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Home > Investments > UK

By Jan Luthman | Published Aug 06, 2012

Unemployment fears remain

The Office for National Statistics has estimated that the UK economy contracted by 0.7 per cent during the second quarter. At the same time, employment picked up and wages continued to rise. The corollary to this apparent conundrum is that unit costs of production rose and productivity fell.

The UK’s international competitiveness is already weak. The UK national minimum wage stands at £6.08 and will rise to £6.19 in October – some 30 per cent higher than the US Federal minimum wage of $7.25 (£4.60) per hour.

In addition, UK citizens enjoy healthcare, unemployment and social benefits unavailable to American counterparts. Yet, in spite of the US’s substantial wage advantage, and a labour market and economy arguably more efficient than either the UK or eurozone, the chairman of the US Federal Reserve, Ben Bernanke, has commented that progress in lowering his nation’s 8.2 per cent unemployment “seems likely to be frustratingly slow”. What hope for UK employment?

Investment in plant and processes that might improve productivity requires confidence and/or finance that UK companies lack at this time of economic recession at home and great economic and political uncertainty overseas – to say nothing of a banking crisis.

One might also bear in mind that investment in equipment is irrevocable – repayments and amortisation remain unforgiving burdens if levels of business decline – while investment in temporary employees may be easily reversed. Little wonder, then, that the category of employment showing the greatest and most remorselessly consistent growth is that of persons in temporary or part-time employment because they cannot find full-time employment.

The argument that if we cannot compete on price then we must compete on quality and technical excellence has some merit. However, moving an entire economy and education system a long way up the skills chain - and doing so faster than one’s global competitors - is not only challenging and costly, but also very long term. In the shorter term, if the UK is to lower unit costs of production and regain manufacturing competitiveness, we see four possible routes:

• UK wages fall

• Wages elsewhere rise much faster than in the UK

• UK employment falls

• Sterling falls

UK wage growth has indeed slowed: in the past year, it has declined from 3 per cent a year to 1.5 per cent. However, given the disparity between wages in the UK and wages in low cost economies of the world, achieving comparable costs with this route could take a generation.

More comfortingly, wages elsewhere, particularly in China and the Far East, are rising very rapidly indeed. Statutory minimum wages throughout China have soared in the past two years. This country’s current five-year plan envisages minimum wages escalating by some 13 per cent a year. This, in combination with a major expansion of social welfare and healthcare programmes, could prove dramatically effective in boosting domestic consumption and transforming China into an increasingly powerful consumer of what we produce, rather than merely a low-cost producer of what we consume.

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