To Explain How Unemployment Can Be Very Low, Wage Growth Also Low – Immigration

There’s a standard piece of economics, so standard that even Karl Marx got it right, concerning the unemployment rate and wage growth. The lower that unemployment rate then the higher will be wage growth – the higher the unemployment rate then the lower wage growth. This has held since whenever and yet it seems not to right now. That’s something that needs to be explained of course.

A possible, possibly even a correct and possible, solution to the conundrum being immigration. No, not in the sense of hordes of brown people coming and taking our jobs. Rather, given European mobility these days, the unemployed aren’t here to be counted as unemployed.

The FT has the basic numbers:

The UK’s jobless rate has fallen to a four-decade low, official figures published on Tuesday said.

Only 4 per cent of those active in the labour market were out of work during the three months to the end of June, the lowest rate since the winter of 1974-75. The record low was 3.4 per cent in 1973.

However, the fall in unemployment failed to lift wage growth. Growth in average weekly earnings fell to 2.4 per cent during the period, down from 2.5 per cent in the three months to the end of May. Analysts had expected the rate to remain steady.

This means that real wages have not grown at all in the past year. Inflation in June was also 2.4 per cent.

That’s just not what we expect to happen. As Marx pointed out wages don’t have to rise when there’s the reserve army of the unemployed. People need more workers, go get some of those starvelings. Your own workers demand more? Fire them and hire starvelings. But when there’s no such reserve army then the capitalists are in competition with each other for the labour they can exploit. Competition, as ever, pushes up the price of that scarce resource – wages rise when there’s little unemployment.

Except, of course. when they don’t. To which a possible answer is immigration.

There’re tens of millions out there across the EU – well, OK, Romania, Poland, Bulgaria perhaps – who could quite happily turn up here and work. Indeed people run employment agencies tempting such people to get on the plane and do so.

If this were true, if our reserve army is over there, then what would the effect be upon our figures? We’d see a low unemployment rate for people actually in the country (you don’t get benefits as an economic migrant you know, can’t hang around hoping work will turn up. It’s only after you have worked that you qualify) but also low wage growth as a result of the reserve army still existing.

This is one of those things which is definitively true, the question being well, how true is it? Enough to explain all those numbers? Potentially so but I’d not be able to prove it. We’ve a low recorded unemployment rate along with low wage growth because the unemployed looking for a job, hose who keep wage growth low, aren’t in the country as yet.

This explanation also neatly steps around the usual finding that immigrants don’t change pay rates. For they bring their own demands and desires with them, so while they increase labour supply they also increase labour demand. That’s not the same thing as the existence of the reserve army which just hasn’t arrived here yet.

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Rhoda Klapp
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Rhoda Klapp

CT, March 28 this year:

Tim: Posit that there is no such reserve army.

Rhoda:Of course there is a reserve army. They live in Krakow. Old-fashioned closed-system views of employment economics don’t work while we have freedom of movement of workers.

Do I have a convert or was this what I was meant to reply?

Spike
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Another problem with the closed-system view is that it views all labor as interchangeable. Sometimes when you squeeze new supply into the system, it is not of the same quality as the old. The young worker does not understand that he must arrive on time, dress properly, and smile at the customer even if he’s just had an argument with boss or girlfriend. The foreign border-jumper does not speak the language well nor understand how the local customer expects the transaction to proceed. I think the current near-full-employment era is resulting in higher wages for the same type of worker… Read more »

Bongo
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Bongo

I wonder if wages are indeed rising for the same skill level e.g. graduates in Stem subjects – not many of them in the reserve army, so we’d expect good increases Then once we had that data we’d start demanding all sorts of gradations in skill level ( non-Stem subject graduates might find their incomes are reducing, especially if east European universities are chucking out graduates in these ). I’m also wondering if the drop in commuting journeys ( e.g. TfL farebox income has nudged downwards ) is a reflection on more homeworking or on cheaper methods of getting to… Read more »

Bongo
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Bongo

I wonder if wages are indeed rising for the same skill level e.g. graduates in Stem subjects – not many of them in the reserve army, so we’d expect good increases Then once we had that data we’d start demanding all sorts of gradations in skill level ( non-Stem subject graduates might find their incomes are reducing, especially if east European universities are chucking out graduates in these ). I’m also wondering if the drop in commuting journeys ( e.g. TfL farebox income has nudged downwards ) is a reflection on more homeworking or on cheaper methods of getting to… Read more »

jgh
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jgh

I was saying in the ’90s that the only reason we had low unemployment in the West was because we “exported” our unemployment to places like India. When Indians started doing our jobs the unemployment would come back home. If we counted the unemployment here *plus* there it would be constant.

(Admittedly a flawed initial analysis based on the squashy balloon hypothesis of: there is only X amount of work, if it’s there that means it’s not here, but used to get people to think outside their boxes.)

jgh
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jgh

I was saying in the ’90s that the only reason we had low unemployment in the West was because we “exported” our unemployment to places like India. When Indians started doing our jobs the unemployment would come back home. If we counted the unemployment here *plus* there it would be constant.

(Admittedly a flawed initial analysis based on the squashy balloon hypothesis of: there is only X amount of work, if it’s there that means it’s not here, but used to get people to think outside their boxes.)

afares
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afares

re: Global Slack Hypothesis (please note that while the following applies to inflation, that inflation would have been caused by rising wages, which is why it’s relevant to this article, i.e., it is global slack which affects both wage gains and inflation.) [Quote] There are two competing explanations for the demise of the standard, domestic, accelerationist Phillips curve. The first is that because inflation expectations have become firmly anchored at the target (no one doubts the Fed’s willingness or ability to keep inflation in check), the inflation process has mutated so that the relationship that works now is between domestic… Read more »

afares
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afares

re: Global Slack Hypothesis (please note that while the following applies to inflation, that inflation would have been caused by rising wages, which is why it’s relevant to this article, i.e., it is global slack which affects both wage gains and inflation.) [Quote] There are two competing explanations for the demise of the standard, domestic, accelerationist Phillips curve. The first is that because inflation expectations have become firmly anchored at the target (no one doubts the Fed’s willingness or ability to keep inflation in check), the inflation process has mutated so that the relationship that works now is between domestic… Read more »