Since 2008, aggregate productivity performance in the UK has been substantially worse than in the preceding eight years. Over the same period, aggregate real wage growth has also been significantly lower – it has averaged -0.4% per annum from 2009-16, compared with 2.3% per annum from 2000-08. The MPC, and others, have drawn a link between these two phenomena, arguing that low productivity growth has been a major cause – if not the major cause – of weak wage growth. The logic is simple – if workers produce less output for firms, then in a competitive market firms will only be willing to employ them at a lower wage.
How do firms response to falls in demand for their products in the real world? Do they cut wages? Or are they able only to freeze them? What other methods can they use to adjust their labour costs? And does any of this matter? The answer to the final question is emphatically yes. How firms adjust the quantity and cost of their labour input, particularly in response to a downturn, is relevant for monetary policy. If firms are unable to cut wages – what economists call ‘downward nominal wage rigidity’ (DNWR) – then they have to reduce the number of employees, increasing unemployment, further depressing output and weighing on inflation.
Simon Caunt, David England and Imogen Shepherd.
AWE growth has picked up over the past year but stalled in recent months, remaining some way below pre-recession levels. Should we expect that weakness to continue? One way to gauge wage pressures is through the company visit scores (CVS) the Bank’s Agents assign for businesses they meet. Agents score a range of variables, including turnover, employment and costs, -5 to +5, generally according to growth. An anonymised CVS dataset is published on the Bank’s website. Here we look at what CVS say about prospects for pay, considering factors such as recruitment difficulties, low inflation, public sector pay and the National Living Wage. Overall, we think this evidence points to continued modest rates of wage growth over the coming year.