Despite the gloom, wage rises will be back

Yet almost everywhere, policymakers are becoming notably more pessimistic about the long-term future. Back in the depths of the crisis, members of the US Federal Reserve’s open market committee were confident that the US economy would soon return to its long-term growth trend of 2.5 to 3 per cent. At its last meeting, the consensus had fallen to between 2 and 2.25 per cent. These differences may not look significant, but over time the effect is profound. An economy growing at 3 per cent a year will roughly double in size in real terms every 23 years. An economy growing at just 2 per cent will take almost twice as long.

One thing is for sure: the solution to this state of torpor cannot lie in further monetary support, still less the growing clamour for redistributional policies that shift wealth and income from top to bottom. These things might arguably treat some symptoms of the squeeze in living standards, which both in the US and UK is particularly acute in middle and lower income groups, but they offer no plausible path back to past levels of productivity growth, the prerequisite for long-term improvement in wages and growth.

In a speech this week, Stanley Fischer, deputy chairman of the US Fed, eloquently set out a number of the possible structural explanations for disappointing growth in wages and output. Right there at the top of his list was the demographics of ageing populations, which as we have seen in Japan, reduces the rate of labour participation and can have very negative consequences for demand.

At the same time, capital spending by business has failed to bounce back to former levels. Many new industries simply don’t require the same level of investment as older ones, making the economy structurally less capital intensive, thereby removing one of the prime drivers of past growth. It could be that today’s innovations simply aren’t as transformational as past ones. The IT revolution, some argue, bears no comparison to previous breakthroughs, such as electrification and mass production.

However, the evidence for all these things is at this stage inconclusive, and I’m inclined to agree with Mr Fischer that it is far too early to declare the computer, robotics and biotech revolutions as having little significance for productivity. New cancer treatments, for instance, promise to make oncology wards a thing of the past, a huge gain in health-care productivity.

What’s more, slowing productivity growth is very much an advanced economy phenomenon. Globally, the potential for gain through technological catch-up and infrastructure investment is immense. This in time will also benefit advanced economies. One of the curiosities of the current state of labour markets is that some of the most acute shortages lie in high-skilled, relatively high-paid jobs. There is an evident mismatch between the requirements of the workplace and the skills of the workforce.

All these economic challenges – from deficient skills and lack of investment to ageing – point to obvious failings in the provision of education, affordable housing, infrastructure and health care. The obsession with redistribution is irrelevant to these underlying weaknesses; pursuit of such policies will only undermine incentives and deflect from the overarching challenge of making economies more competitive.

In any case, with a recovering economy, some degree of real wage growth should soon re-establish itself. This is already more obvious in the US than in the UK, but even here it is only a matter of time. Will it come soon enough to save the Tories from electoral defeat? This looks rather more questionable.

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