David Blanchflower: In some respects America and Britain aren’t so different

Both the US and the UK have  seen quite rapid increases in under-employment in recent years

Malcolm Butler will never have to buy a meal or a drink in New England for the rest of his life. The undrafted rookie made the winning play for the New England Patriots to win the Super Bowl with 20 seconds left in the game. It really wasn’t over until it was over. That set my New England-born son wild. It was the fourth Super Bowl win for Tom Brady who was the Most Valuable Player (MVP) – don’t you love it! Ben Bernanke, of course, is my MVP of central bankers.

The Patriots were crowned world champions. Nobody mentioned of course that there are only 32 teams in the NFL and none of them from outside the United States.

It is true that in some other respects the United States is a country alone. According to the OECD, the US average household net-adjusted disposable income per capita of $39,531 a year, compared to the OECD average of $23,938 a year, and $25,828 for the UK. So in comparison with the rich US, the UK is a relatively poor country. US workers have more annual hours than UK workers – 1,790 vs 1,654. The average US student scored 492 in reading literacy, maths and science in the OECD’s Programme for International Student Assessment, vs 502 in the UK, so not all is lost.

Interestingly, a lower percentage of Americans smoke than is the case in the UK: 14.8 per cent vs 19.6 per cent. Indeed, 90 per cent of Americans report their health is “good or very good”, vs 78 per cent in the UK, but a much higher percentage of Americans are obese; 37 per cent, vs 25 per cent in the UK, which in part explains why life expectancy in the UK is longer: 81 vs 79. So it’s a mixed bag.

There are a lot of similarities though between the two countries’ recoveries from the Great Recession. The US and the UK are being hit by the apparent slowdown of the world economy in general and the Chinese in particular, with quarterly GDP growth slowing Q4 2014 to 0.7 per cent and 0.5 per cent respectively.



Of major concern is the recent collapse in the Baltic Dry Index, which tracks the price of shipping dry goods such as coal, iron ore and corn, whose collapse, from a peak around 11,800 in the spring of 2008 presaged the global slowdown. The most recent data has the index at 577, the lowest level since 1986. The index suggests that shippers are cutting their prices to attract business; reduced demand for raw materials is a bad sign and suggests that companies have less confidence in their economic prospects.

One possibility is that the cost of shipping is falling due to drops in the oil price; another possibility is that there is a major excess supply of ships. The most worrying possibility is that this indicates a major collapse in demand. The economist Nouriel Roubini has already argued that China’s slowdown may be sharp. Commodity prices continue to tumble.

Over the last couple of years both the US and the UK have seen significant falls in their unemployment rates, which are below 6 per cent. One major difference, though, is that in the US the participation rate has fallen, whereas in the UK it has risen, although over the last few months it has also started to drop. A major research question in the United States is whether this rise in those who are out of the Labour Force (OLF) is structural or cyclical. In my work I find a large proportion of those who dropped out of the US labour force, many of whom are young, will take jobs when the labour market improves.

Both countries have also seen quite rapid increases in measures of under-employment, especially an increase in the proportion of those in employment who say they are part-time for economic reasons, and these under-employment measures have declined more slowly than unemployment. Workers want more hours at the current rate of pay. It turns out that the OLF and the under-employed together in the US provide additional labour market slack over and above the unemployment rate, pushing down on wage growth. In the UK, under-employment plus a potential inflow of migrants from Eastern Europe weaken workers’ bargaining power, preventing wages rising. Hence it isn’t surprising to find that there is no sign in either the US or the UK of any marked pick-up in nominal wage growth, although there has been a rise recently in real wages as inflation has fallen due to declines in the price of oil and commodities.

Real wage growth in the US has been roughly constant since 2010; nominal wage growth averaged around 2 per cent, although in two most recent data releases it fell to 1.7 per cent. The latest wage data for the UK shows wage growth also of 1.7 per cent.

The first chart shows newly released data from the Office for National Statistics (ONS) on the much more rapid fall in hourly real wages in the UK using the Labour Force Survey measure across four industries. On this measure the smallest decline in hourly real wages is among bankers and financiers (minus 3.5 per cent). Surprise, surprise! The biggest fall was in construction (minus 14.6 per cent). Manufacturing was down 5.5 per cent, while hotels and restaurants were down 6.7 per cent. For the economy as a whole, real wages are down 8.4 per cent since Q1 2008 and 6 per cent since Q2 2010. This is scary.

The second chart shows new data reported by the ONS on the decline in median annual earnings from the Annual Survey of Earnings and Hours (ASHE), deflated by the CPI, and tell a similar story to the first chart. The data are from April of each year and relate to earnings over the preceding year. Real earnings have fallen in each of the last six years, with the sharpest fall in 2011. Overall real annual earnings are down 10.2 per cent on this measure since 2008 and 7 per cent since April 2011. Wow!

In light of this evidence it will be interesting to see if the Bank of England’s Monetary Policy Committee is going to change its optimistic forecast for wage growth of 3¼ per cent in 2015 and 3¾ per cent for 2016 and 2017 in its Inflation Report due out this week. Don’t bet on it. Compared with the start of the recession, typical workers are a lot worse off, in terms of their purchasing power since the recession started, in the UK than equivalent workers in the US.

Go Patriots!