The ‘conundrum’ at the heart of the British economy is getting worse — and economists are baffled – Finance

  • This week, unemployment in the UK fell to a record low, but wage growth is still not gaining momentum.
  • Andrew Goodwin, a leading British economist at Oxford Economics, calls this a "mystery" at the heart of the British labor market.
  • Unfortunately, apparently, there is no end to the stagnant growth of wages for British workers.

LONDON – The unemployment rate in the UK fell to 4% this week is the lowest level since comparable records began in the early 1970s, and some commentators took it as a sign that the UK economy is working solidly despite the uncertainty surrounding Brexit.

However, the data point to a puzzle that has haunted the British economy for several years: if unemployment is so low, why do not workers get large salaries?

"Reducing unemployment was just one of many indicators that suggested that the labor market is becoming increasingly rigid," wrote Andrew Goodwin, a leading British economist at Oxford Economics on Friday.

According to Goodwin, the new low ratio of unemployed to available jobs is a key sign of this tension, as well as a record number of people who have changed their employment status in the last three months.

This is a dilemma for employers – how do they attract people to fill vacant roles?

The two standard methods of this are to bring people who are inactive in the workforce, and to increase the hours of those people who are already working for them.

"The data shows some evidence that firms adhere to both options. Flows from inaction to employment in recent years have been much higher, even given the possibility that some of these people may be temporarily inactive due to universal credit delays, "- wrote Goodwin.

"In the meantime, the ONS part-time employment again in the second quarter, reaching the lowest level since mid-2008," he added.

An increase in the number of common hours worked in these areas will usually require employers to pay significantly higher wages to encourage people to work more or to leave inaction.

Traditional economic theory argues that in a dense labor market with low unemployment, one should see an increase in wages for workers. The logic here is simple: when fewer people do not work, the number of jobs is less, which means that those who work and those who enter the labor market may require higher wages.

In the UK, however, this simply does not happen. The growth of wages in the most recent period was 2.7% excluding bonuses, while The inflation rate in the UK is 2.5%. As a result, real wages are barely growing. Why this happens remains something mysterious for economists.

"It is clear that we did not see the steady acceleration that was usually expected," Goodwin wrote.

Several reasons were put forward for this disengagement, the growth of the giant economy and the collapse of the union in the UK among them. The Bank of England has consistently maintained that this is simply a mistake that will eventually correct itself.

Goodwin does not agree with the statement that there are several good reasons to suspect that wage growth will not accelerate in the near future.

Here is the key extract:

"It is more difficult to envisage this [wage growth rising as the Bank of England argues] not only because of recent experience, but also because the structural factors that influenced the growth of wages, namely the low productivity growth, increased in other labor costs caused by such factors as pension automatic registration and, as recently found our European colleagues, the increase in activity among elderly cohorts tends to oppress the growth of wages – it does not go away. "

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