Take if from me: wages are not going to rise much over the coming years

The Office for Budget Responsibility’s forecasts are way too optimistic


I got up early to watch the Autumn Statement and found it hard to concentrate on what was being said, given the noise coming from the braying Tory mob. They have had so much bad news they had to latch on to any little positive thing they could find, given that one commentator this week said the Conservative Party was  in danger of dying on its knees. The overly political Chancellor sneered his way through and couldn’t resist throwing insults at the person he is worried about the most, his shadow, Ed Balls, who noted how badly the economy has performed during the past three and a half years.

Living standards have fallen. GDP per capita is lower than it was in 2010 when the Coalition was formed. Growth in 2012 was 0.1 per cent, compared with the 2.6 per cent the Office for Budget Responsibility forecast in November 2010. Today’s OBR forecast of growth of 1.4 per cent in 2013 is less than half what it was forecasting in November 2010. Real wages have fallen every year and continue to do so. The Labour Party was quick to point out that working people are on average £1,600 a year worse off since  Mr Cameron entered Downing Street. The Government is set to break its promise to balance the books by 2015 and now has its collective fingers crossed that it will be able to do so by 2019, maybe.

Ed Balls also noted that the coalition borrowing is forecast to be £198bn more than planned at the time of George Osborne’s first spending review. It is hard  to see anything less worth crowing about. Hardly a success story. In fact it’s nothing short of an economic disaster story with a house-price crash looking almost inevitable.

A little burst of growth over the last  three quarters, comparable to the growth of the economy in the three quarters of 2010 when the Chancellor inherited the economy, is nothing much to write home, about because bygones are not bygones in economics. Since the second quarter of 2010 the UK has performed worse, in output terms, than Australia, Austria, Canada, Finland, Germany, Israel, Japan, Norway, Poland, Slovakia, Sweden, Switzerland and the United States.

Great? Well, not exactly. Mr Osborne’s silly little claim that the UK was growing faster than any other G7 country went up in flames two hours after he finished speaking in the House of Commons when the US Bureau of Economic Analysis upgraded its growth numbers for the third quarter of 2013, which showed that the US grew faster than the UK over the same period – 0.9 per cent versus 0.8 per cent.

A good analogy comes from a Nascar race I went to last year where cars dash anti-clockwise left-handed around a short track at more than 200mph. The UK car posted the fastest lap, but was still well behind the leaders, having already been lapped four times by the top 10 cars. Now we find out that the US car lapped even faster, and is still three and a half laps ahead.

A great deal of Mr Osborne’s hopes for growth between now and 2015 rests on their being a substantial rise in real wages, that is to say on worker’s buying power. In part, that will be helped by the fall in inflation to around 2 per cent that is expected to come.

In 2010 the OBR said real wages would get back to their pre-recession levels in 2013, but that has now been pushed back to 2018. Today the OBR is forecasting nominal wage growth of 2.6 per cent in 2014, 3.3 per cent in 2015, 3.5 per cent in 2016, 3,7 per cent in 2017, and 3.8 per cent in 2018. That isn’t going to happen: no way, no how. As someone who has spent most of his career working on wage determination, take it from me: that is much too optimistic.

Wage growth is driven by both outsider and insider forces. Outsider forces are essentially how easy it is for firms to hire workers, so as the unemployment rate falls, wage pressure increases. The rate at which wages rise will depend how close we are to full employment, which is probably around  5 per cent, so unemployment rates well above that are likely to keep pushing down on wages. Insider forces are the ability to pay by firms. As profits rise wages tend to go up as everyone shares in the spoils, but there is little sign that is going to happen as employers want the returns for themselves. Plus there is still a public-sector pay freeze and public-sector workers continue to be fired in droves. Workers are worried about job security, and they want more hours at going-wage rates, which means wages won’t rise much for years.

If the good times had really started to roll we should have seen some movement in the polling data. The YouGov/Sun poll taken on 4-5 December was very bad news for the Tories, giving Labour a lead of 12 percentage points. Of those who voted Tory in 2010,  22 per cent said they would vote for Ukip, compared with 9 per cent of Liberal Democrats and 4 per cent of Labour voters.

YouGov also has some other data which warrant our attention and which do not augur well for the two Coalition parties’ hopes for the 2015 election.

The graph shows the proportion of people in 864 surveys conducted since May 2010 who say they disapprove of the Government’s record to date. On average, since 1 January 2011, 57 per cent of respondents say they disapprove of the Government’s record, 28 per cent say they approve, while 15 per cent don’t know. The first row of the table shows how little that lack of approval has changed, including over the last month.

The story is similar for three other questions in the table. First, respondents were asked: “Do you think the Tories and the Liberal Democrats are working well together?” Since 2011 a majority say “badly”. Second, respondents were asked: “Do you think the Coalition Government is good or bad for people like you?” Since 2011 the majority say “bad”. Finally, respondents in 138 surveys were asked: “Do you support or oppose the Coalition Agreement between the Tories and the Liberal Democrats?” The minority have supported the Coalition since the start with a big jump in 2011 which has remained constant. Interestingly, just as with the polling data, there has been little change in any of these surveys, despite the Coalition’s claims that all is well on the western, northern, eastern and southern fronts. Time will tell.

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