Real wages are rising again. Official figures next Tuesday are expected to show that average earnings rose by around 3 per cent in the year to February. That’s 0.3 percentage points more than the rise in consumer prices in the period, implying the biggest annual increase in real wages for over a year – although this still leaves them over 8 per cent lower than they were 10 years ago.
This does not, however, mean we’re about to see a big or sustained rise in real wages. I say so for a simple reason: productivity is flatlining. Next week’s figures are also likely to show that hours worked have increased by around the same amount as GDP in the past three months. That suggests that the jump in productivity we saw in the second half of last year was just a blip.
This matters enormously. If we’re not producing more, we can’t pay ourselves more. (Yes, economics is sometimes very simple). Flat productivity therefore means flat real wages over time.
But why has productivity been so weak for so long? (It rose only 0.2 per cent per year in the 10 years to the end of 2017). Here, Patrick Schneider at the Bank of England points to a curious fact – that the post-crisis slowdown in productivity is concentrated in the most productive companies. The most productive one-fifth of companies has seen much slower productivity since 2010 than they did before the crisis, whereas the least productive two-fifths have seen slightly faster growth.
This might partly be a story of particular industries. Philip Wales at the Office for National Statistics points out that the productivity slowdown has been located in the finance, telecoms and manufacturing sectors.
There might, however, be good reasons why highly productive companies have been less able or willing to up their game. One possibility is simply diminishing returns: if a company is already embodying best practice, it’s tough for it to get even better. A second possibility is that competition has declined. Slower growth in world trade means that companies face less intense competition from overseas. This weakens incentives to improve or to find new specialist niches. A third possibility is that weak demand has reduced incentives to innovate and invest. And fourthly, increased uncertainty has encouraged companies to delay investment and innovation plans. In the aftermath of the crisis, this uncertainty was about demand and credit availability, but more recently it has been about the impact of Brexit.
It’s difficult to see any of these factors disappearing quickly – or at least we cannot be at all confident they will do so: productivity is difficult to forecast. This will put a cap on real wage growth: it’s possible that a tight labour market will bid up wages even with flat productivity, but insofar as this squeezes profit margins it is not sustainable.
Of course, if real wage growth remains weak then so too will consumer spending, especially to the extent that the savings ratio is now so low as to suggest that households might want to try to restore their finances by saving more or borrowing less. In this sense, retailers’ woes might not be over. And those troubles reflect not just industry-specific problems, but are also a symptom of a deeper problem with the economy generally.
