Commentary – Wages, Earnings and Labour Costs

Over the last 50 years UK nominal wages and earnings have tended to rise as part of the inflationary process, sometimes by rates as high as 30%.

From 2000 to the start of the financial crisis UK nominal earnings rose at about 4% p.a. which, give an inflation rate close to 2% p.a., meant that real earnings increased by around 2% p.a. After the crisis nominal earnings growth has been noticeably lower – barely ever reaching 2% p.a. Given the behaviour of inflation over this period real earnings growth has been more or less consistently negative. Since May 2010 real earnings growth over the previous year has been negative in virtually every month until the last three months of 2014. The figure shows the nominal and real series for the growth of earnings excluding bonuses.

The resultant prolonged drop in real earnings from 2007 was unprecedented in the UK in the last half century. It was not until the end of 2019 that real earnings recovered to their 2007 level.

In most countries in the last 50 years nominal wages and hence the costs of business of employing labour – labour costs – have also tended to rise. The behaviour of labour costs in major countries over the period from 2000 to 2008 provides an example of this general tendency.

Since 2008 labour costs have in most countries continued to rise but in some they have fallen significantly. Portugal for example – one of the countries on which austerity has been imposed – has experienced a fall of around 10% in this measure of labour costs. Ireland – another country experiencing austerity –  has seen the previous sharply upward trend reversed or lowered.

From the start of the Euro to the onset of the financial crisis wage restraint in Germany has kept its unit labour costs from rising. This caused German unit labour costs – labour costs per unit of output produced – to fall further and further below those of their fellow members of the Euro-zone, making German goods and services increasingly competitive The austerity measures adopted in a number of countries has reversed or at least subdued this tendency to increasing German competitiveness. Greece in particular has reduced its unit labour costs since 2010 so that, relative to Germany’s, they are close to, though still above, their 2000 level.