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Why are real wages falling?

Real wages are falling once more. In addition, nominal wages have fallen in the last 2 months which is highly unusual. Both of these developments are Brexit effects and the situation is likely to get worse as Brexit unfolds.

The trends in both real (inflation-adjusted) and nominal wages are shown in Chart 1 below. Real wages peaked in April 2008. A very large gap then opened up between real and nominal wages following the crisis, as nominal wage growth slowed and inflation subtracted from real wage growth.  But as the chart shows, it is rare for nominal wages to fall, and this has contributed to a marked recent drop in real wages.

Chart 1. Trends in UK Nominal and Real Wages, January 2000 to January 2017

Source: ONS

In the two months since November 2016 real wages have fallen by 1%. In nominal terms they fell by 0.2%. Compared to a year ago, nominal wages have risen by just 1.9% and in real terms the rise is zero. All such data are subject to revision. But these changes are so marked that any revision is unlikely to alter the fundamental points.

These are Brexit effects. Just as the substantial devaluation of the pound in the 2007-2008 crisis led to a sharp rise inflation, so the renewed significant fall in the pound since the Brexit referendum is pushing up inflation once more. In both cases, flat or slow nominal wage growth meant that inflation pushed real wages lower.

The current rise in inflation has much further to run. Even if the pound had stabilised after its fall, most importers ‘hedge’ (or insure against) the risk of a currency fall. But those hedges are time-limited, usually after 6, 12 or even 24 months.  A recent article in the Financial Timesargued that the hedges are only now beginning to expire. Import costs will rise sharply, and push consumer prices higher. But the pound has recently begun to fall once more, close to just 1.20 versus the US Dollar, so the extent of import price inflation will continue for some time.

The recent fall in nominal wage growth is more modest than the decline in real wages. But because it is so rare it is alarming.  There is a widespread and mistaken idea that investment leads to job losses and low wages. The opposite is the case. Investment leads to increased production and productivity. Of course, all employers would like to claim all the rewards of increased output themselves as profits. Workers try to claim those rewards as wages and benefits. The outcome is the result primarily of industrial bargaining and struggle.

But investment has been falling. It was lower at the end of 2016 than in mid-2015. Without investment it is extremely difficult to create new highly-paid jobs. The new jobs that are being created tend to be lower paid, and push down average wages, even in nominal terms.

The fall in investment is itself a Brexit effect. As SEB has argued, the biggest negative impact from Brexit is likely to be felt in investment, much worse even than trade. This is because investment is made for a return. Investment returns will necessarily be lower in the UK economy outside the EU Single Market, the world’s largest market, rather than inside it.

The link noted above between investment and jobs, and especially between investment and wages means that lower investment will place further downward pressure on wages. It is clear that significant negative Brexit effects are accumulating.

13 Comments

  1. JohnP says:

    More utter, fact-twisting, nonsense from the uncritical EU fanatic, O’Leary. Real wages are indeed falling, but it is far , far, too early to pin any element of this on “Brexit”. It is a pity O’Leary has followed the Tory methodology with his useless bundling of all the different wage level cohorts in the workforce together as a block. Even the oft repeated Tory claim for the last five years about “wage recovery” was based entirely on the super earnings and bonuses of those on banking sector and upper management type salaries.

    For most ordinary income level workers their real earnings have actually been FALLING uninterruptedly since the 2008 Crash. And the reason for that is unlimited labour supply under the EU structure, the legal hobbling of trade union organisation, and the ever advancing “precariat” low skill/low wage Gig UK economy , which the neoliberal EU is based on as a model.

    The claim by O’Leary that investment has suddenly started to fall “because of Brexit” is just nonsense. British business has been on an “investment strike” for about 15 years or more. This is because of the short-termist financialisation of the UK economy, in which the financial institutions that own most of UK share based bigger businesses are looking at essentially asset stripping the companies they control (through parachuted in short term CEO’s motivate by bonuses to strip our as much short term “shareholder value” as possible – regardless of the consequences on long term viability) . This is the approach that destroyed hugely important UK companies like ICI. This long term investment strike has NOTHING to do with Brexit. This is a core feature of the neoliberal economic model that the EU promotes.

    Why does Left Futures give regular platforms to O’Leary for his entirely neoliberal, uncritically pro EU, misleading articles ! Please stop doing so. O’Leary is not any sort of “left Winger”. His articles would be better suited to The Economist.

    1. Richard MacKinnon says:

      JohnP,
      Up you pop again with that terrible burden of yours. “Why does Left Futures give regular platforms to….” this time its Tom O’Leary.
      JohnP, how many turbulent priests do you need rid of?

      1. Mervyn Hyde says:

        Whilst everyone on this site knows John and I have our differences, I can only agree with his assessment of this poorly constructed article.

        The reality is that commentators accurately point out that wages have fallen ever since the crash for pretty obvious reasons.

        Secondly zero hours working has become more prevalent since then, most jobs that have been created since the Thatcher years have been low skilled low paid jobs, supplementary benefits have also been cut, the Working Tax credit was introduced to supplement wages because of low income. That all happened long before Brexit.

        I really do believe that people extrapolating economic data should work on long term historical data rather making rash assumptions over such a short period of time. Change inevitably brings with it pluses and minuses, only over the longer term will we actually know the true cost of Brexit and to state otherwise is pure speculation.

        What anti Brexiteers need to understand is that we know the levels of failure during our membership of the EU as our manufacturing base has been dismantled; the limits placed on our country also, would ensure that an interventionist government would fall foul of competition rules within the EU. So how do you compute the benefit of staying in the EU when a government is restricted from taking any action seen to be anti competitive?

        Instead of following the narrow Brexit debate which is full of contradictions on either side of the argument we need to examine how we create a sustainable economy and increase peoples well being. What is a fact is, inside the EU Britain has already plummeted into decline without arrest, and the future within the EU doesn’t promise any change from that direction of travel.

        This video also explains how the EU has served other member states equally badly and how only one country has benefited.

        Professor Bill Mitchell:

        1. David Pavett says:

          You say “What anti Brexiteers need to understand is that we know the levels of failure during our membership of the EU as our manufacturing base has been dismantled”. However constant conjunction is not causality. Our manufacturing base was in decline before we joined the EU and continued after we joined it. The shift from manufacturing to services is common to all advanced economies and is even evident in China. So I think your proposition needs some spelling out.

          I haven’t got an hour and a half to spare to watch the video you link without being given a good reason for doing so. What does he establish. The lecture appears to be on the failure of the euro and the eurozone of which the UK was never a member.

          1. Mervyn Hyde says:

            David: As you well know our industrial base has been under attack since the end of the first world war, but never at the rate of decline that we saw in the 1980s when Thatcher deliberately allowed the decimation of our manufacturing base, I have provided documents of Tory origin which you have either chosen to ignore or couldn’t be bothered to read, which outlined their planned agenda.

            That included the dismantling of the state, de-unionising, deregulation, and corporate free market concentration.

            That is evidence of the actual direction of travel that would be pursued by all the Neo-Liberal governments since the 1970s, including Neo-Liberal New Labour. (Blair according to Thatcher was her greatest political achievement).

            Up until the 1970s (prior to the Neo-Liberal agenda) growth averaged around 3% of GDP, after Thatcher’s little exercise in the 80s, we have averaged little better than 1.5% of GDP (Ha-Joon Chang figures)

            During that period it was called “the golden years of capitalism” because incomes rose in line with productivity. That was also why when Thatcher was selling of the Nationalised Industries, Harold MacMillan said that “she was selling off the state silver”.

            Clearly this is not the kind of forum where we produce detailed statistical analysis of the whys and wherefores of how the events over the last 40 odd years have brought us to where we are now, but it is clear the damage wreaked upon our economy by the Neo-Liberal economic agenda, has not been halted by our membership of the EU but has like other countries within the EU declined for exactly the same reasons.

            This Video which is highly pertinent to people like yourself, whom I believe fall into the category of group think, but which in this case relates to the Neo-Liberal agenda in Europe, which demonstrates why the break up of Europe has to happen.

            The video perhaps doesn’t clarify that Bill Mitchell himself would choose a Federated Europe instead of monetary union, and that he is not opposed to countries uniting to overcome problems that are mutual to all the countries, but that is how the EU is currently constructed and the powers controlling it wouldn’t allow it to be any other way.

            Bill Mitchell is an important commentator as he recognises that nothing has to be this way, but that powerful forces are imposing everything from above and that we are the only ones able to change that, currently we don’t have a power base large enough to challenge German domination in Europe (economic Power). If you can’t change that then we have to accept to live by their rules, ending in a Greek Tragedy.

            Independent financial control within country borders cannot happen without having control of your own currency, unless the whole of Europe becomes Germany.

            I would love to know what you actually think about the video.

            As he explains, he does know what he is talking about due his experience in advising the Argentinian government at the time they defaulted on their debts.

          2. David Pavett says:

            @Mervyn Hyde (March 22, 2017 at 6:17 pm). I like the accusation of “group think”. It is like cod-Freudian accusations of unconscious repression. Whatever one says to counter it only confirms it. In other words those who accuse others of “group think” actually exemplify it. Amusing.

            I watched Bill Mitchell’s lecture. He argues that monetary union without fiscal union and political union can’t succeed. I agree. It is not an argument against a federal union based on shared interests and he is clear about that.

            Many of us who argued for Remain have always understood this problem. The Euro project could never succeed. But the European Union is not reducible to the Eurozone which almost certainly will collapse under the weight of the problems it is generating. Then what?

  2. Robin Edwards says:

    The real reason Britain voted Brexit is because UK capitalism is finished, kaput, decaying fast. It cannot compete in Britain let alone the ESM and don’t get me started on the Empire 2.0 delusions of the super neo-liberals who think getting rid of the EU will allow Britain to once again dominate the globe. No, no, no. So, with UK capitalism sclerotic, stagnant, super-monopolised, bankrupt an basically dead being unable to reproduce itself then if Brexit is to mean anything rational it has to mean socialism. That is why the real struggle for 2020 or whenever the next election is is between Socialist Brexit and Far Right Brexit not between Soft Brexit and Hard Brexit. If Corbyn’s Labour gets caught up in an Unpopular Front for Soft Brexit with the Majorites, Blairites, Lib Dems, Bob Geldof, Richard Branson and corporate capitalism they will be wiped out and British Labourism will be deservedly dead. Only a party eschewing discussions with the wretched neo-liberal EU and putting forward instead a radical socialist programme for a post-Brexit Britain and its vision for a New European Settlement that favours workers over the bosses can gain the confidence and loyalty of the working class.

  3. David Pavett says:

    I pointed out, in a comment on his last article, that Tim O’Leary (whoever he is) showed very clear signs of not understanding the basic arithmetic of the compound percentages he was commenting on.

    This suspect maths now, with this piece, extends to reading graphs.

    The paragraph

    In the two months since November 2016 real wages have fallen by 1%. In nominal terms they fell by 0.2%. Compared to a year ago, nominal wages have risen by just 1.9% and in real terms the rise is zero. All such data are subject to revision. But these changes are so marked that any revision is unlikely to alter the fundamental points.

    is packed with errors. A clearer image of the graph can be found here.

    Almost everything is wrong with this paragraph.

    (1) The chosen period of two months is two short to draw an conclusions – especially about such a small difference.

    (2) A fall over such a short period is not “highly unusual” as close inspection of the graph shows.

    (3) The general trend of nominal wages is very clearly upwards.

    (4) The fall in nominal wages in from Nov 2016 to Jan 2016 is not 1% but 0.88%. Again, I have the impression that T’OL really doesn’t understand how percentages work.

    (5) The figures from Jan 16 to Jan 17. Show a rise in nominal wages with real wages remaining constant. The claim that there is something very unusual about these “changes” seems to be based on nothing at all.

    I don’t agree with JohnP’s position on Brexit but I share his concerns about the uncritical economics of articles like this.

    The TO’L articles are all reproduced from the Socialist Economic Bulletin published by Ken Livingstone. The last 6 or seven articles are all by TO’L. Could he be the last remaining contributor? Could he be a pen name for Ken L himself?

  4. James Martin says:

    As JohnP has stated O’Leary’s use of ‘facts’ is laughable, as is his grasp of economics. He doesn’t even separate the public and private sector in terms of wage increases (the former not being related to investment at all). He’ll be blaming any change in the rate of rainfall during the forthcoming month of April showers on Brexit next at this rate, the bloke is an utter joke.

  5. Tim Pendry says:

    Not everything is about Brexit. Brexit dealt a blow to a shaky neo-liberal version of capitalism that cannot get back on its feet seven years after the disastrous false boom that led to 2008 but the problem lay in the wider system.

    Carrying on as before was not an option – the system, a sort of pale washed out pink version of social corporatism masking the iron fist of regulatory neo-liberalism (not even the cruel but more productive dog-eat-dog version of the libertarians) has had vast sums poured into it to save the very machinery that created the crisis in the first place – both economic and political.

    That direction of funds is why there is nothing left in the kitty for social investment. We get austerity while eight years of a ‘centre-left’ black president did nothing for black-white economic differentials under his watch. It’s all cultural politics, innit?

    The austerity is a bad thing but not facing the failures before 2008 and in handling 2008 and the consequences of those failures is why, if we have issues, those issues exist in the first place.

    It has nothing to do with Brexit except insofar as Brexit punctured the bubble of complacency in the trans-national Euro-elite about the slide into the doldrums which they had tried to evade by subsidising their own favoured constituencies and abandoning the mass of the population, hoping the masses were too stupid to see what was going on. They were not, it seems – at least in sufficient numbers.

    I fail to see what the attraction of the centralised European regulatory system is when it regulates on behalf of a closed and patronising elite. Or is it that some Trots see themselves as one day inheriting that machinery as a playground for their own ideological games and nostrums?

    The essence of the situation is this. Only national forces can get us out of this fix by shattering a failed system that can be rebuilt later on an effective inter-nationalism. We have three choices in play – an economically libertarian piratical capitalism that could probably deliver quite well for these islands but at the cost of gross inequality, a ‘radical centrist’ hogwash operation that wants to poddle along blind to the effects on future generations in order to reward its backers or ‘socialism in one country’ based on a significant forced investment in future-based infrastructures and effective welfare sustainable systems.

    In this forum, I would hope we would go for the last and take the hits necessary to get there, but, honestly, piratical capitalism would be infinitely better than a Euro-system thieving off our children and working people to keep the middle classes high on the hog of fine wines and foreign holidays.

    The social care and NHS crises are not down to Brexit, they are down to a complete lack of foresight and planning in the run up to 2008 (under the centre-left watch) and a failure to be radical at the point of crisis in 2008 and redirect capital into an alternative economic system that could drive us out of the doldrums that emerged.

    And a contributing factor to that failure was being stuck inside a system that limited what we could and could not do … there had not even been a debate on alternatives because it was futile under EU rules.

    The rot started with an imperial European project trying to impose its four ‘freedoms’ willy-nilly on a vast empire under conditions of forced integration, a sort of pale liberal version of Stalinism, while, in the Anglo-Saxon world, Clinton invented a triangulated socio-economics that tried to manipulate the market for social ends instead of creating a strong State that directed the market where necessary (social infrastructure) and yet also let it run free where necessary (innovation).

    If you want a better picture of what is going, listen to this from the Today Programme this morning on the British being way ahead on technological investment (absolutely critical) not in London but across the country – http://www.bbc.co.uk/programmes/p04xmzgn

    This is where the energy should go – into scaling up these industries so they create new jobs while a Socialist State keeps watch on and controls bad social and employment effects.

    Who on the Left has any serious awareness that we are on the cusp of a technological revolution of exceptional transformative power and risk and that the UK seems, once again, not only to be in on the start of the revolution but likely to benefit from being rescued from its slow strangulation by the EU.

    It is at this time that we need a strong Left opposition that looks forward to an alternative economics that will challenge Tory ideology, not a bunch of squabbling liberals obsessed with irrelevant political and constitutional issues which they cloak in a spurious economics.

    The latter is just an elite on the make and we just have to take some of those necessary short term hits to get us from A to B. But the real tragedy is that the Labour political leadership is dangerously intellectually unqualified to take things forward … and it has only three years at most to learn the skills to manage a failing system and turn it around.

    By then, from lack of effective opposition, the pirates may just have turned around the economy sufficiently to persuade the electorate, while liberals and Trots continue to insist on Brexit ‘being a disaster’.

  6. Karl Stewart says:

    Yawn…more neo-liberal Thatcherite gibberish from O’Leary.

  7. Bazza says:

    Could be something to do with Tory Neo Liberal Capitalist pursuit of cheap labour?
    Just re-reading Capital Volume 1 but taking time to do this (and reading references) and perhaps Big Business won’t invest in constant capital and are thus attacking variable capital (wages) to make more profit?
    To quote Johnny Rotten: “I could be wrong, I could be right?”
    Perhaps another reason why a future JC Left Labour Government should have Windfall taxes on big business plus state-led public investment, more democratic public ownership, serious taxes on the rich and corporations plus financial transaction taxes and close offshore banking and seriously curb the upper class welfare state.

  8. Bazza says:

    Footnote and see capital’s latest ruse probably in the field of variable capital – getting people to work for more years, more labour power out of the working person -from retirement at 65 to 66 for some and the latest plan to be decided I think in May 2017 could be under 45’s having to work until they are 68 and 20 year olds up to 70!
    Robbing people of vauable years to follow their own dreams, interests and leisures.
    Labour should commit to BACK TO 65 FOR ALL!

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