Join our community of smart investors
OPINION

Stagnant wages, stagnant investment

Stagnant wages, stagnant investment
November 1, 2021
Stagnant wages, stagnant investment

Official forecasts show that Rishi Sunak will fail to deliver his promise of an “economy of higher wages, higher skills, and rising productivity”. The Office for Budget Responsibility (OBR) expects real wages to fall next year and to rise only 0.5 per cent in the following two years. The outlook for real wages “remains poor”, says the Resolution Foundation’s Torsten Bell. He estimates that in the 16 years from 2008 to 2024 real wages will grow by only 2.4 per cent. That compares to a rise of 36 per cent in the previous 16.

This stagnation is not because profits are rising at the expense of wages. It’s much more because productivity growth has slowed. It grew by 32 per cent in the 16 years to 2008, but OBR forecasts imply growth of only 11 per cent between 2008 and 2024. And the OBR foresees no great acceleration. It sees growth of under 1.5 per cent per year over the next five years. That’s less than we had in the strike-prone crisis years of the 1970s.

One big reason (of several) for this slowdown is that companies have stopped investing. Forthcoming national accounts data will show that the volume of business investment this year is lower than it was in 2007. And even before the pandemic it was growing slowly – by only 1.1 per cent a year between 2007 and 2019.

Investment matters enormously for productivity growth and not simply because it means employees are working with better equipment. High investment is a sign that new, dynamic companies are starting and expanding: a lot of productivity growth comes from new entrants rather than incumbents raising their game.

There are many reasons why capital spending is stagnating, some of which pre-date the financial crisis: as long ago as 2005 Ben Bernanke, then chair of the Federal Reserve, pointed to a “dearth of domestic investment opportunities" in developed economies. There are, however, two factors which were triggered by the financial crisis and which might be exacerbated by the pandemic.

One is depressed animal spirits. Investment requires confidence. The financial crisis, however, taught businesspeople (and would-be businesspeople) that financial conditions and demand could deteriorate suddenly and sharply. That knowledge obviously reduces investment intentions. The pandemic could exacerbate these concerns: can we be confident there won’t be another pandemic and lockdown?

The other is a fear of credit constraints. Banks claimed after the crisis that they were willing to lend. But firms didn’t trust them to keep credit lines open, and so built up cash piles instead. While this crisis has seen credit flow (thanks to government loan guarantees) it has left small firms with huge debts: the Bank of England estimates that companies with turnover of less than £25m have seen a 24.9 per cent rise in their debt since the pandemic. This will hold back expansion.

Granted, there should be a snapback in capital spending soon simply as plans that had been put on ice during the lockdowns are finally enacted. But this is unlikely to reverse the long-term stagnation. The OBR forecasts that by 2024 real business investment will have grown by only 1 per cent per year since 2007 – and it has a record of over-predicting. It is this sluggishness that has contributed hugely to stagnant real wages. And it will take a lot more than a Budget to change this.