Are falling real wages the future for us all?

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by Shaun Richards

The issue of wage growth is something we have found ourselves returning to time and time again. The cause is in one sense very simple there has been a lack of it. There are two components of this of which the first is just simply low numbers but the second is another reversal for the economics establishment . This is where we have seen employment gains and in some cases record low levels of unemployment but the wage growth fairy has turned out to be precisely that. As an example if we look back we see that the UK Office for Budget Responsibility opened with equations that would have UK wage growth above 5% in today’s environment rather than the 3% we have.

Japan

The leader in the pack in this regard continues to be Japan so let us go straight to the data released at the end of last week.

The inflation-adjusted average monthly wage fell 0.9 percent from a year earlier in 2019, dragged down by an increase in part-time workers, the labor ministry said Friday.

Average monthly cash earnings per worker, including bonuses, fell 0.3 percent to ¥322,689 ($2,900) on a nominal basis, the first decline in six years, according to preliminary data by the Ministry of Health, Labor and Welfare. ( Japan Times)

If we for the moment stick with the fact that wages fell we can then note that this happened in spite of this.

The unemployment rate was unchanged in December from the previous month, at 2.2 percent, reflecting an ongoing labor shortage due to the rapidly graying population, government data showed Friday.

In the reporting month the number of unemployed was 1.45 million, down 140,000 from a year earlier, according to the Internal Affairs and Communications Ministry. ( Japan Times January 31)

Although they do not mention it this equals the record low for the unemployment rate and we get more detail on the labour shortage below.

The number of people with jobs grew for the 84th straight month, up 810,000 from a year earlier at 67.37 million in December. Of those, 30 million were women, up 660,000 from a year earlier, and 9.02 million were 65 or over, up 470,000.

This is a success for the Japanese economy which has reached I think what economists used to call “full employment”. Actually if they saw the numbers below they would be predicting it would be party time for wage growth.

Separate data from the Health, Labor and Welfare Ministry showed that the job availability ratio in December stood at 1.57, unchanged since September. The ratio indicates that there were 157 job openings for every 100 people seeking jobs.

But reality has not been kind to that particular and it has discombobulated some Ivory Towers so much that they believe in it regardless. A case of Restaurant at the end of the Universe thinking.

Reality is frequently inaccurate

If we go back to the wages data we started with there were two components beginning with a real fall but also a nominal one. The latter I point out because when we look at Japan’s public debt burden it is not going to be solved with income taxes with nominal incomes falling. It is the opposite of what we call inflating away the debt.

The situation is so troubling that a scapegoat is required which are part-time workers.

The proportion of workers that are part-time reached a record 31.53 percent, up 0.65 percentage point from the previous year.

For those who want to know how much the Japanese get paid here you are.

Average monthly wages for full-time workers increased 0.3 percent, to ¥425,288, while those of part-time workers stayed flat at ¥99,758.

December wages are especially important in Japan as they are the main bonus season meaning they are around 175% of the average. So bonuses are low and whilst we do not get much of a sectoral breakdown we see that total manufacturing wages were 2.6% lower in December in real terms.

The index for real wages is now 99.9 or slightly lower than the 2015 average. This is quite a critique of the official policy of Abenomics which was supposed to raise wages in both nominal and real terms but as you can see has not done so.

Regular readers will know I have been concerned since the advent of Abenomics that it was really just another version of Japan Inc under the covers. Well in that scenario Japanese companies would be doing well but not raising wages.

The retained earnings of Japanese companies combined hit a record ¥463 trillion last year. Corporate earnings — which remain near record levels despite the setbacks of the past two years — have clearly not been invested enough in manpower.  ( Japan Times )

Whereas according to the Nikkei Asian Review the longer-term picture is this.

The growing ranks of nonregular workers puts pressure on average nominal wages, which remain 13% below their peak in 1997. From 2012 to 2018 nominal wages grew only 2.6%, labor ministry figures show.

United States

Friday lunchtime in the UK produced this.

Total nonfarm payroll employment rose by 225,000 in January, and the unemployment rate was little changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in construction, in health care, and in transportation and warehousing.

This continued a pretty strong picture especially at this stage in the cycle.

After revisions, job gains have averaged 211,000 over the
last 3 months.

Now if we switch to wage growth we see this.

In January, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $28.44. Over the past 12 months, average hourly earnings have increased by 3.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees
were $23.87 in January, little changed over the month (+3 cents).

In nominal terms this is much better than in Japan but if we switch to real terms then we need to compare with this.

From 2018 to 2019, consumer prices for all items rose 2.3 percent.

I am taking the numbers as a broad sweep because we do not have the January data yet, But we see that whilst there is some real wage growth it is a bit under 1% per annum so not much.

Comment

The difference between the US and Japan is that there is some real wage growth in the former there is none in the latter. Can we explain that? There are two possible causes of which the first is demographics where Japan has a shrinking and ageing population whereas the US is growing. Also there is a structural issue where the Japanese are very resistant to price rises which in a reversal of the wages and prices spirals of the 70s and 80s in my home country seems to have infected wage growth too. The fear as Lily Allen would put it might be a case of the vapors.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so
I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think…

For the economics establishment there is only pain because they continue to plough ahead with “output gap” style theories. Even worse because they failed in the GDP or economic output arena they switched to the labour market. It has turned out to be like playing 3 at the back in football and losing 3-0 and thus switching to 4 at the back and losing 5-0. That is because the labour market has is some places gone beyond what was called full employment and yet real wage growth is weak at best and has gone backwards in Japan which has a stellar employment situation at least according to conventional metrics.

Moving to the UK we finally got some real wage growth but we need to cross our fingers and there is still some distance to travel before we get right back where we started from. Hopefully we can at least regain the previous peak.

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