In which we fix a Guardian headline

UK unemployment rate falls to 7.7% but wages stagnate below inflation

Should read:

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.

12 thoughts on “In which we fix a Guardian headline”

  1. This might be a daft question, and I could probably find the answer myself if I could be arsed, but could the willingness of the average German worker to accept less than inflationary pay rises be connected to the fact that German bosses (say at board room level) do not earn the same multiple of the average grunt’s wage that they do in the UK. It does seem to me that board level salaries are inflated in the UK (principal/agency conflict at work?)

  2. Bingo.

    But, as we know, Teh Graun cannot see aught but a vignette reflected, warped and dimmed through the rancid prism of Keyneseanism.

  3. But, Patty, Germans workers were prepared to accept smaller pay rises than British workers decades ago, before British bosses had mastered the American knack of looting the shareholders to the extent they have recently.

  4. Come on, Tim. It cuts both ways. Increased employment should push wages up as that reserve army of the unemployed gets used up. That wages aren’t rising with record low unemployment (and record high employment) is proof that the employment/unemployment figures are bullshit. And that is because the government simply hasn’t got the first fucking clue how many people are in the country. They are using the wrong denominator to calculate the statistics.

  5. @JamesV: Only if all else were equal, the employment/wage balance had reached an equilibrium and employment continues to fall. If a factor inflating wages like, say, a Gov’t borrowing a metric shedload of money to pay wages at a higher price than productivity warranted were removed or reduced the equilibrium point would fall, so it would take longer before the effect you suggest would kick in…

  6. You’re right in principle that falling real wages should price people into work, subject to the caveat that lower real wages means lower consumer spending and hence less output. But is this sufficient to explain all the drop in unemployment? I’ve been sceptical:
    Might this be another example of your elasticity optimism? (Or my elasticity pessimism?)

  7. @tex
    The German govt didn’t need to directly. The Germany economy is/was run as a giant cartel, all the large businesses own bits of each other and sit on each others board. Hence the alarm when Vodafone toppled Mannesmann Mobilfunk in 1999, thanks to a bit of insider “consultancy”.
    All that is required is for the German Chancellor or finance minister over cocktails or a round of golf to say “You know, I think wages in your sector are too high.” And the director concerned will scurry back and work out an arrangement with the various other stakeholders.
    What the govt did do was introcduce draconian reductions in the dole, which made it more likely that a recently redundant worker would take a lower paid job rather than wait around for things to improve.

  8. “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.”

    50 years ago I stayed with a German family the father and husband of which was a trade union official. He astounded me when he told me that when negotiations were entered into with various managements the discussion was not about what was good for the workforce but for the business as well. Considering the time and union thinking then and even now in the UK it is in fact doubly astounding.

  9. @Antitheneses: Astounding?

    Only, I think, if you’re a Graun reader. That’s why they still blame Thatcher for uneconomic mining; believe a “living wage” will cost nothing, least of all their jobs; and all the other twaddle the likes of Polly peddle.

    It’s all about ‘class’ for these people and a deep-seated sense of grievance that someone is doing better than themselves.

    Keep the business running? The bosses will only take all the profits and exploit the working ‘class.’ And so on ad bankruptitum. (Help me out here PaulB!)

  10. But I think Thatcher herself pointed out that any comparisons between Labour Unions in Germany and the UK were especially absurd as the Germans, above all else, were hyper-conscious (no pun intended) of the need to avoid inflation – the spectre of the Nazi era, and the Left’s continual harping on about the ‘dangers of fascism’ (not meant to endorse it, only to make the valid point that the PRC and USSR killed far more than Nazi Germany) reinforce this.

    Tim, the man you mentioned in your admirable post on the Czech election was part of a group of countries which attempted to put in place legislation which would make denial of Soviet era atrocities in those now free countries that were part of the Soviet bloc illegal – it hasn’t been passed as yet (Possibly too close to the EU’s blueprint I think) but it’s hard to disagree with the sentiment, unless of course you’re someone like Jonathan Steele (or Neil Clark, Polly Toynbee, Seamus Milne..etc,etc)

  11. A German anecdote. Before the recession my son & some friends, young male professionals just out of college, went to Germany and met some young German girls and spent some time with them. The following year 2 of the German girls visited my son & friends here in Florida. Two noteworthy comments the girls made: (1) They could not believe how big our houses were (not that big for FL), and (2) They said they could not party as hardy as my boys because they had so little left after taxes.

    I guess Obama is going to level the playing field.

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