The UK is going through an alarming low-pay recovery


9:30 am - July 15th 2013

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by Anjum Klair

A new TUC reports shows that seventy-nine percent 77% of net job creation since June 2010 has taken place in industries where the average wage is less than £7.95 an hour. Just over one in five new employee jobs created since June 2010 have been in the highly paid computer programming, consultancy and related services industries, where the average hourly wage is £18.40.

In the middle paid industries, which account for nearly three quarters of the UK workforce and where the average is between £7.95 and £17.40 per hour, there has been no net job creation since June 2010.

The shift towards a labour market which is characterised by increasing levels of low wage jobs is worrying, and risks damaging our economic prospects in the long run. While job creation may be better than unemployment this still leaves households struggling with little money to spend in order to aid the recovery.

The report also looks at change over the longer-term in industries we have defined as low paid, middle paid and high paid since 2005.

Employee jobs in low paid industries Dec 2005 – Dec 2012

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Low-paid industries experienced the sharpest jobs decline during the recession. There was a reduction in the net number of low paid industry employee jobs particularly during December 2008 to March 2009; but there was then a jobs recovery with a real sharp increase in employee jobs towards the end of 2011 which has continued to beyond pre-recession levels.

Employee jobs in middle paid industries December 2005 – December 2012

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The net number of jobs in middle paid industries fell dramatically from December 2008 to 2009, and has stagnated at around that level ever since. Jobs in middle paid industries have never recovered from the recession and a significant jobs gap of 599,000 remains.

Employee jobs in high paid industries December 2005 – December 2012

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In contrast jobs in higher paid industries never really felt the impact of the recession. There was a very small fall in net numbers from December 2008 but employee jobs levels in higher pay industries then continued to grow to above pre- recession levels.

While it remains too early to determine the extent to which this shift represents a structural change, without strong economic growth it is likely to characterise our jobs market for at least several years to come.

The trends also demonstrate the importance of securing strong jobs growth in middle paid industries if household incomes are to see a significant rise over the medium term. While it is important that policy debate focuses on mechanisms which will increase rates of pay for workers across low and middle paid industries this analysis demonstrates why it is equally important to focus on measures which will seek to reduce the share of low paid jobs across the UK economy.

In the current context it is also clear that tax credits and other benefits will need to continue to play an important role in boosting the household incomes of those who can only find work in low paid sectors.


cross-posted from the Touchstone blog

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Reader comments


1. Baton Rouge

We have the perfect storm:

The bank collapse of 2008 which crashed the credit bubble; the super profits of the monopolies which are sucking all the life out of the economy; the ever decreasing spending power of the masses.

All lead to a global depression from which capitalism can never escape. Not even a major world war sweeping aside the current political economy such as the one that saw America replace Europe as the new Boss Hogg will save or renew it as beyond globalisation behind a dominant world power capitalism cannot go. All that is left to it now is the unedifying spectable of globalisation in reverse and a New Dark Ages. All its potential is spent and it is now not just an obstacle to human development and survival but the biggest threat to it.

Lower wages are one of the ways in which we regain competitiveness in world markets, so lower wages are what we should expect at this stage in the business cycle.

Baton Rouge: Your socialist faith would be quite touching, were it not so delusional. You place your faith in a goal that has never been even approximately realised, the pursuit of which has resulted in the death of millions, and which you cannot describe in any detail.

Capitalism is the only game in town, and it has the capacity to renew itself. What is collapsing is not capitalism, but socialism: communism and Marxism are dying out.

2

I don’t object to lower wages if it makes us competitive in world markets but I do object to the taxpayer having to prop-up wages with tax-credits. It’s like a home goal, reduce wages and we can compete but then we top said wages up. Roll on laissez-faire.

4. gastro george

“Lower wages are one of the ways in which we regain competitiveness in world markets”

No sign of that in senior management.

steveb @ 3:

You are right. Though I’m not sure quite how we get from here to there, as I imagine the transition could take a decade and would straddle the electoral cycle.

“Lower wages are one of the ways in which we regain competitiveness in world markets, ”

But not for you, obviously.

Since the start of the financial crisis in 2007, the Pound has depreciated by about 25pc.

@ 4: “No sign of that in senior management.”

Including the public sector. In export industries, senior management costs have a minimal impact on competitiveness, though shareholders are increasingly inclined to rein them in.

@ 6: “But not for you, obviously.”

Nothing like playing the man, rather than the ball, is there? Particularly from a position of total ignorance of the man.

BobB @ 7:

“Since…2007, the Pound has depreciated by about 25pc.”

Devaluation is a poor way to increase competitiveness. It increases the cost of imports and raw materials (and hence the price the UK can charge for exports) and stokes inflation at home.

9. Baton Rouge

`Lower wages are one of the ways in which we regain competitiveness in world markets, so lower wages are what we should expect at this stage in the business cycle.’

Is that what you capitalist knob heads have emblazoned on your banners nowadays: `Forward to Poverty Wages’?

In any case this is not your run of the mill business cycle this is the end of the business cycle. Lowering wages in one country might give that country a temporary rest bite vis its competitors but generally it just adds to the global depression. As I said, the Perfect Storm of monopoly profits, collapse of the 30-year credit bubble and tumbling wages = the end.

As for socialism it can only replace capitalism when that system has fully exhausted itself. We have now definitively arrived at that point. Previously capitalist imperialism was able to successfully surround and contain socialism and it is capitalist imperialism that must take the blame for Stalinism and the people who dies at its hands.

TONE: “Devaluation is a poor way to increase competitiveness. It increases the cost of imports and raw materials (and hence the price the UK can charge for exports) and stokes inflation at home.”

The important issue is whether alternative policy options or exchange rate regimes offer more attractive choices, one of which would have been to join the Euro. Another, would be an attempt to resurrect the Gold Standard. Try this from a recent Economist: A Trio of Trilemmas
http://www.economist.com/news/finance-and-economics/21580452-gold-standard-holds-worrying-lessons-single-currency-trio

Yet another way of gaining competitveness is to depress real real wages. From The Guardian today: “The TUC said that Britain’s workers are suffering the most protracted squeeze on their incomes since the long depression of the 1870s. Its calculations based on Bank of England data suggest real wages have now fallen for 40 months. The only time they fell for a longer was from 1875 to 1878.”

Btw Britain’s recovery from the depression of the 1930s began with abandoning the Gold Standard in September 1931. Freed from the need to maintain the Gold Parity of the Pound enabled the Bank of England to cut Bank Rate to 2pc by April 1932 where it stayed until the outbreak of war in September 1939. The Pound depreciated by about 25pc when the Gold Standard was abandoned.

I agree with Milton Friedman in preferring the option of flexible exchange rates.

BR @ 9:

I’m not talking about “poverty wages”, but an inevitable readjustment. In time, wages will start to rise again.

Your deluded apocalyptic rhetoric about “the end” makes you sound like some religious fanatic quoting from the Book of Revelations while wandering about the streets in a sandwich board. Like such people, you have zero evidence for your claim: it is a matter of pure and irrational faith for you. And, also like such people, your (socialist) heaven is vacuous: it has no discernible content – it is simply a negation of the status quo, a denial of all that you consider undesirable, a fantasy for political masturbators.

As for “capitalist imperialism” being responsible for Stalinism, that is disgusting nonsense. The capitalist powers did not force the Soviets to butcher their own people and starve millions of peasants to death. Rather, these crimes were the result of an inhumane, psychopathic ideology.

BobB @ 10: I agree. Floating exchange rates are a good thing and can help in the recovery of competitiveness, but my point was that it is pure folly to rely on devaluation as the one and only solution to loss of competitiveness. Reductions in wages are also needed, as are increases in productivity. The aim must be to make the UK a high productivity, high wage economy.

Tone: “Floating exchange rates are a good thing and can help in the recovery of competitiveness, but my point was that it is pure folly to rely on devaluation as the one and only solution to loss of competitiveness.”

Design, quality and innovation are also factors in competitiveness but are less susceptible to influence by fiscal or monetary policy decisions.

“Reductions in wages are also needed, as are increases in productivity”

I’m unclear as to why the consequences of reductions in unit labour costs are different from the consequences of currency depreciation.

Try The Economist on the dismal narrative about what has been happening to productivity in Britain during the recession and the recovery:
http://www.economist.com/news/britain/21570692-dive-britains-productivity-puzzle-uncovers-serious-risk-economy-job-rich

More illumination on the reasons for Britain’s poor productivity performance in this recession as compared with previous recessions:

“There is no productivity puzzle, says economists’ group

“Britain’s disconnect between falling unemployment and anaemic economic growth has perplexed economists, but new analysis suggests the so-called ‘productivity puzzle’ does not exist.”
http://www.telegraph.co.uk/finance/economics/10115344/There-is-no-productivity-puzzle-says-economists-group.html

@13 Thanks for the link. That’s the first article I have seen trying to explain the “productivity puzzle” and I think it has all of the elements in its explanation. Combine this with the growth in jobs in low paid industries and stagnation in middle paid industries and it does paint a picture.

Some decent growth is required in the economy to take up the slack in capacity.

BobB @ 12:

“I’m unclear as to why the consequences of reductions in unit labour costs are different from the consequences of currency depreciation.”

The consequences of currency depreciation (external devaluation) include importing inflation, whereas reducing labour costs (internal devaluation) does not involve inflation.

15

“The consequences of currency depreciation (external devaluation) include importing inflation, whereas reducing labour costs (internal devaluation) does not involve inflation.”

– The current remit of the Bank of England is to maintain a stable inflation rate regardless of what is happening to import prices

– “Internal devaluation” will, however, cause Britain’s external terms of trade to deteriorate, ceteris paribus, if Britain’s export prices also fall as the result of internal devaluation while import prices remain unaffected.

– “Internal devaluation” is usually a socially painful process, which is why Milton Friedman, amongst others, preferred the alternative of flexible exchange rates.

Yes, BobB @ 16, but it’s not either/or. You can have a little of each, as we have at present.

‘“Internal devaluation” will, however, cause Britain’s external terms of trade to deteriorate, ceteris paribus, if Britain’s export prices also fall as the result of internal devaluation while import prices remain unaffected.’

You’ve packed a lot of questionable assumptions in there. If export prices fell and IF export volumes remained static despite lower prices, and IF lower incomes did not reduce imports, then, yes, I suppose the UK’s external terms of trade could deteriorate further.

Tone

In the Eurozone, the economies of the PIGS(*) aren’t much of an advertisement for the policy of “internal devaluation” over maintaining flexible exchange rates.

(*) The acronym PIGS stands for Portugal, Ireland, Greece, Spain – check out the unemployment rates in those countries.

Britain could have joined the Euro if we had preferred to fix the exchange rate of the Pound relative to the currencies of other countries in the Eurozone forever – always providing we had first rejoined the European Exchange Rate Mechanism (ERM) for two years and maintained a stable exchange rate, as required by the Maastricht rules.

Of course, while the Pound was in the ERM, that would have prevented the government setting the remit for the Bank of England to maintain a stable inflation rate as interest rates would have had to be used to maintain the exchange rate of the Pound instead. As I recall, that is what Nigel Lawson attempted to do in the mid 1980s in order to line up the Pound at a competitive exchange rate to the DMark prior to joining the Pound to the ERM. The result was an unsustainable boom in the late 1980s and a revival of inflation.

In all, neither fixed exchange rates nor internal devaluation appear to be attractive policy options.

Yes, BobB @ 18, I largely agree. But I am not arguing for fixed exchange rates and I’m not arguing for internal devaluation. I am arguing that we can combine internal and external devaluation: indeed, that is what is happening at present in the UK, though I might question whether we have the balance right between them.


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