Britain’s jobs illusion: Low unemployment with low wages

Britain is enjoying a jobs miracle according to a recent article by “The Economist”. Its rate of unemployment is one of the lowest in Europe, and very soon it could fall well below 4%, a level that has not been breached since 1974. However, the economy that has got so many people into work has proved incapable of generating pay rises.

   Indeed, real wages are lower than a decade ago. The journal described a few factors help to explain why Britain has so little unemployment. The country has the least-regulated labour market in Europe and hiring or firing staff is easier than in countries such as France, where the hassle of getting rid of bad employees makes bosses think twice about taking someone on in the first place.

   Policy measures have made Britons more employable. Since the 1980s governments have more closely supervised jobseekers’ efforts, which some research has associated with lower long-term unemployment. However, low unemployment is not generating the high wage-growth that might be expected.

   This is linked to productivity, the decline of unionization, and changes to welfare policy from 2010. Real wages depend on how much workers produce per hour. Since the financial crisis, productivity growth has been well below the pre-crisis levels. Also, Britain’s manufacturing industry uses fewer robots per worker than other countries. Sooner or later the impact of Industry 4.0 will pose a serious threat to the low level of unemployment.

   Also, in the 1960s, when unions were mightier, the share of GDP accruing to workers was far higher “The Economist” mentions. But the kneecapping of the unions in the 1980s predates the recent stagnation in pay. If bosses are less fearful of losing workers to the state, they will be less inclined to offer pay rises.

   Changes to welfare policy from 2010, including tougher rules on who gets benefits, and declines in their value, have also played a role. Cross-country analysis of welfare policy is scanty, but it suggests that the reforms in Britain have been especially hard-nosed. As losing a job becomes a scarier prospect, workers may not bargain so hard for better pay.

   All this means that the labour market may need to tighten even more before wage growth improves substantially. With inflation above the official 2% target, monetary-policy remains at a stable level, but no one can predict what will happens with Brexit in six months.