UK unemployment rate falls to 7.7% but wages stagnate below inflation
UK unemployment rate falls to 7.7% because wages stagnate below inflation
It really is a fairly basic point.
Unemployment is the result of the labour on offer being perceived as too costly for the value it produces.
We can have all sorts of lovely arguments about what causes the perceptions, what the solutions are, fiscal, monetary, whatever. How quickly things ought to change. But not-market clearing is a result of not-market clearing prices.
If wage rises are lower than inflation, this is the same as saying that the price of labour is falling relative to what labour produces. We are thus getting closer to market clearing prices and voila, the unemployment rate falls.
Again, we can have all sorts of lovely arguments about how this desirable situation should come about. For example, you might argue that the workers should get more education, skills, retraining. This raises the value of their output (assumed, not always the case in practice, depends what the training is) and thus employment can rise at the same time as wages (maybe).
Or we might argue, along with Keynes, that wages are sticky downwards. People absolutely hate, hate, hate, to see their nominal wages fall. But we can get their real wages to fall by pay rises being less than inflation. Takes time but it does work.
Which brings us to an interesting point. You know how we’re all told that we must be more like Germany? Hutton and the like tell us this repeatedly. That consensual management style etc. Concentration on the long term, on what’s good for all? This is what Germany actually did a decade ago.
Their labour prices were woefully uncompetitive. So they quite deliberately decided to limit pay rises to under inflation and under productivity rises. Real wages were to stay static at best. This would then bring German wages closer to the market clearing price. And yes, it did indeed work.
Remember this when you read the awailin’ an’ acryin’ about how real wages are falling in the UK. You’ll be awailed and acried at by the very same people who insist that we must be more social democratic like the Germans. But we’re following exactly the same policy as the Germans did. Reduce (compared to productivity at least) real wages so as to get closer to the market clearing price of labour.
If, for example, real wages in the UK stood still for a decade, while productivity continued to increase at 1-2%, then by the end of the process we’d have no unemployment other than the standard frictional stuff.
Like, umm, that Germany we are told we must emulate.