At the start of a new year, we are all tempted to ask the question: what will the next 12 months bring? So let me try and answer this from the point of view of a commentator on the labour market in the UK. It’s an easy question to answer in a single word – uncertainty.
That answer is, of course, more than a bit of a cop-out. So let me spell out three areas where this uncertainty is likely to manifest itself.
First, the strength of the economic recovery and the consequent impact on the labour market is likely to depend crucially on developments in our major trading partners. The recovery in mainland Europe remains weak, and this has already started to put a brake on recovery in the UK. GDP growth in 2015 is likely to be slower than it was in 2014. How much slower is unclear at this point, however. A major source of uncertainty surrounds the possibility of Greece leaving the Eurozone – the so-called ‘Grexit’. This has become an issue once again in the run-up to the Greek election on 25 January. When the possibility of a Grexit was mooted a couple of years ago, the fear of contagion and a subsequent wider collapse of the Eurozone was acute. With interest rate spreads now being more moderate, such contagion is less likely, but the impact of a Grexit could nonetheless be considerable. This is particularly the case if the exit were accompanied, or quickly followed, by Greece defaulting on debt. Several of our major trading partners would be exposed in this scenario and their growth prospects – and hence ours too – would be compromised.
Secondly, the UK’s own election in May will be one in which the policy offerings of the major parties will have distinct labour market effects. The parties have stated their ambitions for narrowing the budget deficit. In so doing, they make very different assumptions about the way in which these aspirations will affect economic growth. Take your pick: but whichever set of assumptions you go along with, there will be uncertainty about how growth – and hence the labour market – will evolve over the coming period while we still do not know the outcome of the election. Moreover, on at least one scenario, further uncertainty is provided by the possibility of another ‘rexit’ – the ‘Brexit’ – with the possibility of a referendum on British membership of the EU. Once again you can take your pick about the assumptions you make about the likely labour market costs and benefits of a Brexit – but until you know the outcome of the election and any referendum, uncertainty will prevail.
Thirdly, there is uncertainty about whether growth in productivity will be restored. Business investment increased healthily over much of 2014, and ordinarily we would expect to see this reflected in productivity gains. That improvement in investment needs to be consolidated in 2015, however – and the uncertainties in the environment may not help in this regard.
Even if productivity recovers strongly in 2015, it is not clear that this will translate into a sustained increase in real wages. While simple models equate wages with marginal product, simple models sometimes fail to capture pertinent information. US evidence suggests that the link between productivity and wages has broken down. If that is a result of the twin forces of global trade and technological developments, then we can expect to see such a breakdown in the UK too. Increased productivity may turn out to be a necessary, but not a sufficient, condition for wage growth. It would be good news indeed if the recent increase in real wages turned out to be sustainable – but whether or not it does still remains to be seen. It cannot simply be assumed that pre-recession trends will be restored.
In light of all this uncertainty, decision makers in business and government need sound advice and regular updating. At The Work Foundation, we play our role in this partly by disseminating our work through our newsletter. I hope you will find something useful here.
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