Labor issues prompt analysis of Phillips Curve theory
Labor issues prompt analysis of Phillips Curve theory
09 APRIL 2018 7:18 AM

As demand for labor continues to grow, employees should have more power over wages. But wages are falling in the U.K., which leads to more recruitment concerns for businesses such as the hotel industry.

The one lesson that stuck with me from studying economics at school was that as cities grow in wealth, their soccer teams do better.

That was more exciting to hear than the theory of the Phillips Curve, which states that as economies grow, so does demand for labor, which results in increased wages.

That leads to more spending, which leads to inflation. But if inflation is kept at reasonable levels, everyone benefits.

It was one of the central tenets of our economic curriculum, which I found myself studying as my French was deemed très terrible.

Inflation to a certain level is regarded as good. Deflation generally is regarded as terrible.

The talk from everyone in the last weeks—from officials at the European Central Bank, business consultancy Deloitte, the U.S. Federal Reserve, and others—is that the Phillips Curve is now defunct at worst or in need of deeper analysis at best. This makes me wonder what economic winds might blow against the hotel industry in the next few years, certainly with labor worries in the United Kingdom being exaggerated by Brexit.

That additional pool of workers does not mean, obviously, the right skills are being produced to aid the hotel industry. The industry still might not be doing enough to counter the idea that working in a hotel means long hours, anti-social work shifts and initial low pay, as well as the prejudice that industry cannot really provide a career.

But maybe I would have thought if wages were falling in all industries, wouldn’t you as an employee think: Well, at least I’ll do something cool, like work in a glamorous hotel and industry? Maybe that is just bias?

The Phillips Curve, named after New Zealand economist A.W. Phillips following a 1958 academic paper, has been discredited in recent years, argued as defunct and a product of its time.

Ian Stewart, chief economist at Deloitte, said in his weekly email to subscribers that “to the bafflement of economists, Britain’s economic recovery has been accompanied by growing demand for labor and falling wages. Since 2007, the number of people in work in the U.K. has risen by 2.7 million, an increase of 9%. Over the same time, earnings—after allowing for inflation—have fallen by about 2.5%.”

That might be because the skills are not there, or because those skills are ending up in other industries. Brexit is compounding that in the U.K., but still—and mathematics, like French, is far from my strong point—there is a strange gap here.

The notion in the hotel industry, and no doubt in others, is that recruitment is the hardest piece of the jigsaw to put together, with those pressures only likely to grow.

Lower wages also might mean longer commutes, or possibly more cramped, stressful lives if employees share accommodation. How many roommates is the norm? One? Three? Seven?

I have always wondered where these central London hotel employees live. Hotel employees cannot work at home or in shared office space and at hot desks.

And it is not a simple case of saying they live out in the suburbs or beyond. Transportation in the U.K. is ridiculously priced and far too expensive for what is generally a crummy service, and it’s another noticeable cost to be borne by reduced pay packages.

Some trouble around this point started in the early 1980s when the U.K.’s council/social housing stock was offered to tenants in right-to-buy schemes.

This was thought to be a liberating idea and allow long-standing residents to own their previously rented homes.

I believe the idea was that houses and apartments could not be sold for three calendar years, which is of course when they were mostly sold off, at greatly inflated prices, with those original buyers buying larger players outside of London.

So, generally, that meant the next generation of central London owners were not the electricians, the cleaners or the hotel staff starting out.

Not too long after, Wall Street and the City of London/Canary Wharf exploded in wealth, which added more pressure. Yes, more shared wealth, but more pressure for certain.

Globalization, for good or for bad, adds more strain.

So interest rates will rise, I guess, but the problem is that governments seem loathe to press the button on that as it will duly add costs to businesses.

Last September Janet Yellen, former chair of the Federal Reserve, said, “Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession.”

The Economist hinted in a blog last November that perhaps a new economic theory was needed to replace the Phillips Curve.

It is a theory only, but when theories are accepted at school they take a long, long time to fizzle out of the system.

Email Terence Baker or find him on Twitter.

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1 Comment

  • Peggy April 21, 2018 12:16 AM Reply

    Keep it coming, wretirs, this is good stuff.

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