Supply and demand sits at the heart of economic theory. If you and lots of other people want a Mars bar and there are not enough Mars bars to go around, we all know the price will rise. Looking towards Christmas, there will be the new ‘must have’ toys/gadgets/mince pies/Christmas puddings, provoking long queues and frantic online searching, with the consequence that the price will rise. Labour and employment, so the theory goes, should be no different. Except it does seem to have been different, at least for the past decade.
In October, the Office for National Statistics released its UK labour market report. This showed that average weekly earnings for employees in Great Britain increased by 3.1%, higher than at any time for the past ten years. It also showed that the labour market continues to be very tight. The unemployment rate was 4%, the lowest since February 1975. The number of people in work was 32.39 million, a figure that continues to remain high. To the unwary, this might suggest economic theory is working – low unemployment, high employment and wages rising above the rate of inflation.
That view would be too narrow. Wage growth was lower than inflation from late-2008 through to mid-2014 and then again throughout most of 2017. This has resulted in average wages being about £20 a week lower than they were ten years ago, taking into account inflation. That has been the case, despite unemployment being low and employment being high throughout the period. (Immigration, it seems, has made little difference to wage growth, according to the latest Migration Advisory Committee report.)
I wonder whether, in fact, that it is employment law that makes the difference. In support of that, I cite two significant changes over the period following the financial crash in 2008, up to now, where the latest wage growth figures coincides with the chief economist at the Bank of England saying he saw signs of a ‘new dawn’ for wage growth. These are the National Minimum/National Living Wage (NMW) and the abolition of employment tribunal fees.
The NMW covers a lot of jobs: 1.5 million in 2015, rising to 1.9 million in 2017 and projected to rise to 3.4 million in 2020. The value of each minimum wage rate is higher in real terms since the NMW was introduced in 1999, albeit it fell in the immediate aftermath of the financial crash.
Therefore, changes in employment law have benefited the wages of those at the lower end of the scale and have meant that the overall figures for wage growth are slightly better than they might have been without that intervention.
One of the jurisdictions most hit by the introduction of employment tribunal fees was unlawful deductions from wages, with the number of claims received by employment tribunals since their abolition more than doubling. Quarterly figures for pre-July 2013 show the number of claims was running at around 10,000. Post-July 2013, this figure drops to 2-3,000 each quarter, until fees are abolished when they rise to around 6,000.
In a roundabout way, this suggests that the invisible hand of the market has its limits and that greater change can be effected in less obvious ways. Economists grappling with their conundrum of high demand for labour but depressed wages might want to take the matter up with some employment lawyers.
Alex Lock, DAC Beachcroft LLP