UK Wages growth is an example of some being much more equal than others

As the credit crunch has progressed the issue of wage growth and in particular the lack of it has moved ever more centre stage in economic analysis especially in the UK. It is hard to believe now but the Office for Budget Responsibility (OBR) forecast wage growth of around 5% back in the summer of 2010. Not only was that the stuff of fantasy but I also feel that such forecasts encouraged the Bank of England to think that above target inflation would only have a minor adverse effect on the UK economy. Instead as I warned back then it had a much more major effect which was made most public in the way that real wages went strongly negative and became a drain on the UK economy. Actually the OBR seems to have such thoughts automatically programmed into its systems as its current forecasts have annual wage growth rising to 3.8% in 2018. I would love that to be true but we have to face a current reality which at the very minimum questions that.

Pay including bonuses for employees in Great Britain was 0.6% higher than a year earlier. Pay excluding bonuses for employees in Great Britain was 0.7% higher than a year earlier.

Not what you might expect

The first issue here is rather basic and it is simply the small size of the increases when economic growth at around 3% per annum is strong. There have been excuses made around bonus payments timed last year to manoeuvre around the 50% higher income tax rate but the number for the single month of July – which should be relatively clear of this – only showed annual growth of 0.7%.

Now let me present the numbers for the annual rate of wage growth in July since 2011 which go 3%,1.5%,0.8% and now 0.7%. Anybody spot a trend? It looks as though wages began to behave as we might have expected in the past and then found themselves crunched downwards in the period 2011/12. As the Bank of England was “looking through” the high degree of consumer inflation then we saw an even sharper reverse in real wages and an own goal from it. But now we see that even the current recovery has so far not reversed the fall in wages. The relationship between wages and economic growth is not what it was and frankly looks broken right now.

Flickers of hope do emerge as for example this morning has seen a stronger employment confidence report (10) from Lloyds Bank. But such moves have so far improved employment numbers and not wages whereas in the past we would have expected both to improve. Also there is a certain irony in Lloyds Bank reporting employment confidence just as it is supposed to be on the cusp of cutting more jobs! My sympathies to anyone reading this who fears they may be affected.

Income Tax Revenues Are Struggling

The slow growth of wages is beginning to have an impact on income tax revenues as OBR head Robert Chote has pointed out on BBC Radio 4 this morning.

British income tax receipts will probably fall short of the government’s target for the current financial year despite a surge in employment,

There is something of an irony here because I am a fan of the increase in the Personal Allowance – the amount you can earn before paying income tax – that has taken place as for example it helps the poverty-trap. However the fact that much of the jobs growth has been in lower paid jobs means that the tax take has not responded to the economic growth we have seen in the way one might have expected.

Also it has other consequences such as the cost of such things as Working Tax Credit which these days acts at times as if it is a subsidy for lower-paid jobs.

What about Directors?

They seem to be existing along the lines of the alternate universe that was described by the pig Squealer in George Orwell’s Animal Farm.

Comrades!’ he cried. ‘You do not imagine, I hope, that we pigs are doing this in a spirit of selfishness and privilege? Many of us actually dislike milk and apples. I dislike them myself. Our sole object in taking these things is to preserve our health. Milk and apples (this has been proved by Science, comrades) contain substances absolutely necessary to the well-being of a pig. We pigs are brainworkers. The whole management and organisation of this farm depend on us. Day and night we are watching over your welfare. It is for your sake that we drink the milk and eat those apples.

Such thoughts and themes are only natural when one reviews the latest data on FTSE 100 Directors pay in the UK from Income Data Services or IDS. It starts relatively mildly.

Salary rises, however, remained muted, increasing by just 2.5%*.

So we start with salary rises which seem modest but of course are much larger than what is general elsewhere. But we need to factor in the fact that salaries are often a much smaller proportion of bosses pay so we need to look deeper and when we do we see this according to IDS.

“FTSE 100 directors have seen their total earnings
jump sharply in the last year, fuelled by a rise in the value of share based awards. Bonus payments have also recovered strongly following a downturn last year.

I thought that bonuses were supposed to have fallen. Apparently not for everyone!

IDS explains that overall earnings growth for FTSE 100 directors was driven by a 44% increase in vested long-term incentive share awards and a 12% increase in bonuses.

IDS says that the median total earnings for a FTSE 100 director is now £2,433,000.

So we observe that George Orwell was indeed correct when he pointed out this.

All animals are equal, but some animals are more equal than others

How has this changed?

Whilst the bare numbers do illustrate a relationship which is plainly changing along the lines of a 99.9% and a 0.1% we do get a more direct comparison if we look at Chief Executives of FTSE 100 companies only.

Between 2000 and 2014 the median total earnings for FTSE 100 Chief Executives increased by 278%, while the corresponding rise in total earnings for full-time employees was 48%.

In 2000 the FTSE 100 Chief Executive earned 47 times more than a full-time employee, by 2014 a FTSE 100 Chief Executive earned 120 times more than a full-time employee.

As you can see there has been a fundamental change in this relationship in this century.

Comment

I wish I could say that such research came as a surprise to me but it seems in tune with the times. The establishment seems to be doing quite nicely whilst the rest of us are feeling the economic squeeze. In a way it seems particularly revealing that such numbers are released on a day when NHS midwives are striking for a 1% pay rise.

For the subject of economics the issue of inequality is a major one. If you believe in rewards for success then by definition you are accepting some inequality. But we have a lot of problems I think in defining success. If a company succeeds how much of that is down to one person? In the case of an owner/entrepreneur such as Richard Dyson then yes I can see the case but I think it is much weaker for those running public companies as they are hired hands and not owners and rarely do the companies boom due to inspiration from them. Yet they are increasingly paid as if it does. If we look at the situation for failure how often are they punished for that? Here we see long-term contracts – which apparently are much too expensive to be given to lower-paid staff – cushioning any blow.

Sky News has calculated the position thus.

 · ow. calculates annual package of highest paid FTSE CEO (Sir Martin Sorrell) is equivalent to pay of >1400 new midwives
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16 thoughts on “UK Wages growth is an example of some being much more equal than others

  1. Bravo for setting this out clearly and indisputably. And look to how the Heath Secretary, Jeremy Hunt, plays to the theme of austerity with his counterargument on the blocked 1% rises, saying it would result in thousands of job losses. His message couldn’t be plainer: you must do the same work for less money and accept the drop in living standards. This was always the backdrop to austerity and the wage adjustment for millions of public sector workers can be no accident.

    • Hi Peter and thank you

      That particular situation reminds me of another quotation from George Orwell in Animal Farm

      “This work was strictly voluntary, but any animal who absented himself from it would have his rations reduced by half”

  2. Shaun,
    I expect tax revenues to be even less in Jan when self employed expected to pay up as ex Job Seekers “advised” to become self employed still struggling despite other benefits!

    • Hi Chris

      I was hoping that (for some at least) it would show the beginnings of the mini-boom and hence some improvement! If you are right about your factor operating in the opposite direction then this year could turn out to be quite a disappointment for income tax and National Insurance revenues.

  3. Shaun,
    I do not see why you think the link between wages and growth has broken. The obvious increase in the labour pool must have an effect. Isn’t it called “supply and demand”?
    As I see it, the increase in supply (of labour) is outweighing the demand from increased growth.
    Maybe you prefer the French model, where existing workers shut out newcomers and leads to plus 10% unemployment.

    On your other point, the wages paid to the employees at the top of companies is now becoming a scandal. I believe that this is partially caused by “corporate capitalism”, whereby the increase in regulations shuts out competition. This leaves the existing directors to claim that they are doing a brilliant job!

    • Hi Nicholas and welcome to my part of the blogosphere

      My point is duofold and we agree on the second bit where the upper end of the pay spectrum is got out of control. The bit you question is not a case of me preferring France but fearing a future where wages for the ordinary person continue to disappoint. The supply fact is the workers in the parts of the third world which are industrialising and becoming competitive as well as migrants to the UK. Both are putting downwards pressure on wages which looks unlikely to end any time soon.

      So if you like the supply curve has shifted yes.

  4. The is no break; the growth doesn’t really exist.
    Houses are a commodity, no matter how much some would like them to be assets, as we all will still need somewhere to live.

    • Hi therrawbuzzin

      A crunch is coming on current trends I agree. Perhaps it will be from house prices falling again as appears to be happening in London now. Of course care is needed as London house prices have flown so high.

  5. The increase in wages at the top is a long-term trend, as is the squeeze on the wages for everyone else along with artificially low interest rates, high house prices, rents and relatively high inflation. At some point this unsustainable pyramid is bound to collapse.

    However, for now this is the new normal, and I am sure the only reason the establishment forecast anything different is to maintain hope for the many that the good old days will soon return.

    • Hi Zummerzetman

      You well be right that a latter day Sir Humphrey is behind such rose-tinted forecasts. If so it does not bode well for the claimed independence of the OBR does it?

      Actually the OBR has turned into something of a failure.

  6. I am reminded that the british isle have been here before

    from the pieced together collapse of Roman Britain we can see that the super rich won out on paying for anything at all , thus beggaring the middle classes of the time and then eventually the merchant trading classes . th ppo being poor , still didn’t get a look in

    regardless of help for the poor if the top will not pay their fair due , and they have the power not to, then running the country will result in bankruptcy

    Then will see the calls for a “strong ” man – but he will not be Arthur

    CTD thats the straight truth

    Forbin

    The show that never ends , step in side friend ! ( and bring popcorn ! )

  7. Migration from inside and outside the EU will continue to supply excess labour that employers will feast. Wages are unlikely to improve as the Govt and Oligopolies secure their grip in maintaining the staus quo. It is interesting to speculate that house prices could fall, not too far me thinks, because those asset price indicators at the centre of our economy must be propped-up. I suggest the Govt buys those properties directly with printed money.

    🙂 Paul

  8. Reducing housing costs would raise workers disposable incomes – giving them more to spend after rent/mortgage. Besides trying to reduce housing costs, just what do you suggest that Brit politicians should do ?

    While it’s useful to observe CEO to worker pay ratio in Britain, British companies try to compete internationally – I suspect the CEO to worker pay ratio is worse many places overseas.

    The juggernaut of American competitive economics rolls on, where consumers gain at workers cost, whilst the bosses become extremely rich. French style worker solidarity laws and protectionism are as useful as King Canute’s orders for the tide to stay out.

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