Wages and economic recoveries

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Question 1: Do you agree that lower real wage growth was beneficial for employment levels during the Great Recession?

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Question 2: Do you agree that the different behaviour of UK real wages relative to Eurozone wages during the Great Recession is in large part due to the UK having different labour market policies?

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Summary

Low growth of real wages has had a positive impact on European employment rates during the recovery phase of the Great Recession, according to the majority view of the latest Centre for Macroeconomics and CEPR expert survey. Asked about the quite different behaviour of wages in the UK relative to the big Eurozone economies, another strong majority of respondents agrees that the dire performance of UK real wage growth is in large part due to the country’s labour market policies, which provide workers with comparatively weak protection.

Introduction

In its 2016 Employment Outlook, the OECD documents that real hourly wage growth has behaved quite differently across countries over the past ten years.[1]

This is true even among the large European economies. Comparing the level of real hourly wages in the fourth quarter of 2015 with a counterfactual value based on the assumption that wages had grown according to the pre-crisis growth rates after the fourth quarter of 2007 reveals stark differences. This ‘cumulative wage gap’ is plus 14.6% for Germany, minus 1.6% for France, minus 3.9% for Italy, plus 1.0% for Spain and minus 26.3% for the UK.[2]

Some of these differences are due to composition effects, but they are clearly not the whole story. Dustmann et al (2014) document that since 2007, the UK has also experienced a massive decrease in competition-weighted relative unit labour cost, whereas this measure remained roughly constant for France, Germany, and Italy.[3] Spain also displayed a decrease, but smaller than the one observed for the UK.

Real wages and employment levels during recoveries

The first question of this survey focuses on the role that wage setting has played in overall economic activity and specifically employment levels during and after the Great Recession. It could be argued that reductions in real wages are helpful for recovery in that they increase profits and enhance incentives for firms to invest and create jobs. In a range of macroeconomic models, lower wage growth would indeed stimulate employment.

But there are other arguments pointing to possible negative consequences of low wage growth. Low wages could mean low demand, and concerns about demand may have been more important than concerns about wage costs during the Great Recession.

The Institute for Fiscal Studies (IFS) documents that younger workers faced especially sharp reductions in earnings in the UK.[4] These workers are likely to have high marginal propensities to consume. Moreover, low wage growth does not necessarily mean higher profits. Difficulties in finding financing for investment and efficiency improvements may have lowered workers’ productivity levels.

Question 1: Do you agree that lower real wage growth was beneficial for employment levels during the Great Recession?

Sixty-two panel members answered this question. A majority agree: 65% either strongly agree or agree, 24% neither agree nor disagree, 10% disagree (nobody strongly disagrees), and one panel member does not express an opinion. The majority of panel members that agree increases to 70% when the answers are weighted with self-reported confidence levels.

Even though only a small number of panel members disagree with the proposition, many panel members emphasise that this is a difficult question. One aspect that makes it difficult to understand the role of wages for employment is that both variables are endogenous. For example, Roel Beetsma (University of Amsterdam) points out that ‘Wage growth being endogenous, one cannot a priori say that it is beneficial for employment.’

A related aspect is that it matters what factors are behind the different behaviour of real wages in different countries. Fabien Postel-Vinay (University College London) writes ‘I agree that, holding productivity constant, some degree of wage moderation will encourage hiring. However, I also think that cross-country differences in post-recession wage growth – the dire performance of the UK in particular – reflect in part differences in the types of jobs that were created. Indeed, I am very sympathetic to the observations that ‘low wage growth does not necessarily mean higher profits’ and that ‘difficulties in finding financing for investment and efficiency improvements may have lowered workers’ productivity levels.’

The particular situation of a given country and its government’s policies are also deemed to be important. Jordi Gali (Universitat Pompeu Fabra) argues that ‘The role of wage moderation/wage cuts in promoting recovery cannot be independent of the monetary regime in place. It will be highly effective if the associated drop in inflation is accompanied by a sufficiently expansionary monetary policy. At the zero lower bound or within a currency union, this may not happen.’

The answers make clear that there are many aspects to this question. Nevertheless, there is strong support for the view that low wage growth had a positive impact on employment rates during the recovery phase of the Great Recession. Sir Charles Bean (London School of Economics) argues that ‘the [UK] wage moderation during 2009-10 was absolutely central to limiting the rise in unemployment during the period after the collapse Lehman Brothers. Continued wage moderation also helps to explain the subsequent strength of employment growth and the return of unemployment to historically low levels.’

Similarly, John Van Reenen (MIT) writes ‘The UK did relatively well compared to other countries in terms of employment rates during the Great Recession. It is highly likely that this was related to greater real wage flexibility, which helped ‘price workers into jobs’.‘

Panicos Demetriades (University of Leicester), who disagrees, writes ‘A low wage economy is likely to be a stagnating economy with low productivity, low effort, insufficient incentives for education and training, low aggregate demand, little investment and high unemployment.’ There are other panel members, even among those who agree, who likewise indicate that moderate wage growth may also have negative consequences for employment.

Sylvester Eijffinger (Tilburg University), who strongly agrees, argues that ‘Lower real wage growth might be beneficial for economic growth and employment in the short to medium term but can be detrimental for economic growth and employment in the (very) long term because it hampers innovation that is necessary for increasing efficiency and productivity growth.’

Several respondents point out that the positive impact of lower wage growth on employment does not necessarily mean that it is a good thing or that it does not also have negative consequences. David Miles (Imperial College) argues that ‘Welfare might have been higher with somewhat higher real wages even if that meant somewhat lower employment – that depends on by how much labour productivity would have been boosted by greater incentives to improve output per worker hour.’

Jonathan Portes (King’s College London) writes ‘to the extent low real wage growth was driven by increases in the insecurity and precariousness of employment, this may have resulted in an overall reduction in the quality of employment for many.’ But, he continues, ‘to the extent that low real wage growth was the result of persistently weak productivity (driven by other factors), it is arguably preferable that the inevitable pain that resulted should be shared rather than concentrated on the unemployed.’

Are government policies important for low UK wage growth?

During the period from 2007 to 2015, the UK has been unique in being the only advanced economy that experienced economic growth and a reduction in real wages.[5] Whereas in 2014, real wages were still almost 10% lower than seven years earlier, GDP had already reached pre-crisis levels in 2013. During this period, real wages increased by an average of 1% per year in France and Germany. 

The first question focuses on possible consequences of different wage behaviour. The second question focuses on possible reasons behind the quite different behaviour of wages in the UK relative to other European economies.

One possible reason is that the UK labour market is more flexible and increases in unemployment rates have a larger dampening effect of wage growth. In other words, policy choices may have shaped labour markets and these policies are important for the behaviour of wages.

Another possibility is that the different behaviour in the UK is simply due to different experiences of inflation. In the UK, the inflation rate was above the Bank of England's 2% target for a large part of the Great Recession and peaked above 4% in several quarters. In France and Germany, inflation averaged around 1% over this period.

Another possibility is that the UK is simply a different type of economy or that the financial crisis affected the UK economy in a different way than it did the other large European economies. 

 Question 2: Do you agree that the different behaviour of UK real wages relative to Eurozone wages during the Great Recession is in large part due to the UK having different labour market policies?

Sixty-three panel members answered this question. Again a strong majority agrees with the question: 60% either strongly agree or agree, 22% neither agree nor disagree, 14% either strongly disagree or disagree, and 3% express no opinion. When answers are weighted with self-reported confidence levels, then the majority increases to 62%.

Wouter den Haan (London School of Economics), who agrees with the proposition, argues that the ‘UK labour market differs in key dimensions from Eurozone labour markets. In particular, it is quite harsh and offers less worker protection. These are due to policy choices and are very likely to impact wage setting, for example, by affecting workers' bargaining position.’

Government policies are not necessarily the only reason for more (wage) flexibility in the labour market. David Cobham (Heriot-Watt University) says ‘the difference in behaviour needs to be related to the substantial shift in the balance of power in the labour market, which in turn is related not just to policies – the removal of workers' and unions' rights – but also to the wider social changes embodied in the demise of an autonomous working class culture.’

Jonathan Portes argues that ‘changes in technology and work practices’ have contributed to structural changes in the UK labour market, in particular the growth of forms of insecure and precarious work’, which in turn have been important for wage setting.

None of the panel members indicate that different labour market policies have played no role at all. Panel members that disagree or neither agree/disagree argue that other factors matter as well and/or matter more. Michael McMahon (University of Warwick), who disagrees, writes ‘I'm sure the flexibility of the [UK] labour market has contributed. As have differences in inflation – you can easily imagine firms reluctant to increase prices even further in tough demand conditions facing pressures to cut costs across the board and wage restraint was part of this. Weak productivity growth has further limited the scope for pay increases (another difference with the countries mentioned like Germany).’

Similarly, Stefan Gerlach (BSI Ltd) maintains that ‘While the UK does have more flexible labour markets than most of the euro area, the different behaviour of inflation is also important.’

Notes:

[1] http://www.oecd.org/els/oecd-employment-outlook-19991266.htm

[2] See table 1.A2.1 of the 2016 OECD Employment Outlook.

[3] See http://fmwww.bc.edu/EC-C/U2014/388/jepDustman.pdf.

[4] https://www.ifs.org.uk/uploads/budgets/budget2017/budget2017_jc.pdf

[5] https://www.ft.com/content/83e7e87e-fe64-11e6-96f8-3700c5664d30

 

 

 

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How the experts responded

Are low wages good for economy recoveries?

Participant Answer Confidence level Comment
Wouter Den Haan London School of Economics Disagree Very confident
Wage moderation during the great recession may very well have been harmful for employment, given that there is empirical evidence indicating that many firms thought the main concern of firms was the inability to sell their products
Akos Valentinyi University of Manchester Strongly agree Very confident
Morten Ravn University College London Neither agree nor disagree Extremely confident
What matters is (a) real wages RELATIVE to productivity, and (b) real wage flexibility. Real wage growth may be high but not obstructing employment growth if productivity growth is high. If the question is meant to be whether low real wage growth relative to productivity is good for employment, I would agree under normal circumstances. Wages is the single largest component of marginal costs for most firms. High real wages relative to productivity make firms uncompetitive, has a negative impact on hiring, and makes it difficult for new workers to enter the labour market. The other way of asking the question, is whether wage flexibility is beneficial for employment. In normal times, wage flexibility should be expected to be stabilizing. To the extend that the value of jobs has declined in the recession, low real wage growth therefore should be expected to have been beneficial for employment. It is possible, however, that in deep recessions, the impact of wage flexibility on demand for goods may introduce an amplification mechanism that may dominate. This will depend crucially on whether wages of existing or new jobs are more flexible and the extent to which workers are insured against the adverse effects of job loss.
Richard Dennis University of Glasgow Agree Confident
Martin Ellison University of Oxford Agree Confident
Gianluca Benigno London School of Economics Agree Confident
At least in the context of the UK economy, a decline in the real wage has stimulated hiring.
Philippe Martin Sciences Po, Paris Agree Very confident
Fabien Postel-Vinay University College London Neither agree nor disagree Very confident
This may be an obvious thing to say, but I agree that, holding productivity constant, some degree of wage moderation will encourage hiring. However, I also think that cross-country differences in post-recession wage growth - the dire performance of the UK in particular - reflect in part differences in the types of jobs that were created. Indeed I am very sympathetic to the observations that "low wage growth does not necessarily mean higher profits" and that "difficulties in finding financing for investment and efficiency improvements may have lowered workers’ productivity levels".
Giuseppe Bertola Università di Torino Agree Very confident
It was, in relative wage-growth terms, to the extent that the Great Recession was an international phenomenon. The demand-side aspects that make the answer ambiguous in principle are relevant globally and for the non-traded sector. But after the initial global impact the crisis had asymmetric implications across advanced countries with different sectoral output composition and international asset positions, and country-specific counterfactuals with higher wage growth would have lower employment.
Harry Huizinga CentER, Tilburg University Agree Confident
Kevin Hjortshøj... Oxford University Neither agree nor disagree Confident
It depends on context, for example levels of debt in the economy in question, and whether the lower real wage growth is due to lower nominal wage levels or lower nominal wage growth or higher inflation. Wage declines don't seem to have helped Greece a lot, though you could make a case that wage developments maintained employment in low productivity growth Britain.
David Cobham Heriot Watt University Neither agree nor disagree Confident
Lower real wage growth makes it cheaper for firms to employ (more) workers, but it does little for aggregate demand, and of course it encourages labour- rather than capital-intensive investment which is bad for long term productivity growth.
David Bell University of Stirling Agree Not confident
Why is the UK such an outlier in relation to the "wage gap"? Different competing explanations - failure to eliminate "zombie" firms post-2008 - surely this applies to other parts of Europe?; weaker labour market institutions - surely applied pre-2008?; substitution of labour for capital - why would this not apply elsewhere?
Volker Wieland Goethe University Frankfurt and IMFS Agree Very confident
Evi Pappa European University institute Disagree Confident
I have some objections about Germany here. A distinctive feature of Germany’s recession experience was that unemployment hardly increased. Also competition-weighted unit labor cost in Germany have been very low even before the recession started and many economists attribute the small increase in unemployment to this factor. In general, wage flexibility per se is a necessary but not a sufficient condition for recovery, labor market flexibility is key.
Roel Beetsma University of Amsterdam Agree Confident
A priori I would think that wage growth relative to pre-crisis growth is the endogenous result of demand and supply, which may explain the cumulative wage gap for Germany. Wage growth being endogenous one cannot a priori say that it is beneficial for employment. Nevertheless, institutional arrangements may have an impact on how demand versus supply translates into wage growth. More flexible labour markets translate increasing unemployment in lower wage growth and this seems to have happened in the UK, which has done relatively well in terms of unemployment since the start of the crisis.
Michael McMahon University of Warwick Agree Confident
Yes. It is hard to compare across countries since the extent of the shock was different but the UK was certainly amongst the most badly hit. It seems in that most sectors in the UK workers have exchanged (nominal) wage restraint and freezes to protect employment. With higher inflation, this has meant falls in real wages. The positive side of this is that unemployment in the UK, despite the recession, never went above 9% in the official statistics. Other countries hit more severely, such as Greece, Portugal, Ireland and Spain, similarly saw declines in real wages. But in each of these countries employment nonetheless fell over the 2007-2015 period; in the UK it increased.
Stefan Gerlach BSI Bank Agree Confident
Differences in real wage growth appear to reflect a combination of the need for labour market adjustment in different countries, coupled with the ability of national labour markets to deliver that adjustment, that is, their flexibility.
Philippe Bacchetta Université de Lausanne Agree Confident
Mario Forni Università di Modena Agree Confident
Jonathan Portes National Institute of Economic and Social Research Agree Very confident
In the UK, it seems clear that low real wage growth helped support employment in the downturn, and helped boost employment growth in the subsequent period. This was not entirely benign: to the extent low real wage growth was driven by increases in the insecurity and precarity of employment, this may have resulted in an overall reduction in the quality of employment for many. However, to the extent that low real wage growth was the result of persistently weak productivity (driven by other factors), it is arguably preferable that the inevitable pain that resulted should be shared rather than concentrated on the unemployed. In other countries, this is less clear; for example in Greece, lower wages probably were not only the result of low aggregate demand, but further lowered demand, so negating any beneficial impacts on overall employment.
Jonathan Temple University of Bristol Neither agree nor disagree Not confident
David Smith Sunday Times Strongly agree Very confident
In the UK in particular, lower real wage growth during and immediately after the Great Recession helped prevent a much worse outcome in terms of unemployment.
Peter Bofinger Universität Wurzburg Disagree Confident
Ray Barrell Brunel University London Agree Very confident
Recent wage growth needs to be compared both to the past and to other countries. German real wage growth was very low in the decade to 2007 (competitive devaluation by wage moderation was the description) and equilibrium unemployment fell noticeably, and employment rose. The post 2007 period saw positive real wage growth in Germany, albeit moderated by tight fiscal policy. The pre 2007 period in the UK saw uncompetitive wage growth (and balance of payments deficits), buoyed up by expansionary fiscal policy. Some wage moderation in the UK was inevitable once competitiveness pressures began to bite. However, real wage growth has been exceptionally low in the UK, but without that employment growth would have been lower and immigration less.
John Hassler Institute for International Economic Studies (IIES), Stockholm University Neither agree nor disagree Confident
The consequences of low real wage growth depends on the particular situation of the country. In some crisis countries within the eurozone, unit labor costs had become unsustainably high. A real devaluation had to be undertaken and in absence of the possibility to devalue the currency low wage growth is a painful necessity. In other countries, its more the wage profile that has been the problem. Low wage growth for categories of workers who have difficulty finding jobs has been good, for example in Germany. However, higher aggregate wage growth would possibly have been good for Germany and certainly good for weaker countries in the union. Currently, in Sweden, low negotiated wage increases make it difficult for the central bank to receive its inflation target.
Jagjit Chadha National Institute of Economic and Social Research Agree Confident
Relatively more flexible labour markets in the UK meant that in the aftermath of the Great Recession real wages rather than employment took the main brunt of adjustment. Real wages are still broadly speaking at or below their pre-crisis peak, whilst employment numbers and hours have tracked output which is some 7% above the pre-crisis peak. The counterfactual can be debated as higher real wages might have meant more unemployment and also more pressure on elevated house prices leading to more mortgage delinquencies. But given the size of the shock, the labour market response was helpful with unemployment peaking at only 8.5% in late 2011.
Ricardo Reis London School of Economics and Columbia University Neither agree nor disagree Not confident
It is difficult to answer the counterfactual "what if real wage growth was higher, then what would have employment been" because both are jointly determined and depend on other driving forces. Moreover, wage growth is definitely not a policy variable.
Simon Wren-Lewis University of Oxford Neither agree nor disagree Extremely confident
There are too many potential mechanisms here that we do not know enough about. Workers may well have 'priced themselves into jobs', but in doing so they may have reduced both aggregate demand and the incentive for firms to invest in more productive techniques. Productivity growth in the UK has been particularly poor compared to other countries, and while this has undoubtedly contributed to low real wage growth, causality may also go in the other direction as well.
Nicholas Oulton London School of Economics Agree Very confident
UK employment growth has been very strong during the recession and subsequent recovery. The unemployment rate rose initially but then fell back to the pre-crisis level or even below it. So it seems very unlikely that aggregate demand has been deficient for most of this period. If there was some tendency for the fall in real wages to reduce demand, there must have been other factors working in the opposite direction, such as the automatic stabilisers or indeed the rise in employment itself.
Mathias Thoenig DEEP-HEC, University of Lausanne Agree Confident
Pietro Reichlin Università LUISS G. Carli Neither agree nor disagree Confident
I think the answer very much depends on countries characteristics, such as labor and goods market types, and the way in which the financial crisis has unfolded in each country.
Harris Dellas University of Bern Neither agree nor disagree Not confident at all
Paul De Grauwe London School of Economics Disagree Confident
Jean Imbs Paris School of Economics Strongly agree Very confident
Richard Portes London Business School and CEPR Neither agree nor disagree Not confident at all
Need a proper model for this, and not clear what it is. Complicating factors: we should have seen deleveraging, financially constrained households, but we haven't in UK. Again, huge difference in 'wage gap' between U.K. and Germany, with similar unemployment experience, and trade balances going in directions opposite to ULC-based 'competitiveness '. This question is so good that I can't answer it. You
Michael Wickens Cardiff Business School & University of York Agree Confident
Given that productivity has also been low over this period, the explanation is probably the level of high immigration, especially among the unskilled. Increasingly low wage unskilled jobs are being filled by immigrants. Given these low wages it is not surprising that Britons don't want these jobs. Instead of solving low real wages by investing and raising productivity, employers have preferred to encourage immigration.
David Miles Imperial College Agree Not confident
Employment levels have probably been helped by lower real wages - productivity has almost certainly been lower. Welfare might have been higher with somewhat higher real wages even if that meant somewhat lower employment - that depends on by how much labour productivity would have been boosted by greater incentives to improve output per worker hour.
Fabrizio Coricelli Paris School of Economics Agree Very confident
The Great Recession originated from the collapse of the financial sector, which can be defined as a supply shock. Higher wages would have worsened the initial liquidity squeeze on firms, with adverse consequences for employment.
John VanReenen London School of Economics Agree Confident
The UK did relatively well compared to other countries in terms of employment rates during the Great Recession. It is highly likely that this was related to greater real wage flexibility which helped "price workers into jobs". I discuss this in “The UK Productivity and Jobs Puzzle: Does the Answer Lie in Wage Flexibility?” (with Joao Pessoa), Economic Journal (2014). See http://cep.lse.ac.uk/pubs/download/special/cepsp31.pdf. The magnitude of the shock and weak recovery was magnified by poor policy choices such as weak financial regulation pre-recession and premature austerity post recession But as the recovery continued we would expect to see more robust growth which has not happened. This suggests there are ongoing structural problems of low productivity. See http://www.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/LSEGC-Report.pdf for a policy related discussion
Jim Malley University of Glasgow Strongly agree Extremely confident
Per Krusell Stockholm University Neither agree nor disagree Not confident
Early on lower real wage growth probably had limited influence on firm investment - the uncertainty about the future dominated - but later on it was likely beneficial in this sense. Higher real wage growth would likely have stimulated demand a bit early on and could have been beneficial on net, but later on likely less so.
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Neither agree nor disagree Confident
The role of wage moderation/wage cuts in promoting recovery cannot be independent of the monetary regime in place. It will be highly effective if the associated drop in inflation is accompanied by a suffiently expansionary monetary policy. At the zero lower bound or within a currency union this may not happen. This is a point that Tommaso Monacelli and myself made formally in a recent paper in the American Economic Review. Reference: Galí, Jordi and Tommaso Monacelli (2016): Understanding the Gains from Wage Flexibility: The Exchange Rate Connection, American Economic Review, 106 (12), 3829-3868
Jan Eeckhout University College London Disagree Confident
Fabio Canova BI Norwegian School of Management Agree Confident
Sean Holly Cambridge University Strongly agree Confident
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Not confident
Kate Barker British Coal Staff Superannuation Scheme Strongly agree Very confident
Panicos Demetriades University of Leicester Disagree Confident
Neoclassical labour market, partial equilibrium, models where employment and real wages are inversely related are too simplistic and far too narrow. A low wage economy is likely to be a stagnating economy with low productivity, low effort, insufficient incentives for education and training, low aggregate demand, little investment and high unemployment. It's a bad macroeconomic equilibrium with many negative social and political consequences and disenfranchised voters. It's a world where populist politicians rise to power and voters who think it can't get worse vote for crazy policies like Brexit. In other words, a world based on myopic models with disastrous outcomes.
Cédric Tille The Graduate Institute, Geneva Agree Confident
Sir Charles Bean London School of Economics Agree Very confident
In my view, the wage moderation during 2009-10 was absolutely central to limiting the rise in unemployment during the period after the collapse Lehman Brothers. Continued wage moderation also helps to explain the subsequent strength of employment growth and the return of unemployment to historically low levels. That strong employment performance has, of course, contributed to the weakness of productivity growth since the crisis.
Joseph Pearlman City University London Agree Extremely confident
Lowered real wage growth is almost inevitable in a recession, and in principle should act as an automatic stabilizer to bring the level of employment up to its pre-crisis level.
Ugo Panizza The Graduate Institute, Geneva (HEID) Neither agree nor disagree Confident
It depends on the nature of the shock and on the degree of openness of the economy.
Robert Kollmann Université Libre de Bruxelles Agree Confident
Jürgen von Hagen Universität Bonn Agree Confident
Alan Sutherland University of St Andrews Agree Confident
Gino A. Gancia CREI and Universitat Pompeu Fabra Agree Confident
Costas Milas University of Liverpool Agree Confident
Sylvester Eijffinger CentER, Tilburg University Strongly agree Extremely confident
Lower real wage growth might be beneficial for economic growth and employment in the short to medium term but can be detrimental for economic growth and employment in the (very) long term because it hampers innovation that is necessary for increasing efficiency and productivity growth.
Francesco Caselli London School of Economics No opinion Very confident
Lucio Sarno Cass Business School Neither agree nor disagree Not confident
Andrew Mountford Royal Holloway Agree Confident
This is simply the wrong question to ask about the labor market. Of course if you make welfare payments low enough and employment obligations small enough then in equilibrium you will have lower unemployment and more people having to put up with low pay and poor working conditions, see e.g. http://www.bbc.co.uk/news/business-37334936 But if this is the reason for low unemployment and high participation rates then it is not the sign of a well functioning labor market. Furthermore, such work often leaves workers below the bread line and so is effectively subsisized by the welfare system thus implying taxation and so inefficiency elsewhere in the economy. Investing in training and workers invariably implies commitment and so a degree of infleixibility. A flexible response to business cycle variability is a clearly a good thing in itself but not if it is at the expense of training and long term accumulation of skills, experience and organizational capital.

Are low wages a consequence of government policies?

Participant Answer Confidence level Comment
Wouter Den Haan London School of Economics Strongly agree Very confident
The UK labour market differs in key dimensions from Eurozone labour markets. In particular, it is quite harsh and offers less worker protection. These are due to policy choices and are very likely to impact wage setting, for example, by affecting workers' bargaining position.
Akos Valentinyi University of Manchester Agree Confident
Morten Ravn University College London Neither agree nor disagree Not confident
The evidence for the UK indicates an increase in UK labor supply during the Great Recession probably due to reductions in household sector wealth (see.g. Blundell, Crawford and Jin, EJ, 2014). UK labor markets are also more flexible than they were 20 or 30 years ago which probably means a more pronounced drop in UK real wages in this recession. However, many European countries have also become more flexible over time (eg. Germany) so it is less clear how this should impact on the relative performance of the UK economy. Surprisingly, in the UK there is no evidence that the drop in real wages derive from compositional changes.
Richard Dennis University of Glasgow Agree Not confident
Martin Ellison University of Oxford Disagree Confident
Gianluca Benigno London School of Economics Agree Confident
Philippe Martin Sciences Po, Paris Strongly agree Very confident
Fabien Postel-Vinay University College London Agree Confident
Giuseppe Bertola Università di Torino Neither agree nor disagree Very confident
The three possibilities are equally important components of the reason why real wages grew little in the UK. The crisis and recovery were different across countries depending on sector structure, monetary policy, and wage flexibility. To disentangle possiblities for the UK it would be interesting to look at labor market segments separately, "the" labor market oversimplifies a country that features London, financial and non-financial services, public employment, and some manufacturing.
Harry Huizinga CentER, Tilburg University Neither agree nor disagree Confident
Kevin Hjortshøj... Oxford University Agree Confident
David Cobham Heriot Watt University Agree Confident
In large part, yes. But the difference in behaviour needs to be related to the substantial shift in the balance of power in the labour market, which in turn is related not just to policies - the removal of workers' and unions' rights - but also to the wider social changes embodied in the demise of an autonomous working class culture and to the otherwise unlamented collapse of the Soviet bloc.
David Bell University of Stirling Disagree Confident
UK certainly has different labour market policies - but not clear why their effects have become so magnified post the Great Recession.
Volker Wieland Goethe University Frankfurt and IMFS Agree Very confident
Evi Pappa European University institute Agree Confident
The UK labor market institutions are pretty flexible and this might have helped the recovery. I would attribute more to institutions and less to policies though.
Roel Beetsma University of Amsterdam Agree Confident
Cumulative differences in inflation rates probably go a long way explaining the wage gap of the UK relative to other countries. However, it is doubtful that continental European institutions would have allowed for substantial real wage erosion, so it is probably the combination of differences in inflation rates and differences in labour market institutions (more flexibility in the UK) that explain the wage gap differences between the UK and elsewhere.
Michael McMahon University of Warwick Disagree Confident
I'm sure the flexibility of the labour market has contributed. As have differences in inflation - you can easily imagine firms reluctant to increase prices even further in tough demand conditions facing pressures to cut costs across the board and wage restraint was part of this. Weak productivity growth has further limited the scope for pay increases (another difference with the countries mentioned like Germany). Finally, the trend in real wages before the crisis was not necessarily sustainable. As such, some changes in trend were necessary.
Stefan Gerlach BSI Bank Neither agree nor disagree Confident
While the UK does have more flexible labour markets than most of the euro area, the different behaviour of inflation is also important.
Philippe Bacchetta Université de Lausanne Neither agree nor disagree Not confident
Jonathan Portes National Institute of Economic and Social Research Agree Very confident
The evidence seems clear that falls in unemployment in the UK have not had the same impact on real wage growth as before the crisis (see work by Machin and Blanchflower). This is true even over the last few years of low inflation (after the 2011 spike). This seems likely to be the result of two factors: first, structural changes in the UK labour market (in particular the growth of forms of insecure and precarious work). Note that this is not really about regulation or law: the UK labour market is somewhat more regulated than in say 2000, but rather changes in technology and work practices. Second, the astonishingly poor productivity performance of the UK since the crisis, which is likely both to reflect demand and supply side issues.
Jonathan Temple University of Bristol Agree Not confident
David Smith Sunday Times Agree Confident
The different behaviour of UK wages during and after the Great Recession partly reflects past policy, and the increased flexibility of the UK labour market. But wage behaviour was weaker than expected even in the light of those past policies. It may be that people were shocked into a change in wage behaviour but something fundamental changed, for reasons that are not entirely clear.
Peter Bofinger Universität Wurzburg Neither agree nor disagree Not confident
Ray Barrell Brunel University London Neither agree nor disagree Very confident
Different labour market policies are only a part of the explanation of lower real wage growth in the UK than in Germany or France. Employment growth has been more rapid in the UK than in either France of Germany in the last decade, and real wages have fallen both relative to others and relative to the past. This would suggest a movement of the supply curve along a demand curve. If wages had not been flexible we might have seen more unemployment, and less labour force growth. The latter would have come from lower participation and from less inward migration. However, if the new labour had the same characteristics as the existing labour (skills, attitudes) we would expect to see an increase in the capital stock. If the increase in labour supply had been anticipated, then capital may have increased with labour, if the increase was not anticipated, the increase in capital would follow, generating demand. We have not seen an increase in the capital stock of anywhere near the needed proportions . This could be because the new labour is less useful, or because managerial incentives are holding back investment in favour of dividends. Both may matter. It is more likely that investment has been held back by the risk, and now the certainty that the UK would leave the Single Market. This will probably reduce productivity by six per cent as compared to where it would otherwise have been, and some of this we may have already seen,
John Hassler Institute for International Economic Studies (IIES), Stockholm University Agree Not confident
Jagjit Chadha National Institute of Economic and Social Research Neither agree nor disagree Confident
Whilst it is reasonably clear we have different and arguably more flexible labour markets in the UK than in many Euro Area countries, it cannot be the whole story in explaining the response of real wages in the UK. That firms may have hoarded labour and lowered the capital-output ratio would seem to me, from the labour demand side, an equally important question. The capital-labour mix chosen by firms may have been distorted by a vulnerable financial sector constrained by new regulations but also the operation of monetary and fiscal policies that may not have encouraged investment.
Ricardo Reis London School of Economics and Columbia University Agree Confident
I don't think it is a coincidence that unemployment is so much lower (and fell faster) in the UK than in most of continental Europe, and at the same time real wage growth has been so moderate. Moreover, there are very clear differences between UK and Eurozone labor policies.
Simon Wren-Lewis University of Oxford Disagree Confident
There are two main factors that account for the relatively poor performance of UK real wages. The first is a very slow recovery in GDP per head. This slow recovery is partly the result of UK fiscal austerity, but there are almost certainly other factors at play. The second is the large depreciation in sterling in 2008 during the financial crisis, and now a second depreciation following Brexit. Both factors are likely to be more important than labour market policies.
Nicholas Oulton London School of Economics Agree Very confident
If the comparison is with the Eurozone, then different labour market policies must be part of the answer. But there is also a contrast with the US to explain. In the latter participation has continued to fall even though the unemployment rate has followed a similar path to the UK's. The UK and the US are usually classified as having flexible labour markets but the labour market response to a similar-size shock has been different. Part of the explanation for the differences with both the Eurozone and the US is the depreciation of sterling which followed the shock and which allowed a relatively painless fall in real wages (at least this is what an old Keynesian would argue). The Eurozone, like the US, is a much more closed economy than the UK so a helpful exchange rate response was much less likely.
Mathias Thoenig DEEP-HEC, University of Lausanne Agree Confident
Pietro Reichlin Università LUISS G. Carli Strongly agree Confident
Yes. I would point out the smaller role of national negotiations and unions and the higher degree of competition in markets.
Harris Dellas University of Bern Agree Not confident
Paul De Grauwe London School of Economics Agree Confident
Jean Imbs Paris School of Economics Disagree Very confident
Richard Portes London Business School and CEPR Agree Not confident
Must have some effect, but here too there is a mystery: the 'productivity puzzle '. If factors unrelated to U.K. labour market policies and institutions are driving exceptionally low productivity growth, then this may be a strong independent force keeping real wages down. But we don't know why productivity growth has been so slow. Maybe it's because labour market is so flexible and can absorb so many low-skill workers.
Michael Wickens Cardiff Business School & University of York Agree Confident
My explanation has been given in my answer to the first question.
David Miles Imperial College Agree Confident
Employment growth has been greater in the UK than most other European countries - but labour productivity growth has been much worse. Whether overall welfare in the UK has been higher as a result of this mix is far from clear.
Fabrizio Coricelli Paris School of Economics Disagree Very confident
I believe that the different behavior of inflation played a key role.
Elias Papaioannou London Business School Neither agree nor disagree Not confident
John VanReenen London School of Economics Agree Confident
See previous answers. The New Deal and active labour market policy reforms from the mid 1990s onwards have been particularly important in keeping those on benefits actively seeking jobs. See “Evaluating the Employment Impact of a mandatory job search assistance programme” (with Richard Blundell, Monica Costa Dias and Costas Meghir) Journal of the European Economics Association (2004) 2(4) 569-606. http://cep.lse.ac.uk/textonly/people/vanreenen/papers/0305.pdf and more recently “Can helping the sick hurt the able?” (with Nitika Bagaria and Barbara Petrongolo), CEP Discussion Paper 1347 http://cep.lse.ac.uk/pubs/download/dp1347.pdf for causal evidence.
Jim Malley University of Glasgow Neither agree nor disagree Confident
Per Krusell Stockholm University Agree Not confident
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Agree Confident
Yes, but largely because it was accompanied with a taylor-made monetary policy and a milder fiscal consolidation.
Jan Eeckhout University College London Agree Very confident
Sean Holly Cambridge University Agree Confident
Fabio Canova BI Norwegian School of Management Neither agree nor disagree Confident
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Not confident
Kate Barker British Coal Staff Superannuation Scheme Agree Not confident
Panicos Demetriades University of Leicester Neither agree nor disagree Confident
To explain this one needs to also look at differences in migrant worker flows within the EU. It could be that the UK attracted more Eastern European workers to low paid jobs, helping to depress real wages and achieve higher growth, at the expense of domestic workers. Low paid jobs done by lots of migrant workers are not a good recipe for sustainable growth and social cohesion.
Sir Charles Bean London School of Economics Agree Confident
The difference in labour market performance between the UK and the euro zone is surely a reflection of the greater flexibility of the former. But the better employment outcomes in the UK also reflect differences in macroeconomic policies - in particular, a more timely and aggressive monetary policy response in the UK than in the euro zone.
Cédric Tille The Graduate Institute, Geneva No opinion Confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Disagree Not confident
Don't know enought about the UK, but I suspect that above traget inflation was more important than labor market flexibility
Robert Kollmann Université Libre de Bruxelles Neither agree nor disagree Confident
Jürgen von Hagen Universität Bonn Agree Confident
Alan Sutherland University of St Andrews Agree Confident
Gino A. Gancia CREI and Universitat Pompeu Fabra Neither agree nor disagree Confident
Costas Milas University of Liverpool Agree Confident
Sylvester Eijffinger CentER, Tilburg University Strongly agree Extremely confident
The different behaviour of UK real wages relative to Eurozone wages is indeed in large part due to the UK having different labour makets policies, particularly by its more flexible labour markets. Labour markets in France and Germany are less flexible resulting in more unemployment there. The election of Macron may have big consequences for the flexibility of French labour markets.
Francesco Caselli London School of Economics No opinion Confident
Lucio Sarno Cass Business School Agree Confident
Andrew Mountford Royal Holloway Agree Confident
This is simply the wrong question to ask about the labor market. Of course if you make welfare payments low enough and employment obligations small enough then in equilibrium you will have lower unemployment and more people having to put up with low pay and poor working conditions, see e.g. http://www.bbc.co.uk/news/business-37334936 But if this is the reason for low unemployment and high participation rates then it is not the sign of a well functioning labor market. Furthermore, such work often leaves workers below the bread line and so is effectively subsisized by the welfare system thus implying taxation and so inefficiency elsewhere in the economy. Investing in training and workers invariably implies commitment and so a degree of infelixibility. A flexible response to business cycle variability is a clearly a good thing in itself but not if it is at the expense of training and long term accumulation of skills, experience and organizational capital.