Last week’s figures showed that nominal wage growth is at a 10-year high; that productivity fell in the third quarter; and that inflation is stable. These numbers imply that workers are at last getting a bigger slice of the economic cake.
We can think of this in very simple terms. The value of what a given number of workers produce can rise in one of two ways – either if productivity rises, or if the price of what they produce goes up. What workers get is simply their wage. It follows that if wages rise faster than the product of productivity and prices their share of output is increasing. And if wages rise less, it is falling.
My chart plots this measure – the so-called own product real wage (OPRW) – since 1988. It shows that the OPRW rose from the mid-1990s to the financial crisis as real wages rose faster than productivity, but fell between 2008 and 2014 as real wages fell. Since then it has stabilised, and in fact rose in the third quarter. That rise, however, only partly reversed the fall earlier this year caused by the rise in productivity.
In truth, though, movements in the OPRW have generally been small in recent years – which is another way of saying that shares of wages and profits in GDP have been relatively stable.
But there’s no assurance that this must remain the case. A big problem here is that unless we get a surprise rise in aggregate demand there is no reason to think that productivity will grow strongly. Most of the things that cause such growth – such as capital spending, world trade, animal spirits, bank lending – are weak.
And if productivity stagnates then – as a matter of brute maths – only three things can possibly happen.
One would be that faster wage growth causes inflation to rise as companies try to protect their profit margins. Few economists, though, expect this. With demand likely to remain weak – and with over-capacity on the high street – many companies just don’t have the pricing power.
Another possibility is that the recent pick-up in wage growth ceases. If companies cannot pay for wage rises by raising productivity or prices, they’ll reject high pay demands. This is quite possible, Although unemployment – despite its recent rise – is near a 44-year low, there are 1.9m people out of the labour market who want a job. And as Danny Blanchflower and David Bell point out, many workers are underemployed. The labour market, then, isn’t as tight as it seems. That gives employers bargaining power.
The third possibility is that wage growth does rise, causing a squeeze on margins.
Which of these three things happen will of course vary from company to company. But the fact here is nasty: somebody – either employers or workers – is going to be hurt and disappointed.
