Wednesday, 19 February 2014

Are real wages about to surge ahead?


The squeeze on real wages that has gone on for longer than modern Britain has ever known is about to come to an end. Don't take my word for it. Look at recent wage data, which has been strengthening slowly, and the latest Consumer Price Index inflation numbers, which have been nuding down towards the former figure for some months.

When the lines cross, and pay packets start growing faster than price receipts, people will start to feel wealthier. The so-called misery index that takes into account inflation, unemployment and raw Gross Domestic Product (though this version contains data on the national debt as well) will start to fall even faster than it is at the moment. That sunny moment isn't far away now - at least in theory. It might well come in the late summer or autumn, but it might change the whole dynamics of the economy, and the very changeable electoral weather with it. As 'Public Policy and the Past' has noted on many occasions, rising real wages might save this government from ejection at the polls in May 2015. It didn't help the Major government much in 1997 but, hey, it's something to hang on to. An end to a historically-unusual economic ice age is something to celebrate - for everyone.

But look a little closer and all may not be what it seems. Today's relatively disappointing jobs data might herald rather slower gross wage rises in the months to come. That's certainly what the Bank of England thinks, signalling for all its worth that historically low interest rates will be with us for a year or so yet - and very low rates for some time after that. And lots of what employment growth there is has been in self-employment - now at record levels. Almost all of that's been full-time work, it's true, but that sector of the economy is notorious (registration required) for sucking up underemployment and marginal workers that'd rather get out there and do something - however unprofitable - than sit around at home. About half of the jobs being created are in the South-East of England and London, too, hardly helping the red-hot boom conditions there - or the rest of the country.

And remember that the CPI figure isn't all there is to it. The Retail Price Index figure - including rent and mortgage costs - actually edged up a little, thus meaning that the lines between household incomings and outgoings wasn't really closing. Given that the UK has failed to build enough houses for about forty years now, that's little surprise - but it might seem like a hollow joke to be told about the good times ahead when you're struggling with the rent or the interest repayments on your absurdly-overpriced bricks and mortar. Neither of those figures seem likely to cave in any time soon - though they may well edge down to 1.5 per cent or similar - so any rise in real earnings will be gradual at best.

The upshot? No-one is going to feel richer in 2015 than they did in 2010 - or 2008, the first year of the financial crisis (see above for the story since then). Ed Miliband will still be able to look square into the camera during any Prime Ministerial debate and say (as Ronald Reagan once did, long ago) 'are you and your family better off than when this government came to power?' The answer will be 'no', but also 'we're feeling a little better than we did, thank you very much'. A great deal rests on how people feel about that equivocal answer.

There's little doubt that the numbers will show us quite robust real wage growth by the end of the year. But what that means - how it will feel, and impact on politics? Well, that's much more uncertain. Only time will tell.

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