Photographer: Chris Ratcliffe/Bloomberg

British Workers Are Getting a Promotion, But Not a Raise

The U.K. has jobs, now where's the wage growth?

The latest numbers on the U.K. labor market are undoubtedly looking rosy: a 5.7 percent unemployment rate and almost 2 million new jobs since mid-2010, even with an unprecedented shrinking of the public sector payroll.

If the headline numbers from the Office for National Statistics are great, why aren't economists ecstatic? In a word: wages. And in several more words: how the new economy might spell bad news for workers even if they do have jobs.

In the three months through January, wage growth eased slightly to 1.6 percent. That was "lacklustre," Investec economist Philip Shaw says, and challenges the celebratory mood Britain's governing Conservatives are promoting ahead of the May 7 election. Alan Clarke, an economist at Scotiabank, said he thinks the Bank of England's projection of 3.5 percent wage inflation at the end of 2015 is ``too ambitious.''

So may the central bank's chief economist Andy Haldane, who suggested in a speech on Thursday that the Phillips Curve - which posits an inverse relationship between unemployment and wage growth - is getting less curvy. Wage growth has consistently disappointed against the Bank's forecasts even as the jobless numbers have shrunk much faster than expected, he said. And this isn't a theme specific to the U.K: read our explainer from last week showing the decoupling between falling unemployment and rising wages in the U.S.

If Haldane is right, wage growth will undershoot the Bank's projections in February.

Wage, phillips curve
Office for National Statistics; Bank of England

Martin Beck from Oxford Economics has analyzed the U.K. job market in more detail. This is what he says:

From 2010 to 2014, the number of people working in jobs paid less than £20,000 per year (in 2014 prices) increased by 1.5m, while the number of people working in jobs paid above this level fell by 800,000. Very well paid jobs (defined as those paying £45,000 or more) have seen a particularly marked fall, down by 700,000 or almost one-fifth of the 2010 level.

Oxford Economics income distribution ages
Oxford Economics; ONS

That's Beck's chart, based on ONS data.

There's an interesting twist here. Britain has created good jobs since the recession, he says - 71 percent of the employment increase from late 2009 - 2014 is made up by high-skilled occupations like accountancy. Those workers just aren't paid quite as generously as they might have been a decade ago.  

The worst crunch has fallen on managerial and administrative jobs in sectors vulnerable to automation, like retail. He cites a 2012 report by the London-based Resolution Foundation which gives reason to believe that the trend is mostly about technology, rather than a cyclical downturn. 

In short, a British worker might land a good job, or be promoted above their colleagues, but so far they aren't gaining the bumper pay increases which used to follow.

That's especially worrying in the U.K., which unlike the U.S. has yet to see substantial productivity growth, George Washington University economics professor Tara Sinclair said in a Tuesday interview. "Productivity is the ultimate determinant of people’s incomes," Bank of England Governor Mark Carney said last week. While it's good that the U.K. shed far fewer workers than the U.S. during the recession, it now leaves Brits with ground to catch up in the productivity race, Sinclair, also Chief Economist for employment search engine Indeed, said.

For now, U.K. inflation is so low - just 0.3 percent - that even with flat or decelerating wage growth, real incomes are being boosted by a comfortable margin. But from July the inflation rate is likely to pick up as the effect of last year's oil price collapse starts dropping out of the annualized measure. By then wage growth below 2 percent may be a cause for concern, not celebration.

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