Britain wins a pay rise

So wages are on the up?

The Office of National Statistics thinks so. Figures it released in mid-September show average wages rising at their fastest pace for six years up by 2.9% in the three months from May to July compared with the same period a year earlier. Given that inflation was running at 0.1% in July (and has since nudged back down to zero), that's a decent real terms rise, which analysts hope will help to underpin consumer demand and encourage a virtuous circle of economic recovery.

The rise has not yet filtered through to everyone: there was a stark difference between the private sector (where wages were up 4.4% year on year) and the public sector (where austerity is biting, with a tiny 0.6% rise). But even so, overall the pick-up represents the fastest real terms rise in over a decade albeit that we are talking about a decade that's been spectacularly grim for wages.

How grim has it been?

In Britain, as in many comparable rich countries, the recession that followed the 2008 financial crisis had unusually lasting effects on how much people get paid. Here in the UK, real wages fell every year from 2009 to 2014, the longest period of decline since the mid-19th century. In the last full year for which figures are available, 2014, median pay was still a hefty 10% below its all time high of 2008. Germany has done a bit better, though wages in May 2015 were still 2.4% below their 2008 level.

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In the US, even after five years of growth, real wages are still 1.2% below where they were at the start of 2009. So although wages are now picking up a bit, there's a lot of ground to make up; even before the recession, wages had not been improving as economists would expect them to ie, in line with productivity.

What are the figures?

According to statistics cited by The Economist, wage growth and productivity improvements in rich countries have, broadly speaking, moved in tandem from the 1940s to the 1960s, but have been diverging ever since. In the US, for example, productivity has jumped 220% since 1960, but wages have risen only 100%. The result is that labour's share of GDP has fallen, relative to capital, and that, of the slice that goes to labour, a greater proportion has been going to the best paid making life tougher for everyone else.

Why has pay fallen?

Academics seeking to explain low wage growth point to a combination of factors at work. One is that, in many industries, machines and other capital goods have simply become a lot cheaper and/or more efficient cutting demand for labour. Another is that, in many developed countries, unionisation has seen a long, slow decline, while at the same time more flexible work contracts have make it easier to fill posts without raising wages. But the central cause of wage stagnation, according to a closely argued and forceful new Morgan Stanley research paper by Charles Goodhart, an ex-Bank of England official and London School of Economics professor, is straightforward: global demographics.

What role does demography play?

Goodhart's case is that since about 1970 the world has been in a demographic "sweet spot" characterised by a falling "dependency ratio", ie, the share of working age people relative to the total population. In other words, there has been a plentiful supply of labour, exerting downward pressure on wages and prices in general. According to Goodhart (and co-author Manoj Pradhan), the working age cohort of the developed world in 1990 was 685 million people a labour pool that was suddenly more than doubled by the integration of both China and eastern Europe into the globalised economy. This was the biggest "positive supply shock" the global labour market has ever seen, resulting in lower wages for established workers, as capital flowed to those areas.

Now, we are at an "inflexion point", says Goodhart. Wages in China are no longer cheap after rising at an average of 16% for a decade. And the demographic sweet spot is over: plummeting birth rates and longer life spans mean the dependency ratio is rising once more (ie, there are fewer people of working age) and especially sharply in developed markets. Conventional analyses might well assume that the demographic crunch will pull the world into a Japan-style deflation. But Goodhart makes the opposite case.

He predicts that scarce labour will promote a bidding war for workers, and increased healthcare and ageing costs will drive fiscal expansion. "We are going back to an inflationary world", he reckons, in which interest rates will rise, along with real wages, and labour's share of wealth will once again grow, reducing overall levels of inequality. Time, it seems, to lobby for a pay rise.

We're in uncharted waters

Professor Goodhart makes some big assumptions,says Ambrose Evans-Pritchard in The Daily Telegraph. "Hedoubts that robots will displace workers fast enough to offsetthe labour shortage, or that greying nations are culturally ableto absorb enough immigrants to plug the jobs gap", or thatIndia and Africa have the infrastructure to repeat the "Chinaeffect".

The world has "never faced an ageing epidemic beforeso we are in uncharted waters. What is clear is that the nearvertical take-off of the dependency ratio is about to shatter allour economic assumptions. The last time Europe's serfs foundthemselves in huge demand was after the Black Death in themid-14th century. They say it ended feudalism."