Pay and Productivity

David Smith's weekly column in the Sunday Times yesterday is worth getting hold of, to study the conundrum around stagnant productivity and rising employment. He uses data from the ONS to look at average weekly real wages, which started falling in 2008 and are still falling now, to consider whether this year will show a turnaround in real incomes.

On pay - the data shows the good news that the overall level of employment now is just above where it was before the crisis started - but that there has been a shift from full-time to lower paid part-time employment. There has also been a fall in the number of public sector workers, who are paid more, and a shift towards private sector employment, which is less well paid - hence a good proportion of the fall of real wages is accounted for by these two factors. Add in the effect of a significant increase in the number of over-65s working, whose total pay package is lower than that of younger workers.

However, it does seem that those who have been lucky enough to remain in full-time employment since 2008 have fared much better, with above-inflation average rises in real wages of

• 2008 6.8%
• 2009 4%
• 2010 4%
• 2011 3.7%
• 2012 3.6%
• 2013 3.3%

David Smith recently spoke on this topic at a conference of the Resolution Foundation, at which all speakers concluded that wages would show real growth this year, for differing reasons - Smith because of a tightening job market, with skills shortages starting to emerge; John Philpott of the Jobs Economist consultancy because of the rising number of vacancies which give greater bargaining power to employees; Ian Stewart of Deloitte because of growing corporate optimism; and Nicola Smith of the TUC because of unions negotiating better terms for their members.

On productivity - it is clear that stronger productivity will enable employers to pay higher wage increases - "the faster the growth in output per worker or per hour, the bigger the real pay rises that can be justified" is a quotation from David Smith that I would love my students to memorise. Using ONS data again, comparisons between this recession and the 80's and 90's is stark - to quote directly again, "at this stage after the recession of the early 80's, output per hour was 12.6% above the pre-recession peak. In the 1990's it was 19.9% up. This time, it is 4.4% down." The best chance for overcoming this, in Smith's opinion, is the accelerator effect - strengthening consumer demand creating the desire for businesses to invest and therefore enabling the opportunity to move workers into higher productivity roles. And given his perspective of the tightening jobs market, he also emphasises the incentive for businesses to invest in productivity enhancing measures so that they can benefit more from the output produced by their existing workforce.

As he says, that's the theory. Let's hope it works in practice.