Now this really is a surprise, isn’t it?

Jobs up, wages after inflation down.

My word, I wonder what could possibly cause such a thing?

The claimant count fell by 41,700 last month,
The employment total rose by 155,000 in the three months to August
The headline jobless rate was unchanged at 7.7%
Wages rose by just 0.8% on an annual basis in the quarter, or just 0.6% in August, compared to inflation of 2.7%

And:

Reaction to the jobs data floods in, with many experts focusing on the fact that wages (up 0.8% year on year in the last three months) are still lagging behind inflation:

Dear God! How can we explain this? What twisted corner of economics could possibly be used to provide the mechanism by which this happens?

Well, why not try Econ 101? Demand curves slope downwards perhaps? When things become relatively cheaper people buy more of them? As wages fall in real terms labour gets relatively cheaper therefore people employ more labour?

Could it be?

Of course, the problem for this explanation is that if it is true then so also must the corollary be true. That higher wages reduce employment. And the minimum and living wage campaigns will never agree with that. So, instead of being able to explain the world through our simple and correct economic theories we’re all left scratching our heads as to what the hell is going on.

Aren’t we lucky to have ideology trumping fact in our political discourse?

8 comments on “Now this really is a surprise, isn’t it?

  1. Inflationary measures have been the tool to try and stabilise the economy and build the recovery from the crash. It is hard to see how increasing wages and benefits would do anything other than add more inflation while making it more expensive to do business, thereby slowing recovery.

    The cost of living campaign seems to want more inflation and more measures to raise incomes to meet or exceed inflation. It is attractive madness.

  2. The Living Wage thing seems entirely sensible to me. If your aim is to make sure everyone has enough money, then simply give them some money and there you go. No need to look at the other ramifications of doing so, or whether that’s sufficient in itself to achieve the end you actually want.

    It’s like me and the monarchy. As soon as this crown I’ve ordered comes in the post I can crown myself King, which will be nice. Naturally, I haven’t felt the need to bother looking at consitutional law, or what would happen if a million other people bought crowns and declared themselves King too.

  3. The idea that cutting wages leads to more employment was popular in the 1930s. It’s that basic idea that Keynes demolished.

    If wages are cut, then employees spend less, which means FEWER jobs, not more jobs. That oversimplifies the issue, but that was Keynes’s basic point, and he was right.

  4. Well no, that wasn’t really Keynes’s idea anyway. He wanted to cut wages, but via inflation (to overcome “money illusion” and all that).

    Being simplistic, more people on a lower wage will spend as much as fewer people on a higher wages, cos the national income is basically fixed by the money supply.

  5. A proper analysis is that it’s not an aggregate thing; which is the problem with macroeconomics as an ideology. It’s not that some aggregate wage level is too high, it’s that some wages in the economy are too high having over-inflated during the boom. Some may simultaneously be too low. It’s those particular wages that are too high for the new economic reality that are contributing to unemployment.

    Which is why the pre-Keynesian rational economic approach was not to intervene, and let the economy sort itself out. Because only at the micro level does the economy know which wages need to fall, which redundant boom era production facilities need liquidating, etc etc. The problem is that activist governments prevent that happening, which is why recessions and depressions drag on and on.

  6. It’s worth remembering that the economy tried to eradicate a huge proportion of the boom era banking/finance industry in 2009, and we’ve all paid a fortune in recession costs as the price of preventing that happening. Keeping the banking industry on state support may be the biggest single cause of economic misery in the modern world, since the cost of it is a generalised impoverishment via economic rent.

    Here’s somebody having a general moan about the actual effects of the- ahem- “neoliberal” strategy-

    http://www.telegraph.co.uk/lifestyle/10377807/Well-never-have-it-so-good-again.html

  7. Ralph Musgrave. And yet the evidence, increased employment figures, does not support your claim.

    Nor do you factor in, reduced prices. Inflation figures come from a basket of things in which a few large increases can skew the headline figure upward, despite other things going down in price.

    Not everyone fills their basket with the same things. People do change their buying habits according to circumstances. They may not buy fewer things, just change what and where they buy. People also use credit.

    The economy is complex: the problem we have is those who think they can run it, believe if they focus on a single aspect… freezing energy prices for example… it will give them a predictable and desired outcome.

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