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Once again, Ed Miliband has focused the political debate on the cost of living crisis. By promising to control rents and freeze energy prices, he hopes to persuade ordinary working people that Labour is on their side.

Curiously, he has rather less to say about the other half of prices and incomes equation. Price rises hurt so much right now because wages are flat – indeed, according to the latest research, the average British worker suffered an 8 per cent decline in their wages between 2008 and 2013.

With the economy growing again, can we expect wages to do likewise? Perhaps not, because according to some analysts, there is a much longer-term trend of wages becoming ‘decoupled’ from economic growth – i.e. the former rising more slowly than the latter. If this is the case and the trends continue, then there will be no sustained growth dividend for ordinary working people.

Last month, George Osborne addressed this issue – and dismissed it – in a speech to the American Enterprise Institute:

“Today I would like to consider two new pessimistic predictions that some now make about the prospects for our economies…

“The second is that the historic link between economic growth and general prosperity has been broken – that even if growth is sustained, the gains will not be shared by most of our citizens but instead concentrated amongst those at the top of the income distribution.”

Osborne believes that decoupling isn’t really happening:

“Recent work by academics at the London School of Economics and our own analysis at the Treasury has found no evidence that employee compensation has become detached from GDP growth in recent decades.

“Previous results that appear to show a break disappear once you take account of rising pension contributions and payroll taxes.”

It isn’t clear if this is what the speech specifically refers to, but a frequently cited source of evidence for the argument that decoupling isn’t real is a paper by two LSE academics João Paulo Pessoa and John Van Reenen. It’s all a bit technical, but the key point of their analysis revolves around two different measures of decoupling:

“We distinguish between ‘net decoupling’ – the difference in growth of GDP per hour deflated by the GDP deflator and average compensation deflated by the same index ‐ and ‘gross decoupling’ – the difference in growth of GDP per hour deflated by the GDP deflator and median wages deflated by a measure of consumer price inflation (CPI).”

On the gross measure of decoupling, “productivity [i.e. GDP divided by hours worked] grew almost 42.5% faster than median wages” over a period of nearly four decades from 1972 to 2010. This would suggest that wages have been lagging behind growth for quite some time.

However, on the net measure this decoupling effect completely disappears.

How can this be? The Chancellor’s argument is that the difference is accounted for by two things – pension contributions and employers’ National Insurance Contributions, which are included in the net measure, but not in the gross. Thus while basic wages have failed to keep up with GDP, employers have made up the difference with other employee benefits.

This, however, is not the whole story.

For a start, counting NICs as an employee benefit is absurd. It may be valid for academic researchers to deal in technicalities, but in the real world National Insurance is just another business tax.

Secondly, Osborne’s speech makes no mention of another important finding from the Pessoa and Van Reenen paper – which is that much of the difference between the two measures of decoupling results from the fact that one relates to mean wage levels, while the other relates to median wage levels. In other words, a big reason why the net measure looks so much better than the gross measure is because mean wage levels are flattered by ‘top people’s pay’ while, by definition, median wage levels reflect the experience of those in the middle.

So, for ordinary working people, it really does look like wages are falling badly behind growth over the long-term. That doesn’t mean we should give up on growth – but there’s a danger that voters will if they’re excluded from its benefits.

3 comments for: Heresy of the week: Sorry George, but wages really have decoupled from growth

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