The 2-Minute Thought: In the Gig Economy, the Phillips Curve Gets Flattened

In a June speech, Andrew Haldane, Chief Economist at the Bank of England, said that much is well with the UK.  The economy has had 17 consecutive quarters of growth, consumer and business confidence is solid, and the jobs market is strong.  Employment is at its highest rate since 1973, while unemployment is at its lowest since 1975. 

But one thing that has been disappointing and puzzling is wage growth.  In spite of good output and jobs numbers, wages have risen little since the financial crisis – much as has been the case in other developed economies.  The puzzle is, if the jobs market is booming, why aren’t wages rising?

As every first-level economics student learns, we expect to see wages rise as unemployment falls -- the traditional relationship depicted by the Phillips curve.  And yet in recent years, this hasn’t happened.  As shown in this chart from Haldane’s speech, the Phillips curve has flattened:

My source: “Work, Wages and Monetary Policy,” speech by Andrew G Haldane at National Science and Media Museum, Bradford, June 20, 2017

Many have focused on slow productivity growth as the main cause – or they direct attention to big structural changes in labor markets due to technology and globalization.  But Haldane points out that there is more than that.  There is also the changing nature of work. 

In particular, Haldane is talking about lower union participation and the growing numbers of self-employed, flexible, and part-time workers.  Call it the gig economy.  Call it the “casualization” of work.  Today, jobs are different. 

The evidence on how lower unionization erodes wages is pretty clear.  Unions historically have been associated with a wage premium of 10 – 15% in the UK because the collective bargaining power of the many is stronger than that of the individual.   As union participation has declined, so have the positive effects that collective bargaining power has on wages.

Haldane suggests there’s a like change with the rise of self-employment and flexible work.   As work has become less structured, more informal, and “more divisible at the level of the individual worker,” more people are being paid by the task or hour than in the past.  As a result, wage negotiation has become less collective and more idiosyncratic.  Indeed, there’s some evidence that self-employment is associated with a wage discount of 15% -- a discount perhaps given in exchange for greater flexibility or control over one’s work.

What’s interesting is Haldane’s suggestion that today’s gig economy resembles the nature of work before the Industrial Revolution.  In the old, artisanal days, there usually weren’t any unions.  Most pre-industrial workers were self-employed, got paid by the piece, and had flexible hours.  Whether you were milking cows or sewing buttons, work was task- or piece-based.  And while not too much should be read into this, Haldane points out that pre-industrialization Phillips curves were similar to today’s: in his words, “as flat as a pancake.”  

My source: “Work, Wages and Monetary Policy,” speech by Andrew G Haldane at National Science and Media Museum, Bradford, June 20, 2017

Note: The 2-Minute Thought will be on break next week and return on August 10.