2008 and much less than in the period 2000-8. Over this eight-year period only France, Germany, Iceland, Norway and Sweden saw average growth rates of above 1 per cent. In the UK real wages grew not at all and they fell in Greece, Italy and Portugal. The highest growth rate was 11 per cent in Sweden, compared with the highest in the previous period of 27 per cent in Norway.

The weakness of wage growth has continued to be a surprise to policymakers. At the press conference following the rate increase decision at the FOMC meeting on 13 June 2018, chair Jerome Powell said "we bad anticipated and many people have anticipated that wages--that in a world where we're hearing lots and lots about labor shortages--everywhere we go now, we bear about labor shortages, but where is the wage reaction? So, it's a bit of a puzzle. I wouldn't say it's a mystery, but it's a bit of a puzzle. And one of the things is, you will see pretty much people who want to get jobs--not everybody--but people who want to get jobs, many of them will be able to get jobs. You will see wages go up."

Hope springs eternal. The projections from the June meeting showed that the FOMC members thought that the long-run value for unemployment, its natural rate, is in the range 4.1 per cent to 4.7 per cent. (1) With the unemployment rate at 3.8 per cent, there surely, according to the FOMC, should have been roaring wage pressure, and fear of a wage explosion is one of the main reasons the Fed is raising rates. The fact that there is little sign of wage growth picking up is neither a puzzle nor a mystery. To be clear, the FOMC are raising interest rates to increase the unemployment rate, which they estimate is currently below the NAIRU. Hence why, for them, the lack of wage growth is a puzzle and a mystery.

It is our contention in this paper that a considerable part of the explanation for the benign wage growth in the advanced world is the rise in underemployment. This is also reported in table 1, here measured as the proportion of those who say they are involuntarily part-time as a percentage of total employment. This measure of underemployment picked up for most countries after 2008 and then turned down. However, it is notable that in Australia, Italy, New Zealand and the Netherlands the rate rose steadily over the period. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.