The Uk used to enjoy plenty of wage inflation. It was called the “British disease” and went with too many strikes, frequent devaluations to keep us in world markets, permanent decline of large nationalised industries like steel, coal and railways, and large accompanying job losses in those state leviathans. The cash pay rises were soon eroded by price rises.
After the Thatcher Union reforms and the privatisation of much of the old nationalised industry estate the extremes of wage inflation and the accompanying poor performance were eliminated. The UK entered a “NICE” period, when cash wages rose modestly, productivity improved and former nationalised sectors like telecommunications and energy grew with more jobs being created. Real wages rose each year.
The Great Recession of 2008 changed all that. The UK lost 7 % of ts output in a year. A new era was ushered in with low cash increases in wages, and falling real wages. This was bad for the last two years under Labour and has continued at a lesser pace under the Coalition. Productivity has been weak.
Some commentators have called this the productivity puzzle. I have never thought it much of a puzzle. Part of the reason for the decline was the big losss of output, which makes companies less efficient. Many companies do not cut their workforce in line with the loss of output. Part has been the decline of North Sea oil output, a very high value added sector. Part has been the loss of high end profitable activities from the City as people have diverted high earning areas of their banks and businesses to lower tax jurisdictions in Asia, Switzerland and the low tax islands of the world in response to 50% Income Tax and 28% CGT rates.
There is one additional issue I have not so far raised, which I would like to ask about today. That is the decision of the past government to invite in up to 5 million new people to the UK over little more than a decade. The UK has a workforce of around 30 million, so the increase in the potential workforce from large scale immigration must have had some impact on the UK labour market. More than 2m jobs have been taken by people born overseas.
Business likes the ability to recruit people from around the world, and likes a plentiful supply of good value labour. Employees of UK companies already settled here need income levels that sustain a reasonable lifestyle in one of the dearer locations in the world.
The issue is one of balance. Allow too little migration, and business might find it difficult to set up or continue here without access to the affordable skills they need. Let in too many new people, and you must depress wages and make it more difficult for unemployed people legally settled here to find a job. Part of the issue of wages is tied up in the potential supply of labour. Over the last decade the UK has had an unprecedented expansion of its labour supply, which is part of the background to stagnant wages.