The Prospector had an in-depth chat with leading economist and author George Magnus on a wide range of domestic and global economic issues. This is the second of four parts of the interview which will be published here in the coming days.
Jay Elwes: On the matter of Britain's stagnant wage problem, it seems there are two ways to look at this—one optimistic, the other pessimistic. Wages have been stagnant since even before the crisis hit in 2007/8. And they are stagnant still. And the implication of that is that we are experiencing a prolonged period of wage stagnation in the middle of which was the “Great Moderation”, so called, which led to a certain amount of wage inflation. But then came the crash and recession and wages are now back to their “real” rate. And that suggests that this period of flat wages will continue.
If that’s the pessimistic view, the optimistic one is that productivity is a lagging indicator and as growth returns productivity will pick up and wages will go up with it.
I wonder whether you recognise those two and if you prefer one over the other, or a synthesis of the two.
George Magnus: I definitely recognise the view that productivity may be a lagging indicator, and that it may get better as the recovery becomes more mature. I also think that’s a hope. It’s a view of optimism and hope that it will happen. It’s not really born out of any really evidence or of comparisons with other countries where we can basically see trends which are more disconcerting. And I am in that camp which sees the stagnation of real incomes as firstly something that predates the financial crisis.
And secondly it’s partly related to globalisation in a way because you have the export of jobs to low wage countries where wages in some countries clearly have some impact, which is difficult to measure. I think what concerns me more are two or three other things which explain the weakness of income formation: of living standards, which is what politically it has been pigeon-holed as. One of these is technology, the advent of more and more sophisticated technology is really of the kind that is supplanting brain power rather than adding to muscle power. So the first industrial revolution, we had the technology revolution—technological changes which made work easier and we had to re-school and educate people how to use them. And that’s where our big productivity boom came from, certainly through much of the early part of the Twentieth Century.
But this technological revolution is really about displacing muscle power and also displacing brain-power. So a lot of the jobs that are going are middle-wage paying jobs: middle-level supervisory, middle-level technical, middle-level managerial and so. What you’ve got is a bifurcation in the labour market: strong demand for people with high skills, good education, high training levels and there’s still obviously a strong demand for people in low wage jobs, temporary work, part time and so on. So it’s the squeezed middle in the labour market which is the problem.
That’s aggravating a second problem which is causing a suppression of real incomes and that is income inequality. So it’s not the only factor that's contributing to income inequality, but it’s an important factor which is taking away the middle part of the wage structure and keeping downward pressure on growth of average real incomes.
The third factor, which I suppose is an ongoing one, and we may find some improvement in this in the next 12-18 months, is actually when the level of demand relative to the output of the economy is subdued, then it puts downward pressure on wages. Now we might find, given that we’ve got over 30m people at work—which is a record number of people in that age cohort of 15-64s—we might find that if unemployment continues to come down, that companies start using some of their cash piles to pay more for wages as they’re trying to attract more people. It’s possible that we may have some relief from that in the near term.
But there are these structural issues, which won’t go away. You can’t solve them very quickly—my view is, to the extent that robotics and automation and advanced technology are taking away jobs, there is no substitute for that, except by actually changing the education budget, education system and making sure that for the next 10-20 years, you start producing people that are capable of adjusting to this. But that’s for the long term.
JE: And do you think this would help to restore the missing middle section of the wage scale?
GM: Nobody really knows, we’re flying a little bit blind here. There are certain things we know: that careworkers in the future will be in strong demand, but it’s not very skilled work and they don’t get paid very much and so on. But we don’t really know where jobs are going to be. But I think that adjusting to big technological shocks—this is a big shock of that nature—is something to which we will have to respond in some way and I think the way to respond to that is not to roll over and just resign ourselves to being run by machines (that’s somewhat sci-fi!) But actually to learn how to accommodate and assimilate new technologies, and we’ll find new ways of doing that. But I think we can’t really do that without changing social and education policy.
JE: And what about the banks? Do you think they have effectively fought off political efforts to rope them into helping engineer this recovery—into being more responsible?
GM: It’s not a concluded battle. I think it is disappointing. Clearly the banking and financial industry has changed. Its financial position is stronger and there is more regulation and supervision. For the moment we should probably assume that our regulators and supervisors are not asleep in the way they were in the 2000s. But I think the behaviour of banks and the kinds of operations that they are still embroiled in conducting, and obviously the "too-big-to-fail" problem which is one of the lessons we’ve supposed to have learned form the crisis, I think even bankers would acknowledge things haven’t really changed. And therefore in that sense it’s probably a failure that we’ve either succumbed too much to lobbying, vested interests in some respects, and it just leaves a feeling of unfinished business.
I think that as far as Britain is concerned, nothing is going to happen between now and the next general election. But it will be an election issue because Labour is going to make it an issue. It will be incumbent on the next government, on the next parliament, whether they want to take this relatively hands-off approach and just say self-regulation and self-restraint are the best policies. Or whether people in the country and politicians actually believe that’s a pipedream, that actually you can’t rely on self-restraint, you’ve got to impose environmental constraints on the financial services industry about what it can and can’t do and what it should or shouldn’t do.
JE: Earlier this month, Ed Miliband set out plans for fixing the banking sector. In his analysis, financial services have turned from "means" to "end" and do not work in the interests of the greater good. He put forward proposals: to limit the size of banks by proportion of market share, to ban mergers between banks. What did you think of such proposals?
GM: In spirit, I think that what is being proposed resonates. We want to have—to speak in terms of generalities—it would be better to have a more competitive banking sector. It would better to have a smaller, well-capitalised [banking sector]—I would say that all the time under any discussion that the only good banking sector is one that has lots of capital, if you want to make it safe. In a smaller, more competitive industry you’d find some banks would do very well and be able to pay their staff very well, but some wouldn’t. But there wouldn’t be this generic: “well my neighbour is paying lots of money, therefore I have to pay lots of money to myself” and so on.
I think that is a problem. It is a cultural issue which has to be addressed. Now whether you trust the government to put an arbitrary cap on market size and say once you reach a certain level of the market, you have to sell branches or sell assets or you have to divest—it’s a little bit of a hornet’s nest if you do that way. Because what happens if you have a bank failure? If you have a bank failure then by definition everyone else's market share will go up, and it might not necessarily be the right time or the right signal that says we’ve got to break up the banks. There are probably other ways of making the banking industry more competitive and of imposing constraints on what they can do. [In his Independent Commission on Banking report, Sir John] Vickers had a lot of proposals, which haven’t been embraced.
So, for what it’s worth, I would give Ed Miliband points for raising the issue conceptually that this is something we need to pay attention to. But I’m not sure that he’s found the right way of going about it.
Jay Elwes: On the matter of Britain's stagnant wage problem, it seems there are two ways to look at this—one optimistic, the other pessimistic. Wages have been stagnant since even before the crisis hit in 2007/8. And they are stagnant still. And the implication of that is that we are experiencing a prolonged period of wage stagnation in the middle of which was the “Great Moderation”, so called, which led to a certain amount of wage inflation. But then came the crash and recession and wages are now back to their “real” rate. And that suggests that this period of flat wages will continue.
If that’s the pessimistic view, the optimistic one is that productivity is a lagging indicator and as growth returns productivity will pick up and wages will go up with it.
I wonder whether you recognise those two and if you prefer one over the other, or a synthesis of the two.
George Magnus: I definitely recognise the view that productivity may be a lagging indicator, and that it may get better as the recovery becomes more mature. I also think that’s a hope. It’s a view of optimism and hope that it will happen. It’s not really born out of any really evidence or of comparisons with other countries where we can basically see trends which are more disconcerting. And I am in that camp which sees the stagnation of real incomes as firstly something that predates the financial crisis.
And secondly it’s partly related to globalisation in a way because you have the export of jobs to low wage countries where wages in some countries clearly have some impact, which is difficult to measure. I think what concerns me more are two or three other things which explain the weakness of income formation: of living standards, which is what politically it has been pigeon-holed as. One of these is technology, the advent of more and more sophisticated technology is really of the kind that is supplanting brain power rather than adding to muscle power. So the first industrial revolution, we had the technology revolution—technological changes which made work easier and we had to re-school and educate people how to use them. And that’s where our big productivity boom came from, certainly through much of the early part of the Twentieth Century.
But this technological revolution is really about displacing muscle power and also displacing brain-power. So a lot of the jobs that are going are middle-wage paying jobs: middle-level supervisory, middle-level technical, middle-level managerial and so. What you’ve got is a bifurcation in the labour market: strong demand for people with high skills, good education, high training levels and there’s still obviously a strong demand for people in low wage jobs, temporary work, part time and so on. So it’s the squeezed middle in the labour market which is the problem.
That’s aggravating a second problem which is causing a suppression of real incomes and that is income inequality. So it’s not the only factor that's contributing to income inequality, but it’s an important factor which is taking away the middle part of the wage structure and keeping downward pressure on growth of average real incomes.
The third factor, which I suppose is an ongoing one, and we may find some improvement in this in the next 12-18 months, is actually when the level of demand relative to the output of the economy is subdued, then it puts downward pressure on wages. Now we might find, given that we’ve got over 30m people at work—which is a record number of people in that age cohort of 15-64s—we might find that if unemployment continues to come down, that companies start using some of their cash piles to pay more for wages as they’re trying to attract more people. It’s possible that we may have some relief from that in the near term.
But there are these structural issues, which won’t go away. You can’t solve them very quickly—my view is, to the extent that robotics and automation and advanced technology are taking away jobs, there is no substitute for that, except by actually changing the education budget, education system and making sure that for the next 10-20 years, you start producing people that are capable of adjusting to this. But that’s for the long term.
JE: And do you think this would help to restore the missing middle section of the wage scale?
GM: Nobody really knows, we’re flying a little bit blind here. There are certain things we know: that careworkers in the future will be in strong demand, but it’s not very skilled work and they don’t get paid very much and so on. But we don’t really know where jobs are going to be. But I think that adjusting to big technological shocks—this is a big shock of that nature—is something to which we will have to respond in some way and I think the way to respond to that is not to roll over and just resign ourselves to being run by machines (that’s somewhat sci-fi!) But actually to learn how to accommodate and assimilate new technologies, and we’ll find new ways of doing that. But I think we can’t really do that without changing social and education policy.
JE: And what about the banks? Do you think they have effectively fought off political efforts to rope them into helping engineer this recovery—into being more responsible?
GM: It’s not a concluded battle. I think it is disappointing. Clearly the banking and financial industry has changed. Its financial position is stronger and there is more regulation and supervision. For the moment we should probably assume that our regulators and supervisors are not asleep in the way they were in the 2000s. But I think the behaviour of banks and the kinds of operations that they are still embroiled in conducting, and obviously the "too-big-to-fail" problem which is one of the lessons we’ve supposed to have learned form the crisis, I think even bankers would acknowledge things haven’t really changed. And therefore in that sense it’s probably a failure that we’ve either succumbed too much to lobbying, vested interests in some respects, and it just leaves a feeling of unfinished business.
I think that as far as Britain is concerned, nothing is going to happen between now and the next general election. But it will be an election issue because Labour is going to make it an issue. It will be incumbent on the next government, on the next parliament, whether they want to take this relatively hands-off approach and just say self-regulation and self-restraint are the best policies. Or whether people in the country and politicians actually believe that’s a pipedream, that actually you can’t rely on self-restraint, you’ve got to impose environmental constraints on the financial services industry about what it can and can’t do and what it should or shouldn’t do.
JE: Earlier this month, Ed Miliband set out plans for fixing the banking sector. In his analysis, financial services have turned from "means" to "end" and do not work in the interests of the greater good. He put forward proposals: to limit the size of banks by proportion of market share, to ban mergers between banks. What did you think of such proposals?
GM: In spirit, I think that what is being proposed resonates. We want to have—to speak in terms of generalities—it would be better to have a more competitive banking sector. It would better to have a smaller, well-capitalised [banking sector]—I would say that all the time under any discussion that the only good banking sector is one that has lots of capital, if you want to make it safe. In a smaller, more competitive industry you’d find some banks would do very well and be able to pay their staff very well, but some wouldn’t. But there wouldn’t be this generic: “well my neighbour is paying lots of money, therefore I have to pay lots of money to myself” and so on.
I think that is a problem. It is a cultural issue which has to be addressed. Now whether you trust the government to put an arbitrary cap on market size and say once you reach a certain level of the market, you have to sell branches or sell assets or you have to divest—it’s a little bit of a hornet’s nest if you do that way. Because what happens if you have a bank failure? If you have a bank failure then by definition everyone else's market share will go up, and it might not necessarily be the right time or the right signal that says we’ve got to break up the banks. There are probably other ways of making the banking industry more competitive and of imposing constraints on what they can do. [In his Independent Commission on Banking report, Sir John] Vickers had a lot of proposals, which haven’t been embraced.
So, for what it’s worth, I would give Ed Miliband points for raising the issue conceptually that this is something we need to pay attention to. But I’m not sure that he’s found the right way of going about it.
