I say this because just three factors can account for three-quarters of the variation in annual real wage growth since 1990.
One of these is past inflation. If inflation is high one year, real wage growth is higher the next, as workers claw back some of the unexpected loss of real incomes.
The second is unemployment. As you'd expect, high unemployment reduces subsequent wage growth.
Thirdly, is labour productivity. This affects real wages in two ways. First, faster productivity growth is associated with faster real wage growth; if workers become more productive, they get paid more. Secondly, past productivity matters. If this is high relative to past real wages the latter subsequently rise, and if it is low, real wages subsequently fall.
These factors are now ambiguous for real wages. The good news is that productivity might - only might - be picking up; it rose 0.5 per cent in Q2. The bad news is that unemployment is still so high as to bear down on real wages. Since 1990, each percentage point above-average unemployment rate has been associated with 1.1 percentage points lower than average real wage growth. (The wage-productivity ratio is close to its long-run average so its effects should be innocuous.)
I estimate that if productivity grows by two per cent in the next 12 months - roughly its long-run average and consistent with Q2's growth - then if post-1990 relationships hold, real wages will rise by around 1.2 per cent in the next 12 months.
On the one hand, this is an improvement on recent years. On the other, it suggests that real wages will probably rise less than real GDP, implying that workers will get a less than full share of the recovery. (We don't need a firm view on GDP growth to say this, as if GDP growth disappoints, productivity will probably grow slowly, which will hold down real wages. It's high unemployment that's the problem for real wages.)
In one sense, this is good news for investors. It means that if we get a normalish economic upswing with a pro-cyclical rise in productivity, profits will do well. There is, though, a danger here. If profits are seen to rise at the expense of wages, political demands to do something about the "cost of living crisis" might intensify.
Note: I'm defining real wages here as total employees' compensation, divided by hours worked and deflated by the CPI.
