After the financial crisis and the ensuing great recession that started in April 2008, the unemployment rate rose from 5.5% to 7.5% over 12 months. Over the same time period, wage growth – as measured by single-month average weekly earnings in the private sector – also fell sharply. This is what usually happens in a slump.
But not this time around, in 2020. Something weird is happening to wage growth.
In the US, there was a big rise in the unemployment rate to just under 20% in April, before falling back steadily to 7.1% in November. But wage growth actually rose sharply, and was 5.9% in November.
The picture is the same in the UK. After an initial drop into negative territory earlier this year, there was a sharp rise for -2.9% wage growth to 3.2% in October.
So, everyone is better off right? Actually not. XpertHR, a consultancy specialising in pay, reported that pay settlements limped towards year end with median settlements at 2%.
It appears that what has happened both in the UK and the US is that the lower part of the wage distribution – the lowest-paid workers – has just dropped out.
It’s a batting average effect if you like; the team average rises because batsmen 10 and 11 are not counted any more. We are not exactly sure, but it looks bad news. The issue is whether these jobs – many in pubs, clubs and restaurants - return after the furlough payments stop. But many jobs won’t return, if there are long-run changes in behaviour after the pandemic as expected.
It is unclear after Brexit and the end of the lockdown whether those jobs are coming back.