Weekly Economic Briefing

The power of labour flexibility

29 July 2014

Global Overview

  • Labour market institutions have an important role to play during economic shocks. Where institutions are flexible and facilitate real wage adjustment, recessions and weak recoveries are less likely to cause long-term damage.
  • Rigidities in many Euro-zone labour markets have exacerbated the impact of the downturn on employment. Further reform can help address these shortfalls, although some of the relative price adjustment should come from Germany.
  • The UK has undergone a relatively pronounced adjustment in real wages over recent years which has supported employment. The Bank of England will want to see some signs that wage growth is recovering before it looks to hike rates.
  • The US economy has also benefitted from this flexibility. With different measures of wage growth still comfortably below pre-crisis rates, the Fed is likely to feel it can take its time removing policy accommodation.
  • Japan’s labour markets have seen a remarkable adjustment in the last decade or so. However, falling wages are as much the result of compositional changes as they are an acceptance that basic salaries need to reflect economic realities.


The sensitivity of markets to upward wage pressures is understandable given that rate rises are the next obvious step once tapering is complete. However, labour cost indicators do not speak with one voice with regard to how close the US economy is to full employment.



UK wage growth remains anaemic despite rampant employment growth and a robust recovery. The Bank of England will want to see this improve before it starts to tighten policy.



Euro-zone wage growth has remained remarkably resilient through the crisis due to rigidities in labour markets. Pay rises in Germany would help to smooth the rebalancing process.



Japan’s overall success in ensuring that wages have adjusted to weaker economic growth hides more stubborn trends among its workforce.


Emerging Markets

The success of emerging market economies is partly a story of massive labour mobilisation. However, while jobs continue to be plentiful there are increasing signs of a skills mismatch.


Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

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