How is wage inflation affected by recessions?

Wages don't always fall in slumps, it seems.

Earlier this week, I wrote that pegging benefits to wage inflation fails Macroeconomics 101, arguing that since wages rise faster than inflation except in recession, it's macroeconomically dangerous to peg benefits to them:

If benefits were to be pegged to wages rather than inflation, then some… counter-cyclicality would be scrapped. The benefits bill would shrink in recessions and increase in boom times, compared to where it would be without the change. That would mean prolonged depressions, and a magnification of the boom-and-bust cycle. Macroeconomically, its one of the worst things you could do.

I illustrated it with this graph, showing that wages were rising faster than inflation until the crash, and only then dropped below:

Overlay from Timetric

But Mindful Money's Tom Hirst points out that when you take a longer view, the effect reverses:

Renato Faccini and Christopher Hackworth of the Bank of England's Structural Economic Analysis Division produced an interesting paper in 2010 looking at how output, employment and wages behave in recessions. They conclude that the manner in which businesses have responded to the falls in output during this recession looks rather different [than previous recessions]. Real wage per hour growth has been weaker than in the early 1990s".

In previous recessions wages have remained stickier than inflation. This is due to a combination of those on low salaries losing their jobs, which pushes up the average, and the difficulty employers face in reducing the wages of their employees.

As Hirst argues, what we need to know now is whether this reversal in trend is a one-off, or if it's the "new normal". Faccini and Hackworth argue that there are a couple of reasons to believe it is so (citing labour market flexibility and cost of dismissal, and the new popularity of unconventional monetary actions like QE) – but we can't know for certain without further research.

Either way, of course, it remains the case that pegging benefits uprating to wage inflation is a terrible way to save money. Almost all the time, wages increase more than inflation, and so this proposed switch is textbook short-termism.

Employers sign up students to work at Barnard College, NYC. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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An alternative Trainspotting script for John Humphrys’ Radio 4 “Choose Life” tribute

Born chippy.

Your mole often has Radio 4’s Today programme babbling away comfortingly in the background while emerging blinking from the burrow. So imagine its horror this morning, when the BBC decided to sully this listening experience with John Humphrys doing the “Choose Life” monologue from Trainspotting.

“I chose not to choose life: I chose something else. And the reasons? There are no reasons. Who needs reasons when you’ve got Radio 4?” he concluded, as a nation cringed.

Introduced as someone who has “taken issue with modernity”, Humphrys launched into the film character Renton’s iconic rant against the banality of modern life.

But Humphrys’ role as in-studio curmudgeon is neither endearing nor amusing to this mole. Often tasked with stories about modern technology and digital culture by supposedly mischievous editors, Humphrys sounds increasingly cranky and ill-informed. It doesn’t exactly make for enlightening interviews. So your mole has tampered with the script. Here’s what he should have said:

“Choose life. Choose a job and then never retire, ever. Choose a career defined by growling and scoffing. Choose crashing the pips three mornings out of five. Choose a fucking long contract. Choose interrupting your co-hosts, politicians, religious leaders and children. Choose sitting across the desk from Justin Webb at 7.20 wondering what you’re doing with your life. Choose confusion about why Thought for the Day is still a thing. Choose hogging political interviews. Choose anxiety about whether Jim Naughtie’s departure means there’s dwindling demand for grouchy old men on flagship political radio shows. Choose a staunch commitment to misunderstanding stories about video games and emoji. Choose doing those stories anyway. Choose turning on the radio and wondering why the fuck you aren’t on on a Sunday morning as well. Choose sitting on that black leather chair hosting mind-numbing spirit-crushing game shows (Mastermind). Choose going over time at the end of it all, pishing your last few seconds on needlessly combative questions, nothing more than an obstacle to that day’s editors being credited. Choose your future. Choose life . . .”

I'm a mole, innit.