What can wages and employment tell us about the UK’s productivity puzzle?
Richard Blundell, Claire Crawford and Wenchao Jin
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Re-cap
• We know that productivity has fallen within firms
• In some firms (small ones especially), the wage bill has also fallen
• But unclear whether firms are firing expensive workers and hiring cheaper ones, or if the wages of existing workers have fallen
– Also unclear whether our sample of firms was representative
• Important when thinking about potential productive capacity in the economy and who has been most affected by the recession
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What do we do here?
• Show that wages are falling to an unprecedented degree
• Try to explain why. Investigate three possibilities:
• Labour supply: is it higher now than in previous recessions?
– More individuals willing to work at any given wage
– Workers might be more willing to accept lower wages than in the past
• Composition of the workforce: is it less skilled/productive?
• Changes to labour market institutions:
– Perhaps wages are now more flexible and responsive to unemployment
(e.g. Machin and Gregg, 2013)
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Changes to average real hourly wages by recession
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
0 1 2 3 4
-6%
1979
Year since the labelled year
1990 2008
Source: New Earnings Survey Panel Dataset, excluding employees whose pay was affected by absence, those with non-positive hours or earnings, and overtime. Nominal wages have been deflated using the Retail Prices Index.
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5

Distribution of real hourly wages over time
40
35
30
25
20
15
10
5
0 the 5th percentile the 10th the 25th the 50th the 75th the 90th the 95th percentile
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The labour market perspective
• Compared to past recessions, in this recession:
– Participation and employment rates have remained higher, even amongst groups hardest hit in this recession (e.g. young people)
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Employment rate of those aged 16-22 vs. 23-64 in the UK by recession
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
0 1 2 3 4 5 years since the start of each recession
23-64, from 1979
16-22, from 1979
23-64, from 1990
16-22, from 1990
23-64, from 2008
16-22, from 2008
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The labour market perspective
• Compared to past recessions, in this recession:
– Participation and employment rates have remained higher, even amongst groups hardest hit in this recession (e.g. young people)
– Participation has increased amongst groups typically thought of as furthest from labour market, e.g. lone parents
• Possibly as a result of changes to job search conditions attached to benefit claims
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De-trended change in lone mothers’ labour market participation rates since the policy change, by age of youngest child
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Quarter since the last quarter before the policy change youngest kid 12-15, 2008Q3 youngest kid 7-9, 2010Q3 youngest kid10-11, 2009Q3 youngest kid 5-6, 2011Q3
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The labour market perspective
• Compared to past recessions, in this recession:
– Participation and employment rates have remained higher, even amongst groups hardest hit in this recession (e.g. young people)
– Participation has increased amongst groups typically thought of as furthest from labour market, e.g. lone parents
• Possibly as a result of changes to job search conditions attached to benefit claims
– Self-employment has been higher
• Though some suggestion this might be disguised unemployment
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Proportion of workers who are self-employed
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
FES ONS
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Self-employed people not earning much?
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
% self-employed whose self-employment income is below 90% earners
% self-employed whose self-employment income is below 80% earners
% self-employed whose self-employment income is below 35 hours of NMW
Source: authors’ calculation from the Family Expenditure Survey
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The labour market perspective
• Compared to past recessions, in this recession:
– Participation and employment rates have remained higher, even amongst groups hardest hit in this recession (e.g. young people)
– Participation has increased amongst groups typically thought of as furthest from labour market, e.g. lone parents
• Possibly as a result of changes to job search conditions attached to benefit claims
– Self-employment has been higher
• Though some suggestion this might be disguised unemployment
– Labour supply amongst older workers has gone up
• Maybe due to State Pension Age increase and negative wealth shocks
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Employment and self-employment rates among
55-74 year olds
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
% 55-74 men self-employed
% 55-74 men employed
% 55-74 women self-employed
% 55-74 women employed
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Employment of 60 year old women has risen
80%
70%
60%
50%
40%
30%
20%
10%
0%
Age 60
Age 61
Sources and Notes: Figure 2.2 of Cribb, Emmerson and Tetlow (2013)
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Workforce composition
• Labour supply was higher during this recession than in the past
– Especially amongst older workers, lone mothers
• If these individuals were on average lower productivity than existing workers – and they could find work – then might expect workforce composition to help explain lower productivity
• Is the compositional effect more negative in this recession than historically?
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Decomposing changes in real log hourly wages
2%
0%
-2%
-4%
8%
6%
4%
1980-83 1990-93 2007-10
Actual change Compositional effect, β 1(X1-X0) Remaining change, ( β 1β 0)*X0
Note: analysis based on the family expenditure Survey. Details of the method can be found in
Blundell et al2013
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Can workforce composition help to explain the fall in wages/productivity?
• Short answer: no
• Compositional effect was positive
– i.e. workforce become more highly skilled, etc
• And no less positive than in previous recessions
• On this basis would have expected average wages/productivity to rise
• Fact that it didn’t means that wages/productivity must have fallen within individuals
• In fact, real wages fell for a majority of individuals who stayed in the same job and nominal wages fell for a third of them
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% employees in same job whose nominal hourly wages were cut/frozen/raised in coming year
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% nominal cut nominal freeze
Source: New Earnings Survey Panel Dataset 1975-2011. Freeze defined as |%change|<0.1%.
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Why have wages fallen?
• Labour supply has been increasing over time and remained higher in this recession than in previous ones
• Changes to labour market institutions
– Perhaps workers are less protected from wage falls than they were?
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Distribution of individuals’ year-on-year nominal hourly wage growth by type of collective agreement, 2008-11
Source: New Earnings Survey Panel Dataset. Conditional on employees being in the same job as the preceding year. Each of the six distributions pool together observations from 2008 to 2011.
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Summary
• Labour supply seems to have been more robust during this recession
– Welfare policy changes (e.g. tougher job search conditions attached to benefit claims, raising of state pension age for women)
– Effects of the financial crisis (e.g. wealth shocks)
• But no evidence that these changes have reduced average quality of labour in this recession (and composition no less positive than in past)
– Strong evidence against the workforce composition hypothesis
• Substantial reductions in wages (and hence productivity) occurred within individuals
• It’s arguably better to have within-individual wage reduction and within-firm productivity stagnation than adverse compositional shifts.
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