UK unemployment is as low as 1975 – but why aren't wages rising?

https://www.theguardian.com/business/2017/mar/15/uk-unemployment-wages-pay-growth

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The last time Britain’s unemployment rate was lower than it is today was in the summer of 1975. For those whose memories don’t stretch that far back it was the time of the UK’s first referendum on EU membership, Harold Wilson was prime minister and inflation was at at postwar peak of more than 25%.

The contrast with today’s labour market is stark. Joblessness stands at 4.7%, a level that many economists would consider close to full employment, yet there is not the glimmer of the upward pressure on wages that was so evident in the mid-70s.

Back then, increases in the cost of living were matched by demands for higher pay, which in turn led to higher inflation. Eventually, governments of both left and right resorted to statutory incomes policies as they sought to bring inflation down.

The latest data from the Office for National Statistics suggests that the UK now has a non-statutory incomes policy, enforced by employers rather than by Whitehall. Unemployment in the three months to January 2017 was 105,000 lower than in the previous quarter and employment was up by 92,000.

Yet, wage pressure over the same period abated. Average earnings in the three months to January were 2.3% higher than a year earlier: in the three months to December 2016 they rose at an annual rate of 2.6%.

These figures speak volumes about the modern labour market and in particular how the balance of power has shifted in the past four decades. Even when jobs are relatively plentiful and inflation is picking up, workers are unwilling or unable to press for higher pay.

The reasons for this transformation is obvious: deindustrialisation and the growth of employment in the non-unionised service sector; curbs on the power of trade unions; an increase in labour supply. In addition, the one area where trade union density remains high – the public sector – is subject to a 1% pay cap. Here at least, statutory incomes policy lives on.

While record levels of employment are welcome, the weakness of pay means that consumer spending is going to be squeezed hard over the coming months. Inflation is running at 1.8% and will soon overtake earnings growth. Most people will keep their jobs and they will still be able to afford their mortgages because the lack of any wage pressure means the Bank of England will keep interest rates ultra low. But the feelgood factor will be noticeable by its absence.