There’s an interesting discussion about pay in the IFS Green Budget and the increase in highly skilled employment at the same time as a decrease in real wages. (See previous posts here, here and here.) The IFS believes that the fall in wages has been mitigated by these compositional effects. Because the recent rise in employment has been among the higher-skill level groups, the fall in wages is not as severe as it might have been. Or, to put it another way, had the composition of the workforce stayed the same, the wage collapse would have been even worse.
The IFS comments:
The overall conclusion that compositional effects are, on average, increasing real wages is also true in both the public and private sectors, and for both men and women.
In summary, we can rule out a story that says that the continued weakness of earnings is due to compositional effects, such as lower-paid types of people returning to work after losing jobs during the recession. Cyclical compositional effects might be playing some role, but they are being dominated by the continuation of longer-run compositional changes, such as increasing education levels, that should act to raise pay.
In other words, rising skill levels would normally be expected to raise pay. The fact that they haven’t is indicative of the severity of the pay squeeze.
But, as the Resolution Foundation’s interactive chart shows, real-terms median pay levels for all occupational groups are now lower than they were in 2004. For all except the managerial group, they are lower than in 2002.
For all groups, real-terms median pay levels started falling before the financial crisis. The recession has just made the fall that bit worse. The drop in pay is sharpest among the Professional and Skilled Trades groups, both falling by more than 6 percent in the decade since 2004. As Larry Elliott says, we have sacrificed pay for jobs. That seems to be true even for the highly skilled.
Of course, all these figures would look even worse if we included the self-employed, whose earnings, on a number of measures, were on the slide before the recession and have collapsed since 2008.
The IFS blames falling productivity for the pay squeeze, though it acknowledges that pay has fallen even faster than productivity.
And, in any case, this just changes the question. Why has productivity collapsed? The pay puzzle becomes a productivity puzzle.
There’s a lengthy discussion of the productivity paper in this Bank of England paper by MPC member Martin Weale. He points out that the UK’s post-recession drop in productivity hasn’t been much worse than for of many other OECD members. That said, he’s not very optimistic about the near future.
After the disappointments of the last few years one would be bold indeed to be confident that this is the start of a sustained revival. I have not been able to identify factors responsible for the weak productivity growth, except in the broad sense that it is related to the financial crisis and the experience of countries during the period 2008-2010, so I cannot be confident that shadow of this is now easing.
And looking at the underlying rate of growth:
Chart 8 suggests that the third quarter of this year is no more than a brief ray of sunshine in the gloom.
The key to improving productivity is to improve skills say the CIPD, UKCES, the CBI and just about everyone else. But that’s where we came in. We have more people in skilled occupations yet still our pay levels and productivity have fallen.
It could be that this is all simply the result of a catastrophic economic crash. Maybe it’s unreasonable to expect employment and pay to recover as quickly as they did after previous recessions. But the fact that these trends seem to have started before the downturn is worrying. Could it be a sign of a longer-term shift in the balance of power in the workplace? Are many employers substituting labour for capital and paying lower rates simply because they can?
We have tended to assume that education, skills and qualifications gave workers bargaining power and therefore some protection from the pressure on wages and conditions experienced by the unskilled. It seems that is no longer the case. Middle-class professionals can have their pay rates hammered down too. If, as some commentators predict, technology enables even complex jobs to be chopped up into discrete tasks, things may be about to get that bit worse.