Job Rich, Cash Poor

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Job Rich, Cash Poor

In recent years, the UK labour market has seen an exceptionally strong rate of job growth but a persistent failure of wages to keep pace with rises in the cost of living. The RBS Economics team looks at why this has been the case.

Economic Analysis

05 December 2014

“Aren’t most of the jobs being created just people being self-employed?”

Self-employment has been very strong in recent years but the majority of job creation has been people working for someone else. UK employment rose by almost 1.1 million between the summers of 2012 and 2014. And fully two-thirds of these jobs were employee jobs. This is an impressive number. It’s more than we saw in the years leading up to the crisis and it’s more than half of all the people employed in Wales.

“If they’re not self-employed, aren’t they all just low-skilled jobs?”

Again, no. Two-thirds of the employee jobs created between the summers of 2012 and 2014 can be described as ‘high-skilled’. High-skilled refers to people working in professions (medical professionals, engineers, IT professionals etc.) and associate professionals (lab technicians, prison officers, IT technicians etc.).

These occupations enjoy weekly earnings premiums, before tax, of 40% and 20% respectively, over the UK average of around £500 per week. In other words, the economy has been creating plenty of high-skilled, high-paid jobs.

But more recently, low-skilled jobs have been playing a larger role in the job growth numbers. In the year to June 2014 low-skilled jobs accounted for almost 50% of the jobs growth, compared to around 20% for high-skilled jobs.

“Will wage growth ever improve?”

Yes, but perhaps not much. Firstly it’s necessary to understand what’s holding back wage growth:

  1. Long-term factors that are not going away:
    More people coming to the UK to work and jobs moving to lower-cost countries means more competition. And many workers are also competing against technology which is replacing labour; self-ticketing machines at airports, self-service checkouts and the increasing use of robots across industry, from car plants to warehouses, are all examples of this. All of these factors are likely to continue to keep a lid on wage growth.

  2. Short-term factors that should improve:
    ‘Job-hopping’ remains lower than it was pre-crisis. This movement of people between jobs helps push up wages. But encouragingly this ‘churn’ has begun to improve over the last twelve months. Employers have also had to contend with various non-wage costs in recent years, for e.g. auto-enrolment pension legislation. Faced with higher costs, many employers can’t increase wages. However, an absence of similar legislation should help pave the way for them to do so.

But the most important reason for low wages has been the poor performance of productivity. This is the negative side-effect of exceptionally strong job growth. It’s taking more and more workers to produce a unit of output, and the problem for them is that firms grant wage rises on the basis of higher productivity.

We can expect productivity to gradually improve as the recovery continues. But other factors come into play in trying to address low productivity, including equipping workers with the right skills and improving early years education. It’s also important to improve infrastructure so that people, goods and information can all move quickly and freely around the economy.

Wage growth doesn’t have to stay below the rate of inflation indefinitely. And there are grounds for believing a gradual improvement will take place over the coming year or so. But the wait for consistent wage growth is likely to go on for a lot longer.

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2014

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