Wages stagnation in Northern Ireland a brake on recovery

Posted on August 22, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The speed of economic recovery in the UK has taken many by surprise. First the good news. Employment is up. Retail sales are up and business investment is expanding. This is good news for exporters in the Republic of Ireland especially those in sectors such as agri-food where, traditionally, the UK market has been an important destination. It is also good news for Northern Ireland where, even if timely data are lacking, it appears that output and employment are on the rise. See Section 2.3 of the latest NERI Quarterly Economic Observer . It also appears that many households are drawing on savings to spend a bit more in shops and local economies.

A recovery in labour market fortunes in the UK might also help to relieve some of the pressure on the labour market in the Republic of Ireland. For example, as traditional routes for higher education graduates remain relatively closed in the public sector in the Republic of Ireland the old reliable neighbour next door could be an attractive option for graduate teachers and nurses. However, this is not good in terms of retaining highly skilled young workers in the labour force.

Then the bad news in the UK. Real wages (that is, wages after adjustment for inflation) are stagnating while living standards are not set to increase for at least another year. The problem is that nominal wage growth has been so poor that even with inflation below 2% per annum real wages are falling. A major development in recent years has been the heavy concentration of economic growth in the south east of England with below average growth in other UK regions including Northern Ireland.

A combination of high household debt and stagnant living standards/wages coupled with a rise in precarious, involuntary part-time employment and ‘zero hour contracts’  is not a recipe for a sustainable recovery.

Many analysts are puzzled by the confluence of:

  • Rising levels of output across most of the UK economy
  • Fast growth in employment and hours worked
  • Stagnating productivity levels
  • Falling (real) wage levels.
  • Rising consumption
  • High levels of personal debt

There are a number of possible reasons to do with this ‘paradox’. The most recent Bank of England ‘Inflation Report’ (August 2014 ) examines some of these issues in more detail. The Report identified ‘weak wage growth’ and productivity as significant recent short-term factors in the UK labour market. The Bank projects modest growth in nominal average weekly earnings (1.25% this year and 3.25% next year). On this basis a resumption in real wage growth (when price inflation is factored in) will not be experienced until next year at the earliest. Although pay settlements are averaging around 2% on average over the 12 months to mid-2014 nominal wage growth is somewhat less. Although Northern Ireland data are not to hand it would appear from various information sources that settlements are above zero but less than the 2% UK average.

Wage and productivity growth: private sector nominal earnings and output per worker

Wage and Productivity Growth UK  

Weak wage growth may be linked to many factors including shifts in the make-up of the workforce, the structure of industries and sectors where growth is happening, timing issues and the ‘old reliable’ of ‘measurement issues’ (in spite of the best efforts of statistical offices productivity is notoriously hard to measure and is subject to retrospective revisions which attract hardly any attention compared to the public fuss over provisional estimates of quarter-quarter changes in GDP). It appears that Northern Ireland is sharing recent UK-wide trends in relation to output at least up to the end of 2013 (but signs of contraction in the first quarter of this year), employment and productivity but at a slower pace and from a lower base level (timely detailed information is not available). It is also apparent that the employment participation rate (the proportion of working age population in work) is rising and this may be contributing to wages and productivity being flat other things constant.  The participation rate has risen by 3 percentage points from 70 to 73% across the UK between mid-2011 and mid-2013 while in Northern Ireland it has risen by 1 percentage point from 67 to 68% (Source UK Labour Force Survey).  Added to the mix is a rise in self-employment some of which is linked to a gradual as well as upcoming increases in the retirement age. However, this has not featured, so far, in Northern Ireland. See a paper by my colleague Paul MacFlynn: ‘ Hours and Earnings in the Northern Ireland Labour Market ’ where he has noted a trend towards more part-time and precarious employment in Northern Ireland since 2007 with implications for women and young workers.

Key to raising productivity levels in Northern Ireland will be:

  • An effective new industrial strategy (where my colleague Paul MacFlynn has contributed a piece on ‘ The Enterprising State ’)
  • Policies to lay a good initial education foundation, upskill, retrain and improve organisational performance through greater employee participation and organisational learning.
  • Avoiding a permanent shift to low-paid, low-skill and precarious employment (as well as low-paid, high-skill and precarious employment).

A debate around whether Northern Ireland (or any other part of the UK) should further reduce corporation tax rates misses the point.



Posted in: Northern Ireland Wages

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