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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What Jeremy Corbyn gets right about the single market

Technically, you can be outside the EU but inside the single market. Philosophically, you're still in the EU. 

I’ve been trying to work out what bothers me about the response to Jeremy Corbyn’s interview on the Andrew Marr programme.

What bothers me about Corbyn’s interview is obvious: the use of the phrase “wholesale importation” to describe people coming from Eastern Europe to the United Kingdom makes them sound like boxes of sugar rather than people. Adding to that, by suggesting that this “importation” had “destroy[ed] conditions”, rather than laying the blame on Britain’s under-enforced and under-regulated labour market, his words were more appropriate to a politician who believes that immigrants are objects to be scapegoated, not people to be served. (Though perhaps that is appropriate for the leader of the Labour Party if recent history is any guide.)

But I’m bothered, too, by the reaction to another part of his interview, in which the Labour leader said that Britain must leave the single market as it leaves the European Union. The response to this, which is technically correct, has been to attack Corbyn as Liechtenstein, Switzerland, Norway and Iceland are members of the single market but not the European Union.

In my view, leaving the single market will make Britain poorer in the short and long term, will immediately render much of Labour’s 2017 manifesto moot and will, in the long run, be a far bigger victory for right-wing politics than any mere election. Corbyn’s view, that the benefits of freeing a British government from the rules of the single market will outweigh the costs, doesn’t seem very likely to me. So why do I feel so uneasy about the claim that you can be a member of the single market and not the European Union?

I think it’s because the difficult truth is that these countries are, de facto, in the European Union in any meaningful sense. By any estimation, the three pillars of Britain’s “Out” vote were, firstly, control over Britain’s borders, aka the end of the free movement of people, secondly, more money for the public realm aka £350m a week for the NHS, and thirdly control over Britain’s own laws. It’s hard to see how, if the United Kingdom continues to be subject to the free movement of people, continues to pay large sums towards the European Union, and continues to have its laws set elsewhere, we have “honoured the referendum result”.

None of which changes my view that leaving the single market would be a catastrophe for the United Kingdom. But retaining Britain’s single market membership starts with making the argument for single market membership, not hiding behind rhetorical tricks about whether or not single market membership was on the ballot last June, when it quite clearly was. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.