The common theme of low-wage growth
Weak wage growth runs through the many themes which markets are focussing on
The media and financial markets have tried to make sense of a number of key themes in the past twelve months, including:
- The only modest rise in GDP global growth, major central banks’ reluctance to tighten monetary policy and the Fed’s glacial pace of rate hikes despite the improvement in the US labour market ;
- Donald Trump’s surprise election victory in the November US presidential elections;
- The Brexit referendum vote in the UK; and
- The rise of nationalism and populism in Europe.
Clearly a number of interconnected, sometimes self-reinforcing country-specific as well as global economic, financial, political, social and demographic factors have contributed to the shifting landscape which markets, companies, households and policy-makers face. But slowing real wage growth in developed economies, including the US, UK, Eurozone and Australia, has been a critical common denominator, in my view.
The failure of failure of nominal wage growth to keep up with inflation and rising income and wealth inequality following the great financial crisis are increasingly shaping public sentiment, influencing central bank and particularly government policies and colouring politicians’ pre-election rhetoric. Modest global GDP growth is clearly holding back real wage growth which is in turn weighing on GDP growth. Faster productivity growth could arguably break this cycle but as policy-makers are finding out there is no quick and easy route.
As a result, I would expect monetary policy in the UK, eurozone, Australia and other major economies to remain accommodative near-term and to be only very slowly tightened in the US, with governments increasingly turning to fiscally expansive policies to try and boost growth and wages. If this scenario pans out, the direct and indirect impact on financial markets should not be under-estimated.
Labour markets’ apparent strength in US, UK, Australian and even eurozone
Labour markets in developed economies have undoubtedly strengthened in recent years. Net employment in the US, eurozone, UK, and Australia has risen respectively 14 million, 2.9 million, 2.7 million and 1.1 million since end-2009 – a total of 20.7 million jobs created (see Figure 1).
These numbers mask country-specific trends, namely that total employment during the great financial crisis (2008-2009) fell sharply in the US (by about 8 million), the eurozone (5 million) and UK (750,000) but flat-lined in Australia (see Figure 2). Moreover, while the recovery in employment started around 2010 in the US, UK and Australia, the eurozone continued to shed jobs until early 2013 (see Figure 3) – highlighting the eurozone’s structural challenges and perhaps undermining the wisdom of the European Central Bank (ECB) waiting until January 2015 to initiate its quantitative easing program.
But in any case the recovery in employment in most developed economies is now entering at least its fifth year. The employment growth rate has slowed quite sharply since mid-2016 in the US, UK and Australia (see Figure 4), while it is still in the ascendancy in the eurozone (see Figure 5), which again likely reflects the more mature job recovery in the US, UK and Australia.
This significant job creation has been largely responsible for the rapid fall in unemployment rates in the US, UK and eurozone (see Figure 6). It has fallen to a decade low in the US and UK and in the eurozone has fallen below 10% for the first time since April 2011. In Australia, the unemployment rate has risen slightly in recent months but remains below 6%.
However, this focus on headline employment and unemployment figures masks a number of underlying weaknesses in these labour markets, as I have repeatedly stressed (see US economy not at full employment, 13 May 2016). These include:
- A rise in the number of unemployed leaving the labour force;
- The still modest share of those employed full-time and falling working hours; and
- Still large pools of available labour depressing nominal wage growth
1. Rise in the number of unemployed leaving the labour force
Part of the fall in the unemployment rate has been due to a rise in the number of unemployed leaving the labour force altogether but remaining within the working age population and still potentially wanting to work (see Figure 7). Moreover, the working age population continues to rise at about 0.7% per annum in the UK, 1% in the US and 1.5% in Australia. The result has been, until recently, a fall in the labour participation rate in the US and Australia and only a modest rise in the UK (see Figure 8).
Another and perhaps more potent way to track this trend is to measure the share of the working age population which is employed. While it has risen to multi-year highs in the UK to around 60.5%, it is still low in the US (60%) by historical standards and has fallen in Australia by nearly two percentage points in the past 8 years (see Figure 9). This potentially presents long-term problems, including a smaller share of the working population having to finance pensions for ageing populations. Up-to-date data are not available for the eurozone.
2. The still modest share of those employed full-time and falling working hours
Whilst developed economies have created a significant number of jobs, many of these jobs have been part-time and low-pay. As a result the share of employees which are employed full-time is flat-lining at quite low historical levels in the UK (73%), has risen to 82% in the US but from a low base and has fallen sharply in Australia to 68% (see Figure 10). To put it in context, half of the jobs created in Australia since early 2000 have been part-time jobs and only 28% of the increase in the working-age population has ended up in full-time jobs; in the previous 7 years that ratio was close to 50%.
The still modest share of those working full-time alongside a fall in the hours worked by both full-time and part-time workers has contributed to a fall in the number of hours worked per worker in the US, UK and in particular Australia (see Figure 11). Up-to-date monthly data are not available for the eurozone.
3. Still large pools of available labour which depress nominal wage growth
The combination of the above trends has resulted in still sizeable pools of potentially available labour – which I define as the unemployed, those working part-time and those not in the labour force but wanting to work. While this aggregate has fallen in recent years, it remains near 41 million in the US (see Figure 12) and 12.4 million in the UK (see Figure 13).
While the Australian Bureau of Statistics does not publish up-to-date monthly data of those not in the labour force but wanting a job, it estimated that in 2015 that number stood at around 1.2 million. Adding this figure to the number of unemployed and part-time workers, the pool of potentially available workers in Australia is about 5.75 million based on my estimates (see Figure 14).
Large pools of labour holding back wage growth
These still sizeable pools of potential workers are one important factor contributing to only modest nominal wage growth and in turn negligible real wage growth, in my view. As figures 15 and 16 show, there is an inverse correlation between the size of these pools of labour and wage growth in the US and UK. It is a similar story in Australia.
Combined with rising inflation, particularly in the UK, the result has been very modest real wage growth in the US and UK (around 2% yoy) and Australia (sub-1%), which is in turn likely holding back household consumption growth and ultimately GDP growth. The counter-argument is that household consumption growth has held up, including in the US and UK. However, dis-saving in the US and significant consumer borrowing from banks in the UK is at the margin helping to hold up household consumption growth. Moreover, UK retail sales contracted 1.9% mom in December and BRC data suggest flat-lining retail sales in January.
The simplest explanation is that economic growth has been insufficient to drive both higher employment and higher working hours and wage growth and that this growth has been unequally distributed, with CEO and executive pay growth outstripping workers’ pay. This is a theme which politicians across the left-right spectrum, including US President Donald Trump, British Prime Minister May and presidential candidates in the French presidential elections, have ceased on.
In the UK, there were many reasons why the electorate voted in favour of the UK leaving the EU but concern about the “import” of cheap EU labour was arguably one of them. It is no coincidence that President Trump has emphasised his goal of bringing jobs back to the US, particularly in blue-collar manufacturing, while promising to boost labour-intensive infrastructure spending.
Central banks, including the Fed, Bank of England and European Central bank have also had to factor in weak real wage growth in their reaction functions with even the Fed delivering a glacial-pace of rate hikes. Voting FOMC member Brainard last year repeatedly expressed her concerns about pockets of weakness in the US labour market. I would argue that weak wage growth is one the reasons the BoE is willing to look through the current rise in UK inflation and is reluctant to hike its record low policy rate.
However, still loose monetary policy may be insufficient to raise potential economic growth and wages and set in motion a virtuous cycle and I therefore expect governments, including in the eurozone, to varying degrees use fiscal stimulus to positively shock economies.
Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.
 It is admittedly difficult to gage what share of those who say they want a job are truly able and willing to work. In the same way, it is conceivable that some part-time workers are unable or unwilling to become full-time workers while some of the unemployed may not have the skill-set which matches demand. So adding all three groups together (unemployed, part-time workers and those not in labour force who want to work) may not give a totally accurate picture of the potentially available pool of workers. However, the overall trend is of informational value in my view.