Friday, July 18, 2014

UK: cost of living crisis continues

by Michael Roberts

The latest data on employment, earnings and prices in the UK confirm that the cost of living crisis continues, despite the claims of the Conservative-led coalition government.

By cost of living crisis, we mean that the average earnings of Britons are not rising as fast as prices in the shops, so that, on average, British households continue to suffer a fall in their standard of living (before we take into account net taxes and benefits).

The latest data for June 2014 showed an uptick in UK consumer price inflation (CPI) from 1.5% yoy in May to 1.9% yoy. This was mainly caused by a jump in food and clothing prices, which have been muted up to now. If the cost of housing is included, retail price inflation (RPI) rose from 2.4% yoy to 2.6%.
So inflation is still outstripping the rise in average earnings. That’s despite the improvement in UK employment, which supposedly suggests a tightening labour market that should help workers bargain better for wage increases. Unemployment in the three months to May fell to a new post-crisis low of 6.5%.
UK unemployment rate
But weekly earnings rose only 0.3% yoy, or 0.7% yoy excluding bonuses.
UK weekly earnings
The trend for average earnings growth is down over the last two years. Indeed, it could well turn negative in June – so wages before prices and tax will be falling compared to last year! This is partly due to a statistical effect, as last year employers postponed bonuses for 2013 into this tax year when the top rate of tax is lower. So the yoy rate will recover after the summer. But even so, it will still be below the rate of inflation.
UK cost of living
If there are more jobs and not so many people are being made redundant, why are wages not picking up? I discussed this in a previous post ( Much of the recent increase in employment is really in self-employment, not jobs in companies. Nearly one-third of the increase in jobs since 2008 has been from self-employed with a very sharp rise in the last year. The Resolution Foundation shows this well.
self employed
And these self-employed workers are not highly paid but have set up their own businesses because they cannot get a proper job. Most are struggling to make a living. Few are turning over enough to be above the VAT threshold. The growth over the past decade or so has been among low turnover businesses.

The self-employed are not very productive i.e. they don’t produce much per person. So the headline increase in overall employment has not led to a matching rise in output. Thus UK productivity growth, already one of the lowest in the OECD, continues to founder.
UK productivity 2014
Manufacturing output in the top G7 economies remains below pre-downturn levels, with Italy, France and Japan remaining more than 10% below and the UK still 7.5% below. The US has performed best, but manufacturing output is still 2.6% below its pre-downturn peak.  This weak recovery is reflected in stagnant or even declining living standards for most people in the biggest capitalist economies.

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