Fall in wages

The sky outside my window is rather grey and dull, and that is what the UK economy looks like at the moment. I am neither an economist nor a statistician, but it is possible to feel and observe what is happening merely by walking around the towns, talking to people, watching and listening to the news, and reading the papers. According to the Institute of Fiscal Studies (IFS), [r]eal wages have fallen by more than in any comparable five year period. This does not surprise me, and it sounds like a prefect one-line description of the squeeze that many people are living through at the moment. It also notes that nominal wages have fallen, at a time there is inflationary pressure on the basics such as food and fuel. Apparently, bigger firms tend to cut the workforce, and smaller firms tend to keep the workforce but at lower wages. It is therefore not necessarily unemployment that is the problem but under-employment and under-payment.

The IFS thinks that part of reason why unemployment has not risen as much as it might have been expected is due to greater labour supply. Lone parents and older workers who used to withdraw from the labour market are staying in the market, and they are accepting lower wages, attributable in part to the changes in the welfare system. One political hot potato and unmentioned in the press release is migration, especially from within the EU: what has been the role of migrants in terms of the wage level before and after the beginning of the crisis? There has been political dishonesty, where some politicians argue the case for cheap labour offered by greater labour supply from migrants in keeping British economy competitive, and at the same time claim that migration is a problem. It is of course not a question of either or, but the political discourse, much needed, has not taken a form that would result in a reasonable set of policies.

There are different, confusing, and even contradictory, signs on the economy at the moment. How long will it take for real wages to increase again? Are things going to be better in one year’s time? What can the government, the Treasury, or the Bank of England do? Only brave souls would answer these questions, and predict the future. Britain is like a blindfolded person near a cliff, but not sure where the edge is, and that edge could be inflation, deflation, or a prolonged period of stagflation.