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Brexit is delivering better pay for British workers (on average)

Summary:
I find it amusing when some self-styled ‘progressive’ commentator, usually writing in the UK Guardian newspaper, bemoans Brexit and points to claims by business that there is a shortage of workers. The ‘shortage’, of course, is results from not being able to access unlimited supplies of cheap foreign workers as easily as before. When I see a shortage of workers, I celebrate, because it means employers will have to break out of their keep wages growth low mentality to attract labour; that they will have to offer adequate skills training to ensure the workers can do the work required; and, that unemployment will be driven as low as can be. What is not good about that? Brexit has done a lot of things, one of them being to provide the British working class to arrest the degradation in their

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I find it amusing when some self-styled ‘progressive’ commentator, usually writing in the UK Guardian newspaper, bemoans Brexit and points to claims by business that there is a shortage of workers. The ‘shortage’, of course, is results from not being able to access unlimited supplies of cheap foreign workers as easily as before. When I see a shortage of workers, I celebrate, because it means employers will have to break out of their keep wages growth low mentality to attract labour; that they will have to offer adequate skills training to ensure the workers can do the work required; and, that unemployment will be driven as low as can be. What is not good about that? Brexit has done a lot of things, one of them being to provide the British working class to arrest the degradation in their labour market conditions that neoliberalism has wrought in a context of plenty of low wage labour always being in surplus. A similar thing will come from the pandemic in Australia where our external border has been shut for nearly 18 months now.

On August 6, 2021, KPMG and REC (the Recruitment & Employment Confederation) published the latest – KPMG and REC, UK Report on Jobs – which revealed that:

Recruitment activity continued to rise sharply across the UK at the start of the third quarter … Permanent staff appointments and temp billings both rose at near-record rates, while growth of demand for staff hit a fresh series high as COVID-19 restrictions eased further and economic activity continued to pick up.

However, the availability of candidates continued to decline rapidly in July, driven by concerns over job security due to the pandemic, a lack of European workers due to Brexit, and a generally low unemployment rate. As a result, pay pressures intensified, with starting salaries rising at the fastest rate in the survey history, and temp pay inflation also accelerating notably on the month.

The Report said that:

1. “the rate of salary inflation was the sharpest seen in nearly 24 years of data collection”.

2. “an unprecedented rise in demand for staff” – well not really, just since the late 1990s.

There have been similar statements issued by employer and industry groups, such as the British Chambers of Commerce.

All bleating that Britain hasn’t got enough skilled workers.

Well, that just tells me that they need to train more workers given that last time I looked (a minute ago), there were more than 1.6 million who were unemployed.

There are also reports that “Employment experts believe people are being put off from work in certain sectors that have developed reputations for low pay and poor conditions in recent years” (Source).

So the cure is obvious – offer better training opportunities to the available workforce and better wages to induce the workers to invest the time in the training.

Pretty simple.

Brexit is done.

There are other reports about wage inflation in the UK becoming a problem and another negative from Brexit.

So this is the ‘market’ working.

The Office of National Statistics published the latest wage data – Average weekly earnings in Great Britain: August 2021 (August 17, 2021) – which shows that:

1. “Growth in average total pay (including bonuses) was 8.8% and regular pay (excluding bonuses) was 7.4% among employees for the three months April to June 2021 …”

2. “… since this growth is affected by compositional and base effects, interpretation should be taken with caution.”

I will come back to point 2 soon.

The following graph shows the annual growth in real (adjusted for inflation) average weekly earnings from January 2001 to June 2021 for Total Pay (which includes bonuses) and Regular Pay (which excludes bonuses).

The most recent rise looks dramatic.

Brexit is delivering better pay for British workers (on average)

But back to point 2.

The ONS does offer a warning in this blog post (May 19, 2021) – Beware Base Effects – for those who seize on month-to-month, or quarter-to-quarter results and think they are new trends.

But, this caution also applies to use of annual or longer-term data, when the base year one is using to compute growth is an abnormal or outlying observation.

As they note:

… it’s important to remember that we have just passed the first anniversary of the pandemic … the statistical effects of that landmark need to unravel before the real the path of inflation and other economic statistics becomes clear.

In other words, if, for example, retail sales had slumped by 20 per cent (because of the pandemic) then a year later any growth will look somewhat larger than is the historic norm because the ‘base’ of the growth calculation was historically very low.

See also this ONS blog post (July 15, 2021) – Far from average: How COVID-19 has impacted the Average Weekly Earnings data
– which explains the ‘compositional’ impacts on the average.

We learn that:

During the pandemic, we saw lower-paid people at greater risk of losing their jobs. Fewer lower-paid people in the workforce increased average earnings for those who remained in work.

Imagine the economy has two sectors, one paying $1000 a week to its 2 workers and the other paying $500 per week to its 2 workers.

The average weekly earnings would be $750 per week.

Now, say the low-wage sector shed a worker, then the average weekly earnings would be $833.30, a rise of 11.1 per cent, event though no individual worker was being paid any more per week.

That is an illustration of compositional effects.

ONS estimated that in June 2021 “the headline regular earnings growth rate is 6.6%”.

Taking into account the base and compositional effects, ONS indicated that:

… the base effect would reduce the headline rate by between 1.8 and 3.0 percentage points based on the two methods set out above. In addition, the compositional effect we estimate at 0.4 percentage points above pre-pandemic levels. This would give an underlying rate of between 3.2% and 4.4%.

So not as dramatic as the previous graph indicates.

Consider this revised graph, which adds the two dotted lines.

The growth rates in real AWE shown by the dotted lines are calculated by expressing current year AWE in relation to AWE in each corresponding month in 2018 (as the base year), which to some extent overcomes the ‘base’ problem.

The difference is quite stark.

Brexit is delivering better pay for British workers (on average)

Another way of appreciating what is going on is to compute the series as index numbers with the base-month of 100 being February 2020.

The following graph – which is in nominal terms – provides a good guide to the current wage movement and hardly suggests out of control wage inflation.

The thick red line just guides your eyes away from the period coming out of the pandemic and suggests that wages growth is just returning to the pre-pandemic trend, which wasn’t spectacular by any stretch of the imagination.

Brexit is delivering better pay for British workers (on average)

But the even more important point is not to try to argue that low wages growth is a good thing or a return to pre-pandemic wages growth, which was hardly flash, is a good thing.

Rather, we should celebrate the ‘market’ working to improve the lot of workers in Britain as the ‘artificial’ excess supply of labour brought on by the unlimited access to low wage labour from the poorer countries in the EU is reduced.

Go back to the first graph and you will see that real wages growth was negative for years after the GFC.

Real AWE fell in June 2008 and then fell continuously until September 2014.

The real wage gains made then turned out to be temporary and real wages started falling again in early 2017.

If we index Regular AWE and the CPI to 100 in April 2008 then it wasn’t until January 2020 that the two indexes coincided again, with the CPI being above the AWE throughout the period.

That is a shocking result for workers, given that during this period, productivity growth was ongoing (albeit weak) – meaning profits were taking an increased proportion of the national income generated.

Overall, the current real gains do not make up for the real losses in the post GFC period.

The analysis presented by the Joseph Rowntree Foundation – Workers in poverty – reinforces the conjecture that the British labour market has been failing the workers.

The JRF conclude that:

The number of workers in poverty has increased in recent years. Just under half of workers in poverty are full-time employees, just over 30 per cent are part-time employees and around 20 per cent are self-employed.

The following graph is derived from JRF data and shows the number of workers in different categories who are considerd to be poor.

In modern Britain, poverty has moved into blight those who have jobs as well as those deprived of work as a result of flawed macroeconomic policy settings.

Brexit is delivering better pay for British workers (on average)

So if wages grow faster than in the past, what’s the problem with that?

UV curve behaviour

The UV (or Beveridge) curve shows the unemployment-vacancy (UV) relationship plots the unemployment rate on the horizontal axis and the vacancy rate on the vertical axis and is used by economists to differentiate between cyclical and structural shifts in the labour market.

Refer to the blog post – Latest Australian vacancy data – its all down to deficient demand (July 2, 2013) – for a conceptual discussion about how to interpret this framework in terms of movements along curves and shifts in relationships.

Mainstream economists interpret movements along the curve as being cyclical events and shifts in the curve as structural events.

So, in that framework, a movement ‘down along the curve’ to the south-east suggests a decline in the number of jobs available due to an aggregate demand failure, while a movement ‘up along the curve’ indicates improved aggregate demand and lower unemployment.

If unemployment rises in an economy where there are movements along the UV curve it is referred to as “Keynesian” or “cyclical” unemployment – that is, arising from a deficiency in aggregate demand.

The mainstream economics literature claims that ‘shifts in the curve’ – (out/in) – indicate non-cyclical (structural) factors (more efficient/less efficient) are causing the rising (falling) unemployment.

Allegedly, the UV curve shifts out because the labour market was becoming less efficient in matching labour supply and labour demand and vice versa for shifts inwards.

The factors that allegedly ’cause’ increasing inefficiency are the usual neo-liberal targets – the provision of income assistance to the unemployed (dole); other welfare payments, trade unions, minimum wages, changing preferences of the workers (poor attitudes to work, laziness, preference for leisure, etc).

Using this logic in the 1970s, when the shifts were first noticed, mainstream economists argued that the Non-Accelerating-Inflation-Rate-of-Unemployment (NAIRU) had risen and that ‘Keynesian’ attempts at reducing unemployment through the use of expansionary fiscal policy would only cause inflation.

They argued that structural policies were needed, which marked the beginning of the neoliberal activation program and the attacks on trade unions etc.

Micro policies like cutting unemployment benefits and/or making it harder to get and remain on benefits became the norm.

The pernicious work test mentality entered the fray.

Industrial relations legislation in many nations made it hard for trade unions to prosecute successful wage claims and minimum wage adjustments stalled or were weak.

The problem was that the evidence used to justify all this was wrongly interpreted.

The shifts in the U-V curve had nothing to do with microeconomic or structural factors.

In most countries, shifts in the UV curve occur during major demand-side recessions – that is, they are driven by cyclical downturns (macroeconomic events) rather than any autonomous supply-side shifts.

Once the economy resumes growth the unemployment rate fall more or less in line with the new vacancy rate and the economy moves back up towards the north-west of the graph.

Here is the British UV curve from the June-quarter 2001 to the June-quarter 2021. I have marked some key date markers to aid your understanding.

It is clear that the British labour market moved down along the lower loop from the centre cluster as the GFC ensued and the Cameron government imposed misguided austerity policies.

As the delayed recovery took hold, the response was expected – vacancy rates rose and the unemployment rate fell in lockstep.

Then the pandemic hit and between the March-quarter 2020 and the June-quarter 2020, vacancies collapsed (falling from 785 thousand or 2.2 per cent to 340 thousand or 1 per cent), while the unemployment rate was largely protected by the policy intervention.

Over the next 12 months, vacancies have risen sharply without the commensurate decline in unemployment. I expect the latter will come soon as firms realise they will have to train local workers if they are to realise their own expansion plans.

Brexit is delivering better pay for British workers (on average)

Conclusion

Clearly, some firms will be finding it difficult to immediately fill their vacancies and training takes time.

But in the true full employment period, when vacancies tended to outrun unemployment, firms developed a forward-looking mentality to ensure their training programs were concident with their expected labour needs.

Years of unemployment and access to low-paid foreign labour has altered that sense of preparedness.

Brexit will force an adjustment on firms that will serve to benefit the low-paid workers I suspect.

It might make home help a bit more expensive, however, for bankers and other high-paid professional workers in London.

And it is that cohort that tend to scream about the negative consequences of Brexit.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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