Labour markets: A crazy explanation for what is happening to workers

TODAY Britain’s Office of National Statistics released a new set of labour-market statistics. The numbers reinforce that what has become known as Britain’s “productivity puzzle” has not gone away. The economy added roughly 450,000 new jobs in the year to November, sending employment to a new all-time high. But output has yet to recover its pre-crisis level. Correspondingly, output per hour—productivity—is below the pre-recession level and actually ticked down from the second quarter of last year to the third.Britain’s workers are ever less productive, and firms are snapping up ever more of them. That could only make sense in a world of falling wages. Nominal wages have grown steadily over the last decade, at a pace between 1-2% per year. But prices have risen much faster, leading to a steady erosion in real pay.In a 2012 paper Bill Martin and Robert Rowthorn argued that falling real wages are the critical detail—the key to unlocking this puzzle. They suggest that wage moderation led directly to the labour-intensive nature of the British recovery in three ways. First, it kept firm income higher than it would have been, preventing some firms from going out of business. Second, it made labour hoarding more attractive. And third, at some margin, it led to some substitution of labour for capital in production, or some displacement of production from capital-intensive firms by …

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