Q. What do Israel, Germany and Japan have in common?

Yesterday the IMF issued their World Economic Outlook. A whole chapter is devoted to explaining ‘wage dynamics in advanced economies’. They seek to explain why “nominal [i.e. cash] wage growth in most advanced economies remains markedly lower than before the recession”.

Their answer falls back on the usual technical factors around ‘slack’, ‘inflationary expectations’ and ‘trend productivity growth’.

But it is really much simpler than that.

In their Figure 2.2 (2) they compare nominal wage growth and unemployment (more specifically the change in the unemployment rate between 2016 and the 2000-07 average).  In the top left quadrant are the three countries where both unemployment improved and wages increased: Japan, Israel and Germany.  

The IMF note that they label only a subset of their country sample as follows: “outliers and the 10 largest advanced economies (by 2016 nominal GDP in US dollars) are labelled.”

If you have been playing close attention to these posts over the past three years you will know that there are only a handful of countries where there were no government spending cuts: Germany, Israel and Japan (and, depending on timing, Switzerland, or in the updated view below, Chile instead of Switzerland). The chart shows this by comparing the growth in government spending since the crisis (2009-2016) and before the crisis (2001-2008). When the yellow rows are positive, spending growth has increased.

Government spending, % annual average growth

My earlier work showed the same three countries also the only ones where GDP growth has increased since the financial crisis (here). It is of course rather striking to find Germany the arch champion of austerity actually expanding spending (though some German economists would tell me that they could be doing much more, the same might still be said of Japan).

The analysis gives the lie to the idea that low wages are the price for high jobs growth in the UK. It is perfectly possible to have both.

Too many economists are lost in the trees of technical contortions, when the answer is very obvious when you stand back and look at the wood.