LONDON — Britain’s economy is in the midst of a troubling conundrum.
Unemployment is close to record lows (4.7% at the latest reading), and employment is close to record highs (74.6%). At the same time, however, wage growth is simply not picking up.
4.7% unemployment in an economy like the UK’s would be considered by many economists to be pretty close to full employment — the point at which everyone who wants a job has a job.
If the economy was working as theory suggests it should mean employees would be pushing their bosses for higher pay. Essentially when the jobs market is booming, workers know that they can move to another job if they are unable to get a raise at their current place of work.
However, average earnings grew just 2.2% in the three months up to February, compared to the same three months a year before. Accounting for inflation — which came in at 2.3% at the latest reading — real wage growth is actually falling in the UK for the first time since 2014. This means that the average Brit is getting poorer. Any way you look at that, it does not make happy reading.
The chart below, from Oxford Economics shows just that point:
“The latest data continued to show a striking divergence between movements in unemployment and real pay. The LFS unemployment rate remained at a near-12 year low of 4.7%. But inflation-adjusted regular pay stagnated compared to the level a year earlier,” Oxford’s chief UK economist Martin Beck said in a note circulated on Thursday.
Britain’s current inability to create wage growth has numerous roots, but it essentially boils down to shifts in the way Britain’s labour market functions. In years gone by the labour market was far more focused on manufacturing based jobs. Now the economy is dominated by the services sector — everything from waiting tables to banking — which account for close to 80% of GDP.
There has also been another big, more recent shift, a shift towards the so-called “gig economy,” a class of workers who are technically self-employed and paid per “gig,” typically working in service-style roles like deliveries and taxi-driving, often without set hours and with work assigned via a smartphone app.
Gig economy workers tend to have a much greater deal of flexibility in the way they work, but in turn, sacrifice many of the protections they would receive if they were to have formal employee status.
Boosting wages for gig economy workers can also be hard. Companies in the gig economy like Uber, Deliveroo, and Hassle set their rates centrally and given that workers are effectively their own bosses, asking for a raise and in turn stimulating wage growth that way is virtually impossible.
For example, the only way for a driver working for Uber to make more money without simply working longer hours is for them to somehow get Uber to increase their centrally set rate of pay for drivers, effectively giving all drivers. This does happen, but only very rarely.
With a report from McKinsey late in 2016 suggesting that more than 5 million Brits are employed in some way in the gig economy, the problem is not an insignificant one.
Obviously, the shift toward the gig economy is not the sole driver of Britain’s sclerotic wage growth, and myriad factors, including the decline of trade unions, the rise of zero-hours contracts, and hidden slack in the labour market are contributors. The gig economy’s role, however, is an interesting one.
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