CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press The Differing Labor Market Experience of the UK and US: Explaining Things That Didn't Happen, #25,317

The Differing Labor Market Experience of the UK and US: Explaining Things That Didn't Happen, #25,317

Wednesday, 19 February 2014 05:33

Today's target is the usually astute Ryan Avent. Writing in the Economist, Ryan tells readers:

"Two rich economies, relatively similar in structure, reacted very differently to the global financial shock of late 2008. In America output sank sharply but then rebounded to new highs. Employment, by contrast, fell dramatically and has recovered much more slowly; it has yet to regain the pre-crisis peak. In Britain the trends were reversed; employment is setting new highs while output suffered an L-shaped recovery."

The piece goes on to explain that because of a drop in real wages, firms in the U.K. hired more workers. By contrast, in the U.S. firms went the route of adopting productivity enhancing technology.

The problem with this story is that employment has actually followed a similar path in the U.K. and the U.S. in the upturn. According to OECD data, in the U.K. between 2010 and the third quarter of 2013, the employment to population ratio for workers between the ages of 16 to 64 rose from 69.5 percent in 2010 to 70.8 percent. That's a rise of 1.3 percentage points. By contrast, in the U.S. the increase was from 69.7 percent to 70.4 percent, a rise of 0.7 percentage points. 

While 1.3 percentage points is more than 0.7 percentage points, it doesn't describe a qualitatively different situation. Furthermore, the gap would largely disappear if we looked at hours worked. The OECD data shows the average number of hours per worker increasing by 0.6 percent in the U.S. between 2010 and 2012 compared to a rise of just 0.1 percent in the UK. In other words, the story that firms in the U.K. are turning to hiring labor because it is cheaper simply is not true. The labor might be cheaper, but isn't lead to more hiring.

I actually think there is a great deal to Ryan's larger point, that productivity is to a large extent a response to wages. In the U.S. we have lots of low productivity jobs that exist because people are desperate for work, such as the midnight shift at convenience stores. If wages were higher, these jobs would disappear, leading to a rise in productivity. So the story is reasonable, it just doesn't apply to the situation being examined.

Since I am on the topic of explaining things that didn't happen, I will turn to my favorite, the weak consumption in the wake of the downturn. We have had endless tracks explaining why people are not spending as much in the recovery as they did before the downturn. Most of this centers on debt overhangs and the like. I would hate to destroy so much job creating potential for economists, but it is worth pointing out that people actually are spending.

Here's the simple story, the saving rate is actually relatively low right now, which means that consumption is relatively high.

savings rate

The current saving rate is near 4.0 percent. That's higher than the lows hit at the peaks of housing bubble in the last decade or the stock bubble in the 1990s, but it is considerably lower than the averages for the 1960s, 1970s, 1980s, and even the 1990s.

This means that people are actually spending an unusually high share of their income. They are not spending as high a share of they did in 1999-2000 or 2004-2007, but that's because they had trillions of dollars of bubble generated wealth in those years. The concept of a wealth effect, whereby people spend based in part on their wealth, goes back at least 80 years, so economists should be familiar with it.

Anyhow, just because there is no falloff in consumption doesn't mean lots of economists can't devote their time to explaining it. After all, what else do they have to do?

Comments (10)Add Comment
written by urban legend, February 19, 2014 12:34
Not to change your point, which the hours per worker data confirms, but a 0.7% increase in the entire employment-to-population ratio (all ages) would in the U.S. mean about 1.75 million more jobs. That seems to me to verge on a qualitative difference.
written by urban legend, February 19, 2014 12:49
At current conversion rates, the British minimum wage for those over 21 is equivalent to $10.50. For those 18-20, it's over $8.50. It seems to me that should be part of the calculus in assessing whether a wage drop brought on higher employment, and it seems to cut against that conclusion.

In fact, too, the mandatory U.K. minimum increased every year, including through the crisis. In contrast, the minimum wage in the U.S. has dropped in real terms since the last increase in July 2009. This would seem to call into question the basic data Avent is using.
written by Fred Brack, February 19, 2014 9:27
One question, Dean. And one comment.

Question: The "midnight shift at convenience stores" would disappear if wages were higher? Are you suggesting that 24-hour convenience stores would just lock the doors for eight hours?

Comment: You scoff at the idea that people are "not spending as much in the recovery as they did before the downturn," with "the downturn" clearly referring to the recession that began in 2007 when the housing bubble's deflation started to really bite into the economy.

At the same time you acknowledge that "the current saving rate of near 4.0 percent (is) higher than the (low) hit at the (peak) of (the) housing bubble." I find those two positions -- scoffing one the one hand and acknowledging on the other hand -- directly contradictory.

I'm not suggesting that I disagree with you in any way. I'm just pointing out that there's a bit of legerdemain going on when you attempt to disprove the argument that spending has declined relative to "before" the downturn by stretching "before" to mean "the 1960s, 1970s, 1980s, and even the 1990s."

Anyway, quibbles. Keep up your invaluable work.
A couple of fine points
written by Dave, February 20, 2014 8:44
This is interesting, but I think we should look at the lack of consumer spending as a combination of a flattening out of the trend of wage income due to flat wages and low hiring. The savings rate is not quite so interesting if people have no income to save. So I think the debt overhang story is quite valid, and it is just another way to explain the loss of wealth-effect spending combined with the flattening of wages and hiring. Add these 3 effects together and you can see the effect of the debt overhang. This is real.

The major savings glut is with businesses, and the only problem is that savings aren't being converted to investment, and this is because the lack of consumer spending as defined as being below trend due to the 3 effects mentioned above, gives businesses no reason to invest in expansion.
To clarify
written by Dave, February 20, 2014 8:59
Just to clarify what I said, it is important to realize the components of these aggregate numbers, as Baker so often shows us. This is good. But the personal savings rate is also an aggregate number, so it doesn't show the full picture when trying to explain a drop in aggregate consumer spending. Looking at the reduction in spending of people who remain employed vs. their debut overhang would be interesting. There probably isn't much drop there except the elimination of their previous wealth-effect spending, but that is probably largely due to the fact that most spending is not discretionary.

As I've tried to say before, consumers generally didn't just suddenly start saving money because of a bad economy or a debt overhang. This isn't about people suddenly wanting to save more, as Dean has eluded to here.
One more thing
written by Dave, February 20, 2014 10:30
Given the huge glut of corporate and retirement savings looking for investment, and given that the only private-sector outlet for increasing output right now is investment, we should look at the plausibility of this with respect to the structure of our economy.

These aren't exact numbers, but our domestic economy is roughly 70% consumer spending and in the ballpark of 10% investment (or less). This gives us only 10% of the economy to push on with investment incentives (this includes monetary easing of all kinds because the consumption channel of monetary stimulus is tapped out due to DEBT OVERHANG).

Imagine we could suddenly produce a lot more investment through aggregate (non-specific) incentives of one kind or another. If it is to be self-sustaining in the medium to long term, we have to believe that the total economic activity produced by this investment will roughly match the 70-10 mix. Therefore, the new investment must quickly translate to a seven-fold increase in consumer demand over the level of investment. So if we need to fill a 1 trillion dollar gap in GDP, 875 billion of it must translate to consumer spending rather than investment. Therefore, the only private investments that can achieve sustainable growth above current trend is investment that produces 875 billion in consumer spending to 125 billion of new investment.

Does anybody know of any areas of investment that produce this kind of ratio? It is absurd. This is another explanation for the need for infrastructure spending, but I think it is actually one of the most powerful illustrations of the problem. It also indicates pretty strongly that even inflation expectation, which might produce additional general investment, cannot possibly produce self sustaining growth.
This is about wages
written by Dave, February 20, 2014 11:05
Let's assume somebody undertook investment that translated entirely to wages 1-1. The multiplier might be 1.5 right now. But the multiplier would have to be 7.0 to be self sustaining.

The only other way to fix this is to do 1 of 2 things: reduce the debt level of consumers or increase their wages. Either will translate almost directly to an increase in consumer spending. My original estimate of 1-2 million new jobs due to the minimum wage hike is actually quite low. It might be closer to 2-3 million.

The importance of pushing minimum wage
written by Dave, February 20, 2014 11:14
Now that we have such a divergence of 2 realities, one that says increasing minimum wage will cost jobs and another that says the opposite, and the difference is huge, the importance of winning this is paramount. Push the minimum wage hike as the primary platform for 2014, and make the promise that it will create millions of jobs.

If we win this, we win the economic debate, game, set, match!
Debt overhang
written by jroll, February 20, 2014 11:23
Krugman cited debt overhang again today.

He also has a post from yesterday (I believe) implying letting the banks fail would have been crazy.
written by sharlotteB, February 20, 2014 11:19
Many experts say that the division between commercial and investment financial institutions should have been left intact to start with. Now, even one of the staunchest voices calling for the repeal of Glass-Steagall has changed his mind. Some call the unpredicted reversal "ironic." If you need help with your bank fees, get an installment loan. Installment loans are an inescapable landmark in America’s modern economic landscape. The popularity of the short term loan product has grown significantly.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.