Wednesday 16 July 2014

The unemployment/wages conundrum

(Apologies for the slight break in service, both Messr's Drew and Cityunslicker have been travelling a lot over the last week...normal service now resumed. Thanks to Mr Q. for filling in, pity he was again overlooked in the re-shuffle)

So today we have good employment numbers, with unemployment down to 6.6% (Germany is at 6.5%, USA at 6.3%, Canada 7.1% , Holland 7.2%, Sweden 8.3% France 10.4%, Italy 12.4%). The UK is well placed in the Western world in terms of unemployment rates overall. The levels have come down significantly in the past year and continue to do so. With a 4% probably around the lowest  any economy could sustain (even China has over 4% and Japan too), the UK is on track to get back down in the next few years to the trend rate of 5.0%.

Which is great news for the Government. However there is a big BUT coming. Wage growth has fallen back again to only 0.3% this month. There is simply no pressure on employers to have to pay more for their staff, even if supply is tighter, clearly in many sectors this is not enough to actually engender any wage inflation.

Again, the core reason for this is the increase in self-employed workers. This can skew the statistics, as self-employed people on the whole earn less than employed people. Reality of course tells me something different. Self-employed people are able to claim all sorts of expenses and costs, as well as potentially take cash in hand payments. Many industries with high earning workers like IT have gone almost entirely to a self-employment consultant model. The companies gain great labour flexibility and reduced taxes. The workers lose rights but gain in taxes and flexibility too.

This may well be the model of the future, however it also leads to downward pressure on wages as a per day rate or per hour rate is hard to negotiate on an individual basis - after all, this is why Unions rose to prominence in the first place!

Also some very under-employed people are likely to call themselves self-employed for their own needs of self-esteem.

No doubt overall there is more work available as the economy grows, but how this is shared out and how much tax people want to pay on their earnings is there for all to see.

14 comments:

Blue Eyes said...

I don't know. The self-emoloyed I know do pretty well flitting from bank to bank, giving up their contracts when a more lucrative one is dangled in front of them. Maybe you mean people who avoid the dole by drop-shipping eBay and Amazon tat in which case maybe you are closer to the mark.

I think the drop in unemployment is to do with a better economy and a slightly tougher welfare regime. Wages will start to rise when we get a bit closer to real growth rather than catch-up growth. The economy is still hugely down on where it might have been if it had kept growing at 2% a year instead of losing 10% under Gordoom.

Steven_L said...

The economy is still hugely down on where it might have been if it had kept growing at 2% a year

But all that time it was growing at 2% a year, Gordoom was running a fiscal deficit of over 2% a year.

Since the bust, we went into recession while borrowing as much as 13% of GDP, flatlined at 10% of GDP and are growing at around 2% by borrowing around 7%.

And that's just public debt. Private debt exploded in the 90's and naughties.

And people are seriously talking about interest rates rising! What will happen after the next bust in 2022-2025? Inflation? Mass debt write-offs?

A new era where being in debt for 10 times your income is 'normal' and the cost of credit is highly regulated at fractions of 1%?

Blue Eyes said...

Inflation also collapsed from the 1990s. Why do apparently-intelligent commenters so often forget that?

Is "debt" of "ten times income" inherently unsustaibable if the money is invested wisely? I have "debts" of 3.5 x income OMG! But oh, wait, I have assets of 4.5 x income. Am I a menace? Who lends all this money to the evil debtors? I wisg faux-Austrians would stop shrieking about debt levels and ask more sensible quesfions about debt sustainability.

As for potential rate rises, if the economy is as sensitive to rate rises as you worry, then rates won't have to rise much to choke off the debt bubble you worry about.

If wages are rising pitifully slowly then it doesn't look as though a 1970s-style wage/price spiral is very likely.

Steven_L said...

Debts of a million times income would be serviceable if interest rates were just a few millionths of a per cent.

Only you'd never pay the capital off unless selling whatever you purchased would always cover the principal.

I just wonder if this is where we are headed. As borrowing £10 per annum to end the year £2 better off (as the UK has ever since 'inflation dropped in the 90's' and we started importing more) means interest rates have to stay low, and keep getting lower, or one day we'll enter a massive depression.

theProle said...

Lots of self employed subbies in my game these days, and very few decent employed staff for hire - I got a 16% increase this year (the first big one for a while!), and my gaffer still can't fill his vacancies...

Most employed staff with any get up and go are moving to subbie status if only to rob the taxman (lots of cash work kicking about in this game too) - I'm looking at switching after the summer - I don't earn enough to give the taxman a PAYE sized share, and I spend a fortune on stuff that could be legitimatly expensed.

No idea what's driving it, but to say there is plenty of work about in the medium/heavy engineering world is an understatement.

Blue Eyes said...

SL, it's a good point. A friend at university maxed his credit cards to the point where his discretionary income covered the minimum payments. That is clearly stupid if he buys clothes, clever if he buys an appreciating asset.

We are in a depression.

Electro-Kevin said...

I'm not so sure that we have as much control over interest rates as we think.

Externalities sometimes cause them to be raised.

I admit. I am blinded by science when it comes to "We can create money from nothing to kill debt." or how "Germany can give money go Greece so that Greeks can buy Mercedes Benz cars."

Or why the Chinese will accept our QE'd repayments without being very annoyed with us. One presumes the sell off of our houses, university places - infrastructure is all part of that deal.

10x income/debt ratio can never be right on a personal level - even if there are assets of significant proportions backing it. Equity can be wiped out over night.

It is a typical 'eggs in one basket' situation.

Electro-Kevin said...

't' for 'g'.

My left index finger after two glasses of Pinot.

Electro-Kevin said...

Low wages... one way or another in Britain it is subsidised by the ever dwindling taxpayer.

Steven_L said...

EK, I reckon it's the exchange rate that can't be controlled (without some kind of international treaty) but non black market sterling interest rates can be controlled by regulation.

But there used to be fixed exchange rates, and the USA, Japan and the EU are all up to their necks in debt, so why won't they all try to control interest rates more?

Information published by the Fed after the crisis proved they were injecting dollars into the BofE and the ECB. Why won't central banks start acting more in concert? In fact, if their political masters tell them to, they'll have to. And if the President of the USA asks nicely enough he'll probably get whatever he wants.

Anonymous said...

"The levels have come down significantly in the past year and continue to do so."

The unemployment figures are utter fiction. How can they be anything else when the doors are wide open to unlimited immigration?

Speaking as what would be described as a discouraged worker.

I'm not in the statistics.

Blue Eyes said...

Lump of labour fallacy.

CityUnslicker said...

Good comments. I would posit that PAYE taxes are too high and where people can 'safely' switch they do - either at the upper end or the lower end.

Of my neighbours where I live, the self-employed seem to do lower quality jobs but have higher standards of living than the PAYE types - its a trend which has accelerrated over the past few years.

BE - Lump of Labuor fallacy - tick. Excess of supply over demand in certain industries too though and also minimal wage rises partly caused by cheap labour supply - good in a capitalistic sense, but nto sure how it all comes out in the wash after the cost of benefits.

Blue Eyes said...

I have no doubt that in some industries newcomers have had a huge effect. For example the stereotypical East European builders and plumbers have broken the indolent domestic industry's stranglehold meaning that the customer is more likely to get the work done promptly and properly. Although apparently demand still outstrips supply in London - someone I know was told by the builder that he would do the job "in July".

In other industries where skilled trained EU migrants are competing with people trapped on welfare, wages will fall until the skilled trained EU migrants move up the value chain.

But it is absolute rubbish to state that unemployment would be a million lower if a million fewer EU citizens had arrived.