UK minimum wages over time, comparison with other countries

 

1. This is an important chart from the resolution foundation, labour market outlook, Q2 2024.

Investment and uncertainty

 Uncertainty holds back business investment: see Brexit for example.  The November Bank of England Monetary Policy Report, p.20, shows this chart: 

and says

"Measures of business confidence have recovered a little over recent months but many remain

weak, and contacts of the Bank’s Agents note that investment intentions are subdued (ASBC

– November 2025 and Chart 1.8). Contacts report that weak demand and elevated

uncertainty, including ahead of the Autumn Budget, may be causing firms to delay investment.

Consistent with that, the proportion of respondents to recent DMP Surveys reporting that the

overall level of uncertainty facing their businesses is high or very high has been around its

highest level since end-2022."

What has happened to NHS capital per worker?

 1. a New report "From Diagnosis to Delivery" by Allas et al has, on p.45 some information.

2. The figure is a figure relative to other countries. I don't put much store by that, what matters is how productive we are with the capital not how much we are spending.

3. The figure below says NHS capital per worker has fallen by 36% in real terms since 2010. i think this is a capital stock per worker figure.

4. The ONS data tell a different story.  That is capital services per worker.  If you go to 

https://www.ons.gov.uk/economy/economicoutputandproductivity/publicservicesproductivity/datasets/publicserviceproductivityestimateshealthcareengland

you can download the 1996-2023 data

from which you get that since 1996 capital has grown 7.6% faster than labour, but from 2010, -20%.  So more capital per worker over the whole period. 

The locus of R&D is moving to the information and software industries

 From the technical appendix to Draghi report, p.234.

Tariff engineering

 Fascinating work by Flannen et al, here. Who Pays for Tariffs Along the Supply Chain? Evidence from European Wine Tariffs? 

"We exploit additional detailed product-level alcohol label data for all wines sold in the U.S. to document how changes in product composition reflect an intriguing case of tariff engineering.

 Because the initial tariffs only applied to wines defined by a threshold level of alcohol content (≤ 14% ABV), we document a systematic shift in new product offerings toward higher alcohol content exempt from these tariffs, as well as engineering of existing wines to modify the listed alcohol content for exemption from these tariffs"

They show an example of how wine was relabelled

 And make the comment:

Given the speed with which we observe the tariff-engineering behavior documented in Figure 5 above, it seems unlikely that the wines changing threshold levels to avoid the higher tariff involved actual changes in alcohol content. Rather, these adjustments likely reflected changes in what was reported on wine labels. Using testing data from the Liquor Control Board of Ontario for 1992-2009, Alston, Fuller, Lapsley, Soleas and Tumber (2015) document that alcohol content was underreported on average, and that, conditional on underreporting, the true alcohol content was understated by 0.42 percentage points

A fascinating example of adjustment by non-price dimensions. 

The IFS "Green" or Shadow Budget

 I'm asked to discuss the IFS Green budget (this means their budget analysis, nothing to do with the environment specifically). Here is their analysis and my comments, labelled "comment". 

1. Backdrop: growth decelerating, unemployment and inflation rising.  But near-term outlook: inflation falls to target and growth comes back a bit, from previous monetary loosening. 

2. Near term outlook depends on: what happens to current high savings, population./migration and productivity.

3. What matters? In the near-term, Bank of England easing, the budget.  in the medium term, TFP is expected to pick up.  

Activity

4. the key is the public sector and migration.  "with private domestic demand just 2% above its pre-COVID level compared with an increase of 16% in the rest of the economy over the same time frame. The public sector and net trade have instead played an outsized role in driving recent growth, alongside an expanding population, itself driven by net migration. Real GDP per capita grew just 0.1% year on year in 2024, followed by 0.7% in the first half of 2025." 

hence the key questions:

a. can the private sector fill the gap?

b. if migration falls, will productivity rise to drive growth?

They say yes: 

5. on disposable income, a target for the government, some progress is expected. 

6. on investment, the position is extraordinary.

a. revisions have raised investment. "Business investment is now estimated to have been 6.8% higher than its pre-COVID peak in Q2 2024, compared with just 0.4% above in the data that underpinned the OBR’s March forecast".

b. but the biz invest/GDP ratio is 11 in 2025Q2.  It's 16% in the US and 17% in Germany. 

c. margins have been squeezed, depressing investment. 

d. even stronger investment will not be enough to close the Allas and Zenghelis (2025 capital gap.  My comment: their estimates run from 50-12% less capital per hour than peers, with a central one of 33%.  I am closer to 12% then 33%. 

7. Trade.  

a. "the effective tariff rate on UK goods exports to the US, which make up 16% of total

UK goods exports, has increased 8 percentage points to 9%. Application of macroeconomic

multipliers would suggest that this reduces UK GDP via a direct trade channel by 0.1–0.2

percentage points by the end of 2026" 

b. "Yet, for a small, open economy such as the UK, and especially one whose activity is more

heavily focused in the service sector as opposed to goods production and manufacturing, it is the

increased uncertainty and the global trade slowdown, rather than the direct impact of tariffs

applied to the UK, that has the larger consequence" 

8. the labour market. 

a. "we judge the labour market to be loose. Vacancies in the economy continue to fall and the ratio of vacancies to unemployment is now comfortably below estimates of the equilibrium rate" 

b. "With inflation easing and a loose labour market, we expect nominal wage growth to slow to 3–3.5% in the coming 12 months and to settle around 2.5–3% from mid 2026 onward. We expect improving productivity to allow for 0.5% annual real wage growth with unit labour costs growing at a rate consistent with 2% inflation.

One risk to this outlook is that workers look to catch-up perceived past real income losses (Haskel, Martin and Brandt, 2023; Bernanke and Blanchard, 2025). We judge this to be a limited risk. Extrapolating a trend for real earnings growth up to the start of the pandemic and then playing it forward would suggest that this process is already complete and historical losses have been regained (Figure 1.9)." 

Comment. this is interesting, but it depends on stable inflation expectations.  There is some evidence this is rising.  So I think there may be more wage pressure.  My reading of the Bank work is that there is is still unexplained upward wage pressure.

9. inflation

A graph of CPI 

a. this is mostly driven by energy prices, administered prices (e.g. VAT on schools, Vehicle excise duty). 

b. stripping them out give inflation looking much closer to 2.5% and likely to fall. 

c. inflation expectations have risen, but to the extent this is due to food etc. they willl when the base effects fall away. 

Policy

1. Monetary policy. 

"the neutral rate, the appropriate path to follow has become even more unclear.

Despite the recent cuts to interest rates, monetary policy remains restrictive in an absolute sense and is weighing on economic output (Bank of England, 2025, box A). We view the nominal neutral interest rate as between 3% and 3.5% and so, without further easing, monetary policy is likely to continue to act as a headwind to growth and will weigh on inflation. What is more, the economy continues to be haunted by the ghost of tightening past. The lags between monetary policy decisions being taken and them affecting the economy mean that, even though the extent of restriction has been reduced, we are still feeling the effects of more restrictive rates from two years ago. This point can be illustrated by using granular mortgage data from UK Finance which show we are in the midst of a wave of remortgaging (Figure 1.18). People dropping off five-year deals will be moving to a rate that could be more than 2 percentage points higher than previously. This suggests that the cash-flow channel of monetary policy will bite for the foreseeable future."

"We continue to think that quarterly cuts to Bank Rate are the appropriate path for the MPC to take until the rate is closer to the neutral rate. If not, the risk is that the Bank ultimately has to cut faster and further, with a then-unavoidable undershoot of inflation in the interim. Current market pricing implies that Bank Rate will hit 3.6% in Q3 2026, roughly 0.2 percentage points below the level the OBR had assumed in March." 

Comment. Much depends on what you think the neutral rate is. If U* has risen then policy needs to be tighter. 

 Fiscal.

1. "forecast assumes that this fiscal consolidation is achieved predominantly through a combination of extending the freeze on income tax thresholds beyond 2027–28 and a more frontloaded increase in the basic and higher income tax rates (1 percentage point on each). While this would contravene a government manifesto pledge, we judge this to be one of the few ways to raise sufficient funds credibly and reliably" 

2. A major risk for this Budget (discussed in more detail in Chapter 2) is that the consolidation is insufficient to satisfy markets that we will not be back in the same position next spring, or autumn. ...another fiscal consolidation in the future ...would act as a further drag on growth. This can become self-fulfilling.....The government needs to break out of this cycle.

Comment. This is absolutely right.

The supply side.

The potential growth data are nicely set out 

The population data are amazing.

"We calculate potential output growth has been under 1% in 2023 and 2024. This has been driven by growth in the population of the UK, which expanded 1.3% in 2023 and 1.1% in 2024. These were the highest annual growth rates since the series began in the 1940s. This population growth was almost exclusively a result of net migration flows, particularly from outside the EU. Net migration from the previous year to mid 2024 was 738,718," 

But the population growth figures are likely to fall "Lower net migration leads the working-age population to grow by an average of 0.7% per year" 

"These downward trends are offset over the medium term by rising trend (and realised) total factor productivity growth, which we assume moves from –0.3% currently to 0.4% year on year by 2030. The latter effect dominates and the UK’s potential growth rate increases from around 1% in 2026 to around 1.5% by 2030 (Figure 1.23)."

Some issues with this

1. how does this compare with OBR? 

"In March, the OBR forecast that output per hour worked, which had fallen

by 1.0% in 2024, would increase by 0.2% in 2025 and 1.1% in 2026, and by 1.3% in 2029–30. Outside

of the pandemic, the UK has not seen such rates of productivity growth on a sustained period in the

past 20 years. Our own forecast embodies an increase in output per hour worked of 0.8% in the

medium term. We condition it on the same population projections used by the OBR in March, and

broadly similar expectations for declining average hours and participation. Our forecast is actually a

little more optimistic than the OBR’s on capital deepening. The biggest difference derives from our

differing views of total factor productivity (TFP). The OBR assumes this will average 0.8% annually

over the forecast and reach 1% by 2029–30. This is roughly 0.6 percentage points higher than the path

in our forecast by 2029–30." 

2. what might affect productivity?

"Faster adoption of AI. We have seen significant global investment in the infrastructure required for

AI, and plans for this to accelerate in the UK (Department for Science, Innovation and Technology,

2025; Pabst and Marioni, 2025). There are signs that UK firms are increasingly adopting AI, with

55% of firms answering the Bank of England’s Decision Maker Panel already using it in some form

and an expectation this could increase 10–20 percentage points in the next three years.

▪ Realigning trade with the EU and greater openness. Evidence suggests that more open economies

are more productive, with better generation and diffusion of innovation (D’Aguanno et al., 2021). The

UK has seen the negative consequences of this since Brexit, with estimates suggesting it has reduced

productivity by 4% (Office for Budget Responsibility, 2020; Dhingra et al., 2016). Current government discussions with the EU could reverse some of this trend if they can lead to a more flexible labour market (e.g. the Youth Mobility Scheme), sharing of R&D resources and reductions in the costs of doing trade. That said, as discussed above, the trend globally is for less openness to trade, not more.

▪ Fiscal and political stability crowding in productivity. There is an established link between political, fiscal and economic uncertainty and productivity and growth (Hong, Ke and Nguyen, 2024; Bloom, 2007). The UK government currently has a large parliamentary majority and no requirement to call an election for four more years, and if it can maintain stability of both policy direction and tenure then there could be a dividend in the form of better productivity performance.

▪ Public sector productivity increases. Partly as a consequence of the above, public sector productivity increases may be able to leverage the developments above (AI, openness, stability) to improve. However, even the current plans may seem optimistic, as discussed in Chapter 6."

Some overall comments.

1. The fiscal problems must be solved.  We cannot have another year of minimal headroom and higher taxes that might or might not raise money. The attendant uncertainty will be terrible for investment and confidence.

2. I am less hopeful about interest rate cuts.  Current rates are 4%.  "Current market pricing implies that Bank Rate will hit 3.6% in Q3 2026," says the report.  "Our relatively benign economic outlook is predicated on the Bank of England continuing the trajectory it has been on since August 2024 and removing further policy restraint over the coming months, taking Bank Rate to 3.5% – which we judge is within the plausible range of estimates of the UK’s neutral rate, the short-term interest rate that neither adds to nor subtracts from inflationary pressure – by the end of Q1 2026."  Thus they are more hopeful than the market about rate cuts.  I am pessimistic.  I think the labour market has deterioriated and the natural unemployment rate has risen: I note that the Bank still has unexplained wage pressure in its wage equations.  Thus I would not expect so many cuts.

Why has U* risen?  The extension of NI contributions to the lower paid would have been bourne by workers  but it cannot be with the surprise rise in the NLW.  An additional rise to U* will come from the so-called Employment Rights Bill.

3. Regarding TFP, estimated at around -0.2 for 2025 but forecast to rise to 0.2%ps in 2030, with the OBR expecting 0.8% and 1% by 2029, we have the following.

a. market sector TFP was 0.8 and 1.9 1991-95 and 1995-00, falling to 0.2 2011-18 and -0.4 2019-23.  

b. but that is misleading. The "resource" sector, ag, mining, gas, elect, water, construction is very volatile, especially mining.  Without this sector, market sector TFPG is 0.5%pa 2011-18 and -0.1%pa 2019-23. 

c. the sector that's powering TFPG is ICT service, (sector J, info and comms services), contributing +0.4%pa 2019-23 (in the US 0.5).  What the US has seen is a rise in the use of those services, notably, software, with non-ICT services  contributing 0.4%pa.  In the UK, that sector is contributing -0.3%pa.  So an optimistic take is that sector starts to contribute, or at least not be negative. If not negative, the non-resource TFPG would be 0.2.  So one justification for an 0.2% rise, at least for the private sector is that.

d. Buts,  First, TFPG and intangible investment in services depends on many things, but in part on labour market regulation. This will tighten with the Employment Rights Bill and so lower intangible investment. 

e. But also we have negative TFPG in the public sector, particularly health.  What do we know about this? The ONS publish "public service productivity", see here for the latest.  This meaures "Public service productivity is measured differently to labour productivity and multi-factor productivity and is not directly comparable. It reflects the volume of services delivered to end users, relative to the volume of total inputs (which include labour, intermediate consumption, and capital). The measure is dominated by healthcare and education services because of their relative size. " 

So it is a sort of TFP measure and shows a lower level than 2019

Source: ONS. Notice that quarterly estimates differ from annual with no quality adjustments and less full breakdown of inputs via COFOG. 

More on how the ONS calculate outputs and inputs is here.  Broadly speaking, capital, labour and intermediate inputs are collected for different types of inputs. 

e. 

UK productivity growth history since 1997

 A very useful graph from the Resolution Foundation that I hope they don't mind my posting 

The latest IMF World Economic Outlook

 1. Launched in Washington on 14th October 2025. 

2. Some highlights that caught my eye

3. First, the growth projections

a. they are revised up a bit from April's outlook but that is because US tariffs have turned out to be not as bad as was previously thought.  IMF also remark that some of the bad effects of tariffs have been moderated as importers rush through imports in advance of tariff implementation, when they can.

b.  The UK has a target of being the fastest growing economy in the G7 (G7 is Canada, France, Germany, Italy, Japan, UK, US).  Well in 2025, we will be 2nd fastest and 2026, 3rd according to this forecast.

c. The big story is the US is a huge outlier (aside from Spain).  This is almost certainly driven by AI.  

d.  the IMF stress uncertainty.  Here is the economic policy uncertainty index for the UK up until September 2025 (source: .  Baker, Scott R., Bloom, Nick and Davis, October 15, 2025) 

Not as high as in Brexit, but still well above average levels. 

4. Inflation (the final columns)

a. here the news is not quite as good.  Euro Area inflation will be 2.2 and 2.0 in 2025 and 2026, with the UK at 3.4 and 2.5, much higher. 

b. the stickiness in inflation is likely due to the deteriorating labour market. 

What would the UK have to do to raise our growth rate to that in the US?

 1.  UK labour productivity growth is about 0.3%pa, 2019-2024. US labour productivity growth is at least 1 percentage point higher over a similar period (see OECD ).  So what would we have to do to get an extra 1%pa productivity growth?

2. Lets see this in terms of building more houses.  

3. The rate of return on capital is around 10%.  That tells you the extra output from one extra unit of capital.  Let's convert that into a percentage: since the capital output ratio is about 3, then the percentage change from a 1% change in capital is 0.3%. 

4. The UK has around 30m dwellings (25m in the England).  Dwellings are about 40% of the UK capital stock.   So to get 1 percentage point more growth we would need 12% more housing (0.3*0.4*12%=1%).  

5. On a stock of 30m, 12% is 3.6m new homes.  The government's target is 1.5 new homes over 5 years = 300,000 per year. Over the last decade we have been building around 0.8% of the stock  which is around 240,000.  So at previous rates, this objective would take us 15 years, at the new rate 12 years. That is, we would have to do 15 years worth of building in one year. 

6. a passing note. Why do we care about these seemingly small numbers, changes from 0.3% to 1.3% to 2.3%?  The answer is compounding. By the rule of 72, we can double output in 72/2.3 = 31 years with growth at 2.3%.  With growth at 1.3% and 0.3% it takes 55 years and 240 years.  

UK TFP relative to other countries

 1. The Fernald/Inklaar paper is important.  It argues that the UK TFP levels problem not in manufacturing or market services.  It is  mining and utilities.

2. First they look at overall TFP levels

The key here is that they take comparative level data from 1997 and extrapolate it forward using national data.  This means that an awful lot depends on the accuracy of that 1997 level data.

As they say, the UK coverged towards the US pre-2007 but then has been in a consistent gap. "althought the US has been pulling ahead in terms of labour productivity in the left panel..., TFP levels in the right panel are much more stable. For example, the EU-5 level of TFP was 90% of the U.S. level in 1985, 91% in 1995, and 91% in 2019."

3. where do these TFP level differences come from?  Using the same method they can break levels out by industry

Some definitions:EU-5 (Germany, France, Netherlands, Belgium, Finland). Market services is G, H, I, J, K, N, S.  Other is A agriculture, B Mining, DE Utilities, F construction).  Other is 17% share of UK  market sector value added, manufacturing about the 20%, services the remainder. 63%.  

4. so what explains the differences in the overall TFP levels?  

"But as Figure 2 showed, the overall UK level of TFP remains well below the US or EU-5. If it is not manufacturing or market services, then it must be in the remaining 17% of the market economy that we labelled “other” (agriculture, mining, utilities, and construction). Indeed, a third takeaway from Figure 6 is that he level of TFP in other industries has collapsed since the early 2000s, dropping from approximately two-thirds of the US level to only one-third."

5. They have a good discussion of falling TFP in mining 

"Consider the accessibility of an oil deposit as the “quality” of the natural resource as an input. Holding fixed that natural resource quality, suppose that the same quantity of other capital and labor leads to the same output. Then technology and TFP are both unchanged. But if the quality of the natural resource gets worse (e.g., the North Sea runs out of oil), then the same observed inputs, with unchanged technology, leads to lower output. Although technology has not changed, measured TFP falls.

From this perspective, the observed decline in UK TFP in mining (oil extraction) presumably reflects the declining quality of North Sea deposits. " (My italics).

They continue: " In the U.S., fracking is a technological innovation that substantially lowers the cost of extraction at a given location. Because of that, new locations that were previously uneconomic are now worth drilling. In other words, fracking allowed a given quantity of observed inputs to lead to increasing amounts of oil and gas extraction, despite a shift to lower-quality deposits. Hence, measured TFP (which does not account for the shift to high cost, ‘low quality’ deposits) also understates the true technology gains."

6, the PWT data. The latest PWT data shows comparative TFP levels (this uses the CTFP measure). 

This seems to show Britain ahead of the US.  Looking at the data appendix to the PWT, see here, appendix C, we have this calculation is relative PPP outputs over relative PPP inputs

which is writtne

where j is the country.  

How do they get internationally comparable capital stocks?  For each country Changes in capital stock of assets are calculated by a PIM for each asset.  This change is then aggregated over the assets.  To get an internationally comparable total capital stock level, the level of this is deflated by an investment price for each asset 

where i is the coutnry and a the asset, with the relative prices of the capital stock as 

In turn the "The prices for each asset are based on PPP benchmark surveys: the six ICP surveys since 1970 and the more frequent surveys by the OECD and Eurostat since 1995. The prices from these surveys do not directly map into the six assets we use. "

Given these issues, the meaurement of the comparative levels might be different to the 1997 method used in the Fernald/Inklaar work above.