As U.K. Worker Pay Drops, a Warning on U.S. Income

The Institute for Fiscal Studies (IFS) released a new report on U.K. labor. In it, the authors made these points:

This time really is different. The period since the recession began in 2008 has seen the longest and deepest loss of output in a century and the largest public sector deficit since the Second World War. But it has also been a period when:

• Real wages have fallen by more than in any comparable five year period;
• Productivity levels have dropped to an unprecedented degree;
• Employment has dropped by much less than in previous recessions;
• Inequality has fallen in sharp contrast to the 1980s recession and its aftermath;
• Older workers and consumers have been much less affected than younger generations.

Most of these factors already exist, if an examination of U.S. government data is any indication. The trend bodes badly for consumer spending and individual tax income in both countries. In turn, it will be difficult to erase deficits, as consumer spending continues to be the major contributor to gross domestic product, and that spending is undermined by increased pay for most workers

The inequality factor shows up regularly in the U.S. debate over wealth, in which the so-called 1% and the taxes on them are considered central to the political debate about how to close deficits with higher taxes. Even if increased taxes on the rich do not bring in enough money to dent the deficit by much, the tax is a symbol of whether those who are well off will carry a greater load toward helping increase federal revenue.

The trouble with youth unemployment in the United Kingdom is also mirrored in the United States, and even more starkly throughout the most troubled countries, where youth unemployment is double that of the entire population. The worry is that in all these nations there will be a lost generation of people who cannot find regular employment for several more years. That means people ages 18 to 25 years who enter the workforce relatively late in their lives may have incomes that lag those of their predecessor generations, perhaps permanently. In turn, it means that, as consumers, they will do little for the economy in a decade, and probably a decade after that.

A few problems that affect developed economies probably cannot be addressed at all. Wage stagnation is among those. None of the governments of these nations have the financial capacity to put large stimulus packages into the markets, both because of already high deficits and a drive toward government austerity. Businesses, on the other hand, have found that they can make most of the personnel cuts they made in the recession permanent. And for companies that do need to add workers, the employers have enough leverage to make these positions part time and without benefits.

There is absolutely no reason to believe that the effects of ongoing wage stagnation will change, which means the economic stagnation that goes with it will be long lived.