<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12138/abstract;jsessionid=2C4AB3FAF5676E0DB53550EC36BFC32D.f03t04" rel="nofollow noreferrer">Blundell, et. al (2014)</a> offer an explanation. According to them, <strong>the UK economy experienced a positive labour supply shock</strong> over that period.</p>

<p>First, they present the facts in a very intuitive fashion (graph taken from the <a href="https://www.ifs.org.uk/wps/wp201311.pdf" rel="nofollow noreferrer">working paper version</a>):</p>

<p><a href="https://i.sstatic.net/6CgSx.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/6CgSx.png" alt="enter image description here"></a></p>

<p>They argue that the supply shock was due to two factors:</p>

<ol>
<li><p>changes in welfare policies that made work more attractive and tightened job-search conditions attached to the receipt of unemployment insurance beneﬁts</p></li>
<li><p>an increase in statutory pension age for women that strengthened their labor force attachment</p></li>
</ol>

<p>I don't want to infringe copyrights so I won't include more figures, but look at Figure 14 (showing an increase in employment of older workers after the Great Recession), and Figure 15 and 16 (showing an increase in employment participation of Lone Mothers). As the authors state:</p>

<blockquote>
  <p>"The age limit for youngest child was set at twelve in November 2008 for all new claimants of Income Support and was lowered to ten in October 2009, seven in October 2010 and five in October 2011." (p. 392)</p>
</blockquote>

<p>That is an example of a policy fostering employment participation and a positive supply shock.</p>

CC BY-SA 3.0
2017-02-14T11:10:43.713Z
2017-02-14T11:10:43.713Z
luchonacho
<p>In reading this article from FT, we come across two graphs:</p>

<p><a href="https://i.sstatic.net/lWytr.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/lWytr.png" alt="enter image description here"></a></p>

<p>and </p>

<p><a href="https://i.sstatic.net/00TTe.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/00TTe.png" alt="enter image description here"></a></p>

<p>Shouldn't real wages have a similar trend to productivity? Why was there that discrepancy since the 2009 until 2014? Maybe some other factor that shifted the PS, or the WS curve? It's interesting to notice that in Jun 1st 2014 began the sharp fall in oil prices, which may be the cause for the increase in the real wage we've been observing until know. It seems that workers productivity has had little impact in the behaviour of real wages...</p>

<p>Any help would be appreciated.</p>

<p>Edit: I'm including a graph with CPI in GBR with data from OECD.</p>

<p><a href="https://i.sstatic.net/BFWae.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/BFWae.png" alt="enter image description here"></a></p>

<p><a href="https://i.sstatic.net/bZfhi.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/bZfhi.png" alt="enter image description here"></a></p>

<p><a href="https://i.sstatic.net/QsMoU.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/QsMoU.png" alt="enter image description here"></a></p>

CC BY-SA 3.0
2016-08-04T16:21:54.070Z
There are some scaling issues between your two graphs.  The productivity fall in 2008-09 was due to the surprisingly small reduction in employment during the financial crisis and recession (in other recessions employment had fallen much faster and in some of them productivity had risen), but that crisis both doemestically and across Europe may have weakened UK wages for a longer period.  There was also a public sector nominal wage freeze for several years leading to real reductions
Henry
CC BY-SA 3.0
2016-08-04T17:15:00.833Z
@Henry Thanks for your comment. What scaling issues are you referring to?
An old man in the sea.
CC BY-SA 3.0
2016-08-04T17:31:07.830Z
@Henry Does the public sector have that much weight to completely overshadow the private sector wage growth? Where would one be able to get that info?
An old man in the sea.
CC BY-SA 3.0
2016-08-04T17:37:14.670Z
On scaling, your first chart goes from 1995 to 2016 but your second from 2000 to 2016.  Vertically 120 is about 70% higher than 70 while 360 is less than 30% higher than 280.  So the slopes are not visually comparable.
Henry
CC BY-SA 3.0
2016-08-04T17:38:54.070Z
You can get a lot of UK wages data by sector at https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/datasets/averageweeklyearnings and more general labour market data at places like https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork
Henry
CC BY-SA 3.0
2016-08-04T21:42:07.923Z
@Henry Could you help me make sense of these graphs I've just uploaded. I made them using your sources. About only 22% of total employed, at best, were in the public sector (taken from dataset EMP02).

And the public total weekly (real) earnings was increasing (taken from dataset EARN01). Is this correct? It seems to make it harder to support that opinion.
An old man in the sea.
CC BY-SA 3.0
2016-08-04T23:57:06.507Z
Your latest chart does not account for inflation.  But take your first two charts where from around 2009 to 2014 productivity rose slowly while real pay fell.  In that period series A2FC (Whole economy, real terms) fell by about 5.2% while KAB9 (Whole Economy) rose by 6.4% in nominal terms, indicating the inflation effect over 5 years.  Also in nominal terms,  K54D (private sector services) rose by 7.3%, K58O (public administration) 4.2%, K58U (health and social work) 2.8%, K58R
(education) 4.8%.  All saw real reductions after inflation, but it indicates some relative differences
Henry
CC BY-SA 3.0
2016-08-05T11:06:15.543Z
@Henry You're right about the last graph... I'm sorry. So, to tie this with your initial comment, you're saying that labour market didn't react initially with the usual speed, and that's why we see a decrease in productivity, at the same time, the nominal wages increased, but not enough to compensate for inflation.  

My question is now, how do we model this under macro theory? In basic theory, if productivity increases, PS curve shifts upward, and we get a higher real wage. The problem was that this didn't happened then.
An old man in the sea.
<macroeconomics><labor-economics><open-economy-macro>
Why the difference in productivity and wage trend in the UK economy?
An old man in the sea.
# Why the difference in productivity and wage trend in the UK economy?

(Asked by: username_0 on 2016-08-04)

In reading this article from FT, we come across two graphs:

[![enter image description here](https://i.sstatic.net/lWytr.png)](https://i.sstatic.net/lWytr.png)

and

[![enter image description here](https://i.sstatic.net/00TTe.png)](https://i.sstatic.net/00TTe.png)

Shouldn't real wages have a similar trend to productivity? Why was there that discrepancy since the 2009 until 2014? Maybe some other factor that shifted the PS, or the WS curve? It's interesting to notice that in Jun 1st 2014 began the sharp fall in oil prices, which may be the cause for the increase in the real wage we've been observing until know. It seems that workers productivity has had little impact in the behaviour of real wages...

Any help would be appreciated.

Edit: I'm including a graph with CPI in GBR with data from OECD.

[![enter image description here](https://i.sstatic.net/BFWae.png)](https://i.sstatic.net/BFWae.png)

[![enter image description here](https://i.sstatic.net/bZfhi.png)](https://i.sstatic.net/bZfhi.png)

[![enter image description here](https://i.sstatic.net/QsMoU.png)](https://i.sstatic.net/QsMoU.png)

**Tags:** macroeconomics, labor-economics, open-economy-macro

> **Comments:**
> **username_1**: There are some scaling issues between your two graphs.  The productivity fall in 2008-09 was due to the surprisingly small reduction in employment during the financial crisis and recession (in other recessions employment had fallen much faster and in some of them productivity had risen), but that crisis both doemestically and across Europe may have weakened UK wages for a longer period.  There was also a public sector nominal wage freeze for several years leading to real reductions  
> **username_0**: @username_1 Thanks for your comment. What scaling issues are you referring to?  
> **username_0**: @username_1 Does the public sector have that much weight to completely overshadow the private sector wage growth? Where would one be able to get that info?  
> **username_1**: On scaling, your first chart goes from 1995 to 2016 but your second from 2000 to 2016.  Vertically 120 is about 70% higher than 70 while 360 is less than 30% higher than 280.  So the slopes are not visually comparable.  
> **username_1**: You can get a lot of UK wages data by sector at https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/datasets/averageweeklyearnings and more general labour market data at places like https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork  
> **username_0**: @username_1 Could you help me make sense of these graphs I've just uploaded. I made them using your sources. About only 22% of total employed, at best, were in the public sector (taken from dataset EMP02).  And the public total weekly (real) earnings was increasing (taken from dataset EARN01). Is this correct? It seems to make it harder to support that opinion.  
> **username_1**: Your latest chart does not account for inflation.  But take your first two charts where from around 2009 to 2014 productivity rose slowly while real pay fell.  In that period series A2FC (Whole economy, real terms) fell by about 5.2% while KAB9 (Whole Economy) rose by 6.4% in nominal terms, indicating the inflation effect over 5 years.  Also in nominal terms,  K54D (private sector services) rose by 7.3%, K58O (public administration) 4.2%, K58U (health and social work) 2.8%, K58R (education) 4.8%.  All saw real reductions after inflation, but it indicates some relative differences  
> **username_0**: @username_1 You're right about the last graph... I'm sorry. So, to tie this with your initial comment, you're saying that labour market didn't react initially with the usual speed, and that's why we see a decrease in productivity, at the same time, the nominal wages increased, but not enough to compensate for inflation.    My question is now, how do we model this under macro theory? In basic theory, if productivity increases, PS curve shifts upward, and we get a higher real wage. The problem was that this didn't happened then.  

---

## 1 answers

### Answer by username_2 on 2017-02-14. Score: 2

[Blundell, et. al (2014)](http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12138/abstract;jsessionid=2C4AB3FAF5676E0DB53550EC36BFC32D.f03t04) offer an explanation. According to them, **the UK economy experienced a positive labour supply shock** over that period.

First, they present the facts in a very intuitive fashion (graph taken from the [working paper version](https://www.ifs.org.uk/wps/wp201311.pdf)):

[![enter image description here](https://i.sstatic.net/6CgSx.png)](https://i.sstatic.net/6CgSx.png)

They argue that the supply shock was due to two factors:

1. changes in welfare policies that made work more attractive and tightened job-search conditions attached to the receipt of unemployment insurance beneﬁts
2. an increase in statutory pension age for women that strengthened their labor force attachment

I don't want to infringe copyrights so I won't include more figures, but look at Figure 14 (showing an increase in employment of older workers after the Great Recession), and Figure 15 and 16 (showing an increase in employment participation of Lone Mothers). As the authors state:

> "The age limit for youngest child was set at twelve in November 2008 for all new claimants of Income Support and was lowered to ten in October 2009, seven in October 2010 and five in October 2011." (p. 392)

That is an example of a policy fostering employment participation and a positive supply shock.


---

