The serious allegations and revelations about Teesworks and the Teesside Freeport have sparked renewed attention to the dangers of freeports and other kinds of special economic zone (SEZ), as has recent Government confirmation that eight new investment zones will commence operation in the 2024-25 financial year, with a further five in prospect.

This attention is vitally important.

Although a recent Government-commissioned review of Teesworks did not find evidence to justify allegations of corruption or illegality, it did identify multiple defects in decision-making and transparency, as well as questioning whether it provides value for money.

Many commentators, including anti-corruption experts, consider that this review was insufficient in its powers and scope, and are dubious about its failure to identify corruption. Certainly, it is unlikely that this is the end of the matter as regards the Teesside freeport or others, and investigative journalism by Private Eye, especially, continues to undertake outstanding reporting of this unfolding story.

However, these important issues are being obscured by the swirl of errors, confusions, and hyperbole which has reappeared around UK freeports and ‘charter cities’ or ‘states within a state’ – particularly on social media but also crossing over into the traditional media.

Dispersing this fog is difficult because the claims made are convoluted, fragmented, hard to pin down, and difficult to disentangle from the occasional truth they contain. They would be easier to evaluate if they were based on published research reports about the actual operations or rules of UK SEZs but, tellingly, they are not.

Unpacking what is being said therefore requires a lengthy explanation but, with misinformation on this issue now spreading like wildfire, it is worthwhile both in the interests of accuracy and – crucially – to prevent the false or exaggerated claims being made, giving advocates of SEZs an easy way to discredit their critics.

There is also a more narrowly political issue. To the extent that Labour has no apparent plans to dissolve SEZs if it comes to power, it is being suggested that the party is ‘complicit’ in what is claimed these SEZs consist of. 

SEZs

Special economic zone is a generic term encompassing a wide variety of foreign trade zones, freeports, investment zones, industrial parks, export processing zones, enterprise zones, and even ‘charter cities’ (in this sense, the phrase ‘freeports and SEZs’ is a misnomer).

What all SEZs share is some form of derogation from the laws and regulations of the country within which they are located. But what that means, and the specific institutional and legal forms it takes, also varies considerably.

The actual or potential problems of SEZs around the world are well-established, including a lack of democratic accountability, tax evasion, money-laundering, and the erosion of environmental and labour standards, all the way through to grotesque breaches of human rights.

At the same time, one of the best-evidenced criticisms is that they are an ineffectual, and possibly counter-productive way of promoting economic activity, as they are more likely to draw existing activity to them – to the detriment of other areas – than to generate new activity.

With so many potential dangers and arguably so few benefits, it is entirely right and necessary that SEZs be subjected to very close scrutiny.  

In the UK, the derogations involved have predominantly meant tax exemptions of various sorts, including reduced or waived business rates and employer National Insurance contributions, investment support, and the relaxation of planning rules. Freeports, specifically, also suspend or simplify customs procedures and tariff payments until goods leave them.

It seems likely that some of the SEZs currently being developed in the UK will be given considerable rights to compulsorily purchase land and buildings as happened in the past with, for example, the London Docklands Development Corporation. The official intentions behind these SEZs have included boosting employment, economic growth, innovation, investment, and trade, and reducing regional inequalities, although their effectiveness in these respects is highly contested.

As this suggests, SEZs are not a new phenomenon in the UK, and can be traced back at least to the early 1980s, but they have come and gone, and changed name and detailed provisions over time. There have even been freeports in the past, although the last of these closed in 2012.

The variety of forms SEZs take also makes it hard to pin down the exact numbers involved, as does the fact that in the past few years the Government has made several proposals for different numbers of SEZs, some of which have been modified or abandoned, others of which are at different stages of creation.

As things stand, there are at least 60 enterprise zones still in operation across the UK which were created following the Coalition Government’s 2011 Budget. The current Government is creating at least 12 (perhaps 13) new freeports which are at various stages of development, and there are also the 13 new investment zones currently being created.

It is presumably adding all these together that leads to the figure of 86 frequently appearing on social media as the number of current and projected SEZs in the UK.

An aerial view of the Port of Felixstowe, Suffolk, part of 'Freeport East'. Photo: John Fielding/Wikimedia Commons

States Within a State?

The UK has, or will soon have, a mixture of SEZs. What it does not have, and there are no announced plans for it to have, are charter cities.

Charter cities are a particular, and intensely controversial, form of SEZ, generally found in economically developing countries, in which, typically, a private company or consortium takes over the laws and regulations of a territory within the ‘host country’.

The most famous, or infamous, examples are the now abandoned zones for employment and economic development in Honduras. The claim that UK freeports are, or will become, charter cities started floating around a couple of years ago, based mainly on some rambling essays, by an author using a false name, on a now deleted website.

At that time, and again now, a particular focus of concern was the size of areas denoted on then newly-published Government maps of freeport areas, showing them to extend for up to 45 square kilometres. The concern was reasonable, for the maps were poorly annotated and explained, and became all the more so when combined with the claim that these entire areas were set to become ‘charter cities’.

But that claim was based on a misunderstanding: in fact, as independent experts have explained, it denotes the area within which freeport facilities (customs and tax sites) must be located, not the area within which the derogations (such as tax breaks) apply, although there remain uncertainties, and therefore significant and genuine concerns, about the scope of changes to compulsory purchase and planning regulations.  

In recent weeks, there has been a resurgence of these and similar ideas, and even a X (formerly Twitter) community, which currently has more than 500 members, built around them. Though this latest upsurge does not always use the term ‘charter city’, it makes the same claims by talking of the UK SEZs being ‘states within a state’ or ‘countries within a country’ – with corporations able to set their own tax systems and laws, including environmental and employment laws, to the point where many rights are, or could be, suspended.

If anything, this latest version is even more alarming than before in claiming that all 86 UK SEZs (thus including the old enterprise zones) are such ‘states within a state’.

Flawed Logic and Motivated Reasoning

None of this was true when it was first claimed and none of it is true now.

What is certainly true is that there are free-market and libertarian think tanks which advocate for such developments. It is true that those think tanks, and many individuals within them, are influential with the Government.

It is true that, in 2010, one of them, the TaxPayers’ Alliance, circulated some notes championing charter cities in the UK. It is no doubt true that many Conservative MPs would agree. It is true that Jacob Rees-Mogg’s father wrote a book extolling the kind of libertarian dystopia associated with charter cities and their advocates. And it is true that Rishi Sunak, who is a longstanding advocate of freeports, was once taught by the Stanford economist Paul Romer who was the architect of the contemporary charter cities concept (whether this really means, as is invariably claimed as some kind of clinching evidence if true, that he was 'Sunak’s mentor’ seems improbable since Romer has “no recollection of ever interacting with him”).

But there are no ‘dots to be joined’ here. Whatever any of these individuals or organisations may want, as a matter of fact there is no legal basis in the UK, and no legislation in prospect, which would enable in name, or in effect, anything remotely like charter cities or ‘states within a state’ or ‘company towns’ or any of the similar claims which are circulating.

UK SEZs are part of the UK and remain entirely within the UK’s legal order, and there is no way that they could ‘become’ charter cities, or have their own legal order, without primary legislation (and, as will become clear later, without violating the UK’s trade deal with the EU).

This isn’t one of those issues where there are valid points on 'both sides’ of the debate. It is quite clear cut and beyond rational debate.

UK SEZs do not make their own laws and they do not have the power to set different employment or environmental regulations from the rest of the country.

Except in the most circuitous of ways, UK SEZs have nothing to do with the East India Company or with Hong Kong Freeports during the Opium Wars. Such comparisons make for good rhetoric but are based on the confusions arising from SEZ being a generic term which can be applied to multiple things.

The result has been to conflate all the different kinds of SEZs there are, or have ever been, or have ever been proposed, across different centuries and around the world, and to ascribe characteristics of any of them to current UK SEZs.

At its heart is a well-known logical fallacy along the lines of ‘a dog is an animal. An elephant is an animal. Therefore a dog is an elephant’. What then proceeds is the familiar practices of all ‘motivated reasoning’, which selects or twists evidence to fit assumptions, and mistakes absence of evidence for the presence of a hidden agenda. It soon becomes easy for perfectly well-intentioned people to become completely invested in ‘proving’ the fallacy to be true, and for social media echo chambers to amplify the message, and possibly make it even more inaccurate in the process.

In this particular case, it seems to have gained credence mainly among many who, confronted with similar logic and reasoning from Brexiters, would readily detect its deficiencies. If this case is different perhaps it is because, superficially, it looks like another of the well-founded critiques of Brexit.

Brexit and Freeports

Although most of the UK’s SEZs predate it, Brexit has given new impetus to concerns about them, not least because the Government proclaims the new freeports, specifically, to be a ‘Brexit benefit’ and trumpets the idea that this is because they will be free of EU rules that governed the previous UK freeports.

It is true that the EU has such rules and that these are more stringent than those of the World Trade Organisation, with which the UK has to comply. That the Government, in its desperation to show some value to Brexit, should make a great deal of this is not surprising.

What is more surprising is that critics of these new UK freeports should adopt a mirror-image form of the Government’s rhetoric, by inferring that this means that EU freeports, including those which the UK used to have, are not of concern because they are ‘tightly regulated’, whereas the new UK version will be completely different.

This is a rather starry-eyed view of EU freeports which, like other SEZs, have themselves been criticised for fostering corruption, tax evasion and criminality. That is clearly not an argument for UK freeports, but it does demonstrate that for critics to draw a sharp distinction between ‘tightly regulated’ EU freeports and post-Brexit UK freeports is misleading.

That, in turn, should give pause for thought to those who believe that post-Brexit freeports are set to be deeply malign – whereas their pre-Brexit version was, if not benign, then at least no worse than merely ineffective.

Freeports and State Aid

In reality, as these critics rightly identify, the principal way that post-Brexit freeports differ, or may differ, from those allowed by the EU, relates to state aid, which is indeed tightly controlled in the EU version. However, it is bizarre that they should focus on this issue, given that their wider critique comes primarily from a broadly left-wing viewpoint.

Are they suggesting that state aid is automatically a bad thing? After all, a standard criticism made of the EU by the left, including ‘Lexiters’, is that its restrictions on state aid mark it out as a neoliberal organisation. Why, then, would anyone on the left argue that the UK making more extensive use of state aid than the EU allows should be seen as a problem?

Conversely, if UK’s post-Brexit freeports are, as these critics insist, a playground for ‘anarcho-capitalism’ and the most extreme forms of neoliberalism and libertarianism, that can hardly be squared with the criticism that they are ramping up the provision of state aid.

This criticism is not just ideologically incoherent, it also misses or obscures two crucial points.

The first is that, in fact, post-Brexit UK freeports, and the UK generally, are not able to operate independently of EU state aid rules. It is true that the UK no longer has to obtain advance approval from the European Commission for things such as freeport tax breaks, but it is bound by the state aid provisions within the 'level playing field’ commitments of the Trade and Cooperation Agreement with the EU.

Indeed, there have already been concerns raised by the EU that UK freeport tax incentives (which is what is specifically at issue, though subsidised asset sales could become another) may violate those provisions. Whether they do so, and if they do what action the EU takes, remain to be seen, but it demonstrates the falsity of the claim that UK freeports can simply ignore EU state aid rules, and of the claim that UK freeports are constrained solely by WTO rules.

What is even more important is what this criticism obscures. The EU may object to freeport state aid because it gives the UK competitive advantage. Right-wing neoliberals may object to it because it distorts market competition. But the real concern should be whether freeport tax incentives and highly subsidised asset sales are in fact a cover for cronyism and corruption.

It is this possibility, rather than some idea that ‘state aid’ is inherently wrong, or that EU state aid rules are inherently virtuous, which lies at the heart of the accusations which have already been made about Teesside Freeport and which, very likely, will emerge about others in the future.

Finally, it has been suggested that, to the extent that UK Freeports do not comply with EU Freeport regulations, their existence is a bar to the UK re-joining the EU. This is not true. In the course of any accession process, UK SEZs would simply have to be amended over an agreed period of time to comply with EU rules, as has happened with the SEZs of many accession countries, such as Poland, in the past.

Since freeport derogations are time-limited, this would not likely give rise to contractual disputes. Even if it did, suggestions that this would lead to the UK facing legal claims in a ‘secretive court’ under an ‘investor-state dispute settlement’ (ISDS) mechanism are puzzling. ISDS features in some international trade and investment agreements and has had relevance to some charter city contracts, so this suggestion is likely to just be based on the underlying confusion of freeports and charter cities, since it is a mystery what agreement or associated ISDS mechanism might give rise to such legal claims in relation to UK freeports.

Retained EU Law

The other, quite different, Brexit issue which is being mentioned in relation to SEZs is that of EU law and regulation – especially that relating to employment and environmental standards. Specifically, it is claimed that the Government has axed huge swathes of what was Retained EU Law (REUL), with more to follow.

It is a strange shift in logic because, even if it was true, it would be true for the UK (or in some cases only Great Britain) as a whole, whereas the ‘state within a state’ claim is that SEZs have different laws and even different legal systems from the rest of the country.

But, in any case, it is also misleading.

It is true that Boris Johnson, Liz Truss and, at one time, Sunak, all promised to shred the majority of Retained EU Law. How deeply this would have bitten into employment and environmental protections will probably never be known, as we don’t know which things would have escaped the shredder. But the fact is that, much to the outrage of Conservative deregulatory Brexiters, Sunak was forced – for pragmatic rather than principled reasons – to substantially water-down what became the Retained EU Law (Revocation and Reform) Act of 2023. The bulk of what is now called ‘assimilated law’ has been kept.

It is true that one thing which hasn’t been assimilated is the Retained EU law relating to port service regulations, and some of the freeport critics have lighted on this as being significant – but mistakenly so. It has been axed because UK ports are mostly not state-owned, which is nothing to do with Brexit, and the regulations are only relevant to freeports, specifically, to the extent that they might have contradicted some of the tax breaks being offered. However, the decision to create those tax breaks had already been taken, so the Act changed nothing in that respect.

Crucially, the Act has allowed almost no changes to employment rights, and most EU case law has been written into UK legislation. With regards to environmental regulations, the concerns about the extent of what would be scrapped under the original proposals have not eventuated, although there have been losses, especially of air pollution laws, and to the extent there is divergence from EU rules it is mainly passive (not following EU changes) rather than through actively scrapping existing rules.

That’s not to deny that there is plenty to be concerned about in this, including substantial uncertainty about how assimilated law will operate, and plenty more that could be written. But it has nothing to do with SEZs specifically.

Deregulation

Of course, it is always perfectly possible that this Government, or a future one, might remove some or all employment rights, environmental protections (and literally anything else). That could come from future UK legislation which might, in turn, annul some or even all assimilated law or, most concerningly of all, from individual ministers using statutory instruments, rather than legislation, to do so.

Nevertheless, as things stand there has been no significant, and certainly no wholesale, regulatory change in these areas.

In any case, as with the state aid issue, the UK would be constrained by the level playing field provisions of the Trade and Cooperation Agreement, which contain non-regression clauses relating to employment and environmental protections.

More generally, detailed academic research on post-Brexit regulatory divergence of any sort shows that is has been relatively limited and that, again much to the anger of Conservative deregulatory Brexiters, “non-divergence is the new consensus in British politics”. To reiterate, while this could change, doing so would affect the whole country, not just SEZs. So if a government was minded to make such a change, why would it want to confine it to SEZs? And, even if it did, that would still not make SEZs ‘states within a state’, setting their own law: it would be a political decision by the government, and enacted by national law, just like any other.

The understandable concern that the Government will pursue a strategy of deregulation stands in its own right – but it doesn’t need some bizarre theory behind it about the creation of charter cities.

In fact, the Government has explicitly stated that “there is no deregulatory agenda in freeports”, including in relation to workers’ rights and environmental standards. Of course, it may be misleading. If so, that could be demonstrated by pointing to evidence that there has been such deregulation, or that the legal apparatus has been created to make it possible. Yet, there was nothing in the freeport bidding process which made any reference at all to bidders acquiring the ability to make their own laws, or to set their own taxes, or to establish their own labour and environmental standards (in fact, the regulatory constraints enumerated would make many free-marketers weep). Even more importantly, there has been no law passed or ‘charter’ granted which would allow them to.

If that isn’t enough, consider that the first of these freeports became operational in 2022, but there are no examples of corporate-created law being in place, or of a different set of employment rights or environmental regulations being in force, within them.

The same goes for the 60 enterprise zones which, we are told, are among the 86 SEZ ‘states within a state’. They have had many years of operation, including three years since the Brexit transition period ended and EU law ceased to be binding, to create such corporate legal or regulatory systems. Yet here, too, there are no examples of this having happened.

Evidence and Expertise

The fact that so many exaggerated or inaccurate claims about UK SEZs are gaining traction is a testament to the Government’s failure to communicate its policy and, no doubt, to the lack of trust that many people have in its intentions.

But, even if the Government’s communication was perfect, it would not be able to disguise the genuine and serious criticisms of its SEZs which exist: their questionable economic value, their questionable value for money, their capacity to lead to corruption and criminality, their lack of transparency and accountability, and their capacity to dilute or over-ride local planning controls.

It is not necessary to deny these criticisms, and it is certainly not necessary to defend UK SEZs, including freeports, in order to challenge the wilder accusations that are being made about them. Indeed, challenging those accusations is an important part of ensuring that the real criticisms are not drowned out or discounted.

Similarly, to the extent that many of the accusations are associated with criticising Brexit, they detract from all the many real criticisms of Brexit. It becomes all too easy to dismiss these real criticisms as ‘Brexit Derangement Syndrome’ simply by pointing to such unfounded assertions.

That is especially unfortunate since, whereas Brexiters have been notoriously disdainful of experts and evidence, those opposed to Brexit have tended to be more careful to rely on them. Yet it is notable that these charter city or ‘states within a state’ claims about UK SEZs are not based on any professional research and are not coming from reputable academic experts in a relevant subject or established journalists.

It seems highly unlikely that such experts, many of whom are themselves highly critical of Brexit, are suddenly coy about endorsing what would, if true, be a major and damning critique of it.

The more obvious, and correct, conclusion is that, on the basis of the available evidence, they know it is not true.

‘Unhinged’ letter to all staff, organisers and officers includes ‘disgusting’ section about Palestine

Unite general secretary Sharon Graham has sent a letter to all the union’s staff, organisers and officers that has been described as an ‘unhinged’ attempt to counter criticisms. Skwawkbox will publish analysis of the various sections separately – and will first cover what Unite figures have described as Graham’s ‘disgusting’ comments on Israel’s slaughter of Palestinian civilians in Gaza.

The letter claims that Graham and Unite have led on opposition to the mass murder in Gaza – despite Graham being widely criticised for her silence on the issue and insiders saying that she had to be pressured into a proper statement on Gaza at all.

And the section, which is titled ‘Palestine’, goes on to make clear that while Unite has given a one-off donation (one that Skwawkbox understands was given suddenly and without approval by Unite’s elected executive) to Doctors without Borders, Ms Graham and the union under her will always prioritise defence industry jobs above any outside issues, despite the union’s official, democratic position in support of sanctions and a boycott against Israel.

The full section reads:

Palestine

Of all the issues that have been used in these attacks, probably the most abhorrent is the attempted weaponisation of the conflict and the deaths of thousands of innocent civilians and the collective punishment of the people of Gaza.

Unite, through the General Secretary and the Chair of the Union and the Executive Council, was the first major union to publicly and unambiguously call for a permanent ceasefire in Gaza. We were very clear. We have watched on with horror the bombardment and destruction of Gaza, and the unbearable terror, suffering and death of its innocent civilians. We have been unequivocal that the deliberate killing of civilians, hostage-taking and collective punishment are war crimes and should be identified as such.

Unite has also donated £50,000 to Médecins Sans Frontières/ Doctors Without Borders specifically to help the many victims of this horrific conflict. Most recently the General Secretary has written to the Palestinian General Federation of Trade Unions (PGFTU) offering our solidarity after the horrific bombing of their Gaza headquarters which, alongside providing services to workers, was also functioning as a kindergarten and bakery.

However, we cannot and will not endorse any organisation which decides unilaterally and without any discussion (let alone agreement) with the workers themselves, to support the targeting of our members’ workplaces or their jobs. To be clear, this will not happen. No outside body, no matter what their political position, will be allowed to dictate terms to our Union and our members.

It is important to highlight here that it is a core principle of Unite that as a trade union the ‘first claim’ on our priorities is always the protection and advancement of our members’ interests at work. It is very simple. Unite cannot and never will advocate or support any course of action which is counter to that principle. We are a trade union, not a political party or single-issue campaign group.

Therefore, there is no contradiction for a trade union to hold a position of solidarity with Palestinian workers, while at the same time refusing to support campaigns that target our members’ workplaces without their support. Similarly, we cannot be expected to affiliate to organisations that actively work against our members and their jobs.

Examples include groups that look to build networks inside trade unions to undermine the defence industry or demand the disbandment of NATO and AUKUS. Whatever anyone may think personally about those objectives is irrelevant. We are a trade union with thousands of members employed in the defence industry. It is the views of affected members that take precedence in a trade union. That will not change and nor should it. Unite members have recently been attacked directly, been spat at and called “child killers”. We cannot and will not endorse this.

Emphases added

One furious senior insider told Skwawkbox:

She’s effectively saying members working in defence don’t care if what they make ends up killing women and children in Gaza – only jobs matter. Has she bothered asking any of them?

Another said:

Unite’s official position, democratically reached repeatedly at conference and confirmed again just last summer, is that it supports Boycott, Divestment and Sanctions against Israel. We didn’t add ‘except where it might affect defence jobs’. We’ve also voted for the end of trade agreements with Israel. This is disgusting by Sharon.

Sharon Graham has been alleged by insiders to have:

• banned Unite officials and national banners from pro-Gaza protests
• banned and smeared films and books exposing the ‘Labour antisemitism’ scam
• placed an official under investigation who refused to cancel a Palestine solidarity fringe event at Labour’s 2023 annual conference
• told her chief of staff to threaten a soon-to-retire official with the loss of a pension bonus if he did not soften his support for Palestinians

Her supporters also prevented debate and votes on Gaza at a meeting of the union’s elected executive earlier this month.

According to human rights group Euro Med Monitor, since 7 October last year Israel has killed over 40,000 Palestinians in Gaza and wounded more than double that number, overwhelmingly women and children and many of them with life-changing injuries, while Gaza’s health and school systems have been bombed into collapse, often using US- and UK-made weapons and systems. More than a million people have been forcibly displaced and Gaza is in famine because of Israel’s blockade of food and vital supplies. Israel is formally on trial for genocide before the International Court of Justice and ordered to stop its slaughter – and has been found by UN human rights investigators to be committing genocide.

Unite was contacted for comment but did not respond by the press deadline.

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Ninety per cent of the "Levelling Up" projects promised by Rishi Sunak and former Prime Minister Boris Jonson are still years away from completion, a parliamentary report has revealed.

A report by the Commons Public Accounts Committee found that only £1.24 billion will be spent on the projects by the end of this month out of £10.47 billion programme originally promised by Johnson’s Government to improve dilapidated town high streets and run down areas of the country.

This month is supposed to be the completion of the first round of “Levelling Up” grants which councils had to put in bids under the scheme but the report reveals the deadline has had to be extended for at least a year because so few have been finished. The report reveals that out of 71 so-called “shovel ready” projects due to be completed this month, only 11 had been finished and the remaining 60 would not be completed until next year, if not later.

It also says only £3.7 billion out of the £10.7 billion has been allocated to councils by the ministry because the bidding procedure has been so complex and many councils have wasted council taxpayers money on projects which stood no chance of being accepted by ministers. 

Ministers changed the rules midway through the bidding for Levelling Up projects so that councils that were successful in bidding in the first round were disqualified from bidding in the second. As a result 55 councils wasted scarce council taxpayer’s money by putting in bids that were ruled out.

Dame Meg Hillier MP, Labour Chair of the Committee, said: “The levels of delay that our report finds in one of Government’s flagship policy platforms is absolutely astonishing. The vast majority of Levelling Up projects that were successful in early rounds of funding are now being delivered late, with further delays likely baked in. 

“DLUHC [The Department for Levelling Up, Housing and Communities] appears to have been blinded by optimism in funding projects that were clearly anything but ‘shovel-ready’, at the expense of projects that could have made a real difference. We are further concerned, and surprised given the generational ambition of this agenda, that there appears to be no plan to evaluate success in the long-term.

The ministry tried to claim to the National Audit Office that the majority of the programme was under way but when MPs questioned civil servants from the department it was revealed that “under way” only meant that construction was at the design stage or required planning permission.

Both the Local Government Association, which represents local councils, and the South East Councils, which represents local authorities in London and the South East, were highly critical of the bidding process to get the money.

South East Councils described the process as a “whole system of “beauty contest bidding” [which] is bad government. Levelling up funding further contributes to a “begging bowl culture” through a wasteful, inefficient, bureaucratic, over-centralised, unpredictable, short-termist, demoralising, time-consuming and frustrating way of allocating money to councils.”

In the South East only four councils got any money – they were Gosport, Gravesham, Test Valley and the Isle of Wight.

Martin Almuzara, Richard Audoly, Augustin Belin, and Davide Melcangi

Wage growth has moderated notably following its post-pandemic surge, but it remains strong compared to the wage growth prevailing during the low-inflation pre-COVID years. Will the moderation continue, or will it stall? And what does it say about the current state of the labor market? In this post, we use our own measure of wage growth persistence – called Trend Wage Inflation (TWIn in short) – to look at these questions. Our main finding is that, after a rapid decline from 7 percent at its peak in late 2021 to around 5 percent in early 2023, TWin has changed little in recent months, indicating that the moderation in nominal wage growth may have stalled. We also show that our measure of trend wage inflation and labor market tightness comove very closely. Hence, the recent behavior of TWIn is consistent with a still-tight labor market.  

TWIn: Measuring the Persistence of Wage Inflation

To recover the persistent (“core”) component of wage inflation, we rely on a framework that combines worker-level data with time series filtering techniques. Here, we briefly summarize the methodology. Additional details can be found in our previous Liberty Street Economics post and in this paper. 

We start from monthly data on wage growth across seven different industries from the Current Population Survey (CPS). Following the well-established methodology of the Atlanta Fed Wage Growth Tracker, we define wage growth as the median percent change in the hourly wage of individuals observed twelve months apart. We then estimate a model in which wage growth in each industry is decomposed into the sum of a persistent component and a noise term that captures transitory variation and measurement error. Both persistent and noise components are further split into common and industry-specific terms to accommodate potential cross-sectional correlation. 

Importantly, we estimate the persistence of unobserved monthly wage growth from year-over-year wage changes. Our measure therefore tends to lead year-over-year wage changes, which are influenced by wages in the past twelve months by construction. This produces a timely measure of wage growth, useful to detect turning points in real time.  

Will Strong Wage Growth Last?

The chart below shows our estimated trend (solid blue line) together with the realized twelve-month wage growth defined as described above (black line). The shaded area around the trend is a 68 percent confidence band that captures the uncertainty associated with the estimates. We highlight two main takeaways. 

Wage Growth as Measured by TWIn Peaked in Late 2021, Then Moderated 

Sources: Bureau of Labor Statistics; authors’ estimates. 

First, after remaining stable between 2019 and 2020, the trend increased markedly at the beginning of 2021, nearly doubling over the course of the year. As such, a large chunk of the wage growth we saw over the course of 2021 appears to have been persistent. It is worth stressing once more that the trend extracted by the model is expressed in terms of annualized monthly wage growth, which explains why it leads the actual year-over-year wage growth series in the chart. 

Second, the model suggests that the trend may have peaked in the early months of 2022, and then started declining. The moderation in TWIn flattened out mid-2023 and has remained stagnant since. However, the shaded areas still illustrate considerable uncertainty. The recent slowdown estimated by our model indicates it cannot be ruled out that wage growth will continue to be markedly higher in the near-term than it was before the pandemic.  

However, alternative indicators of wage growth have been sending mixed signals in recent months, as we show in the chart below. The employment cost index (ECI), shown in red, has been trending downward, though the most recent data point for this measure is for the last quarter of 2023. The deceleration in average hourly earnings has stalled recently and the growth rate even ticked up in January. Finally, as discussed, TWIn has been mostly flat in the last six months. These mixed signals reinforce the point on the uncertainty around our TWIn estimates moving forward. 

Alternative Indicators of Wage Growth Are Sending Mixed Signals

Sources: Bureau of Labor Statistics; authors’ estimates. 

Wage Growth Persistence as a Signal of the Labor Market 

Our filtering approach to time aggregation delivers a measure of wage inflation that is timelier than alternatives. We show this in the chart below, which compares the recent evolution of our measure (blue), the employment cost index (red), and the Atlanta Fed Wage Growth Tracker (gold). Our measure of Trend Wage Inflation always leads alternative measures of wage growth: importantly, it is better aligned to labor market tightness. We illustrate this point in the chart where the grey line denotes labor market tightness, defined as job openings divided by the labor force. 

TWIn and Labor Market Tightness Tend to Move in Tandem

Sources: Bureau of Labor Statistics; authors’ estimates. 

Our measure of Trend Wage Inflation therefore represents an additional signal on the current state of the labor market. When labor market conditions are tight – that is, when there are a lot of vacant jobs relative to job seekers – wage growth is high, as firms need to post higher wages to attract and retain workers. TWIn and labor market tightness both peaked toward the end of 2021. Thereafter, both measures have gradually fallen, as the imbalance between job openings and job seekers has gradually diminished. 

What are the implications of persistent nominal wage growth? First and foremost, TWIn adds to other indicators pointing to a still-tight labor market. Many labor market indicators, such as job vacancies or the rate at which unemployed workers find jobs, are still at or above their pre-pandemic level. In addition, persistently elevated nominal wage growth may have repercussions for price inflation, although it may also be the result of wages in nominal terms catching up with previously high price inflation. Our approach offers a way to look under the hood of short-run, noisy fluctuations in wage growth. While considerable uncertainty remains, our estimates point to persistent wage growth that is still above its pre-pandemic levels. 

Chart data

Martín Almuzara is a research economist in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Richard Audoly is a research economist in Labor and Product Market Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Augustin Belin is a research analyst in Macroeconomic and Monetary Studies in the Federal Reserve Bank of New York’s Research and Statistics Group. 

Davide Melcangi is a research economist in Labor and Product Market Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:
Martin Almuzara, Richard Audoly, Augustin Belin, and Davide Melcangi, “Will the Moderation in Wage Growth Continue?  ,” Federal Reserve Bank of New York Liberty Street Economics, March 7, 2024, https://libertystreeteconomics.newyorkfed.org/2024/03/will-the-moderatio....

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Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).