The UK – even a flexible labour market still is a LABOUR market

In their book Animal Spirits George Akerlof and Robert Shiller state that wages are not set equal to the marginal productivity of labour but according to social norms – i.e. equal to (a part of) other wages. A wage is not just the atomistic market remuneration for your labour. It’s also a powerful social token of the respect you earn and a neon sign of your position in society. You’re paid for a position – not for your work. As far as I’m concerned this characteristic of wage setting is more important than the famous ‘stickiness’ of wages. The ONS recently published some information which corroborates this view of wage setting (graph): the only constant pattern in the graph below is the stunning conformity of wage developments in the UK services sector and the UK manufacturing sector – also during the disastrous decline of UK manufacturing before the 2008 devaluation. Even Schumpeterian dynamics were less strong than social norms. Mind that the UK labour market is supposed to be one of the most ‘flexible’ of the European Union.