What is really happening to wage growth in the UK?

The main economic question in the UK right now is what is happening to wage growth? If one looks at the current rate of economic growth as measured by Gross Domestic Product or GDP at around 3% then one would not expect to also see this.

Pay including bonuses for employees in Great Britain was 0.7% higher than a year earlier. Pay excluding bonuses for employees in Great Britain was 0.9% higher than a year earlier.

Conventional economic models and computers would be behaving like HAL-9000 in the film 2001 A Space Odyssey at this time! The numbers simply do not compute and do not correlate with past economic theory.

What many organisations do is simply wish the problem away as for them a “wages fairy” is always just around the corner and the situation is just about to return to what was once regarded as normal. For example the Office for Budget Responsibility is like this.

But it picks up from 2015 as productivity growth recovers.

Actually they appear to have a productivity fairy too! The net result is that back in March they forecast 2.5% wage growth in 2014 which means that it will really have to accelerate to the end of the year. However that is not the end of it as it accelerates up to 3.8% in 2018. Whilst I would love this to be true on current trends it looks about as realistic as the original OBR forecasts which believe it or not were for 5% annual wage growth in the UK. This has been the largest error from what has been an error ridden organisation. But to return to the theme it is not atypical. In essence for many economic forecasters the lyrics of D-Ream are at play.

Things can only get better

Sadly the pattern of wages is that rather than getting better they have got worse and this is compounded by the fact that they have got worse in what otherwise has been a recovery period. Although of course some care is needed as the aggregate economic performance has been considerably better than the individual one.

The Resolution Foundation joins the fray

We find a potential explanation for the current situation being offered by the Resolution Foundation today.

While the ‘wage effect’ within different sectors and worker types accounts for the largest share of the overall slowdown in pay growth in recent years, the ‘employment effect’ associated with compositional change has played an important role.

They identify three main factors which in their opinion have been at play in 2014.

Occupational changes: a sharp decline in employees in managerial roles alongside growth in lower-paying caring jobs and elementary occupations pulled down pay by around 0.4ppts

The age mix: a strong increase in employment among younger (20-29 year-old) workers helped reduce youth unemployment in 2014, but dragged on pay to the tune of 0.2ppts

Job tenure: as employment surged, the number of people in their job for less than a year grew strongly. These typically lower-paid employees pulled down average pay by around 0.2ppts

The essential issue here is whether these changes are a permanent shift or a temporary one. If permanent we do appear to have fallen into some sort of “wages trap”. However even on the more hopeful scenario that they are temporary adding 0.8% to wage growth is not exactly inspiring. Yes it would put it above the current rate of inflation but not by much. Is that the rate of growth in real wages we can hope for these days even on a relatively optimistic scenario?

Another alternative

Other measures of wage growth have been more positive than the official one. For example the Bank of England Agents have told us this.

But there had been signs of pressures starting to build
where there were skills shortages or where attrition had picked up, such as in construction, IT, engineering and parts of professional and financial services……….Some
businesses had been forced to offer higher salaries to attract
new recruits.

Both the Bank of England Agents and the British Chamber of Commerce are suggesting that wage rises are more like 3-4%. The Recruitment and Employment Confederation has hinted at even higher rates of pay growth although I note that its press release this morning is significantly less bullish.

October data pointed to slower growth of staff pay. Permanent staff salaries increased at the weakest rate since February, while temporary/contract staff pay growth eased to a five-month low.

The conceptual issue with the private-sector surveys is that they do not cover everyone and so they may simply be counting those with wage rises and excluding to at least some extent those without a pay rise.

What about the self-employed?

The situation here is not unlike the supermassive black hole song about by the group Muse. We know that self-employment has been on the march and that numbers have grown, but we know very little about their earnings and income. Even the official surveys exclude them in what is something of a disgrace.

Back in August the Office for National Statistics did mount an investigation into the situation.

In 2012/13 the average median income from self-employment was £207 per week, according to the
Family Resource Survey, a fall of 22% (after taking into account inflation) since 2008/09.

Sadly the numbers are out of date but they do not paint a pretty picture as the falls in real wages/income are more than double that of employed workers. And of course the latter’s position is bad enough. Fans of the Retail Price Index will note that the position would be even worse if that had been used.

Maybe not all the self-employed income is being captured but for many this is a like for like comparison over time. You could maybe argue that the newly self-employed are not telling the truth but no doubt some are also in a worse state than they are claiming.

Comment

The news on UK wages is extremely troubling. Maybe we are doing better than the official data would suggest but probably not by much. As we make such an assumption we have to face the likelihood that the (rarely counted) self-employed are probably pulling downwards on the numbers. Thus we arrive on a road where the slower rate of fall in real wages has been caused by the fall in the rate of official consumer inflation. Again we have an issue as less official measures of inflation – not a national statistic! – such as the RPI have not shown such a sharp fall. Using RPI makes real wages in the UK even more problematic.

The fear is that should the economy continue to exhibit hints of a slow down then wage growth could slow down too as for example suggested by today’s REC analysis. In 2014 the Bank of England had to halve its forecast of wage growth in an embarrassing u-turn, could it have to do so again in 2015? Hard times indeed if that turns out to be so.

Rail fares and inflation

I have had some success in my campaign over rail fares and the use of RPI inflation for them and the way that the government has reported this. The National Statistician Sir Andrew Dilnot has written to HM Treasury on the matter in something of a shot across their bows. The full record from the time I raised the issue at the Royal Statistics Society can be found at the link below.

http://www.statsusernet.org.uk/communities/alldiscussions1/viewthread/?GroupId=85&MID=2733

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19 thoughts on “What is really happening to wage growth in the UK?

  1. If there is growth (questionable) but not wage growth, nor tax receipts growth, then it has to be the case that it is going to capital; therE aren’t any other possibilities that I’m aware of.

    Would this surprise you?

    • therawbuzzin – I think the ONS can give courses on double entry book keeping and off sheet balances to the pro;s

      Honestly there’s no limit to their skills it seems !!

      Dont get me started on the EU accounts though 😉

      Forbin

  2. Hello Shaun, talking to various people while on holiday would suggest that this problem is not confined to just the UK. Germans and Americans I talked to said that wages are falling in their countries as they are in Portugal, Spain and Greece. I wonder if, like devaluing currencies, this is another race to the bottom? This is anecdotal evidence but it is interesting that it is a hot topic in other countries as well.

    • Hi Pavlaki

      This is what Zummerzetman often argues on here that wages are in secular decline. Having checked the US jobs reports yesterday I can say that the US position is better than ours with wages according to the Bureau of Labor Statistics up 2% on a year ago. However I note that a reasonable proportion of the growth in employment in the US was in leisure and hospitality were wages average US $368 per week as opposed to the overall US $850 so there may be a swerve coming in these numbers too.

      As to the Euro area well internal competitiveness = wage cuts.

      • Hi Shaun,

        The trends seem obvious to me. When I worked in financial services in the nineties I recall the drop in annuity rates and at the time one of my family was advised to delay taking their pension until they recovered to more normal levels. Advice they were wise to ignore because, of course annuity rates just continued their downward trajectory to where they are today. In some quarters there is this blind faith that house prices/wages/national debt-you name it- will return to ‘normal’. I would argue that this a new normal and sadly the inequalities we see today will not be reversed.

  3. The majority of my acquaintance have been suffering declining real wages for years.

    Just saying that’s all.

    If it wasn’t for tax credits and part time work,the UB stats would be even worse.

    • the coverup is dispicable and cannot economically go on for long . There’s the bills to pay …. oh wait , thats being done with QE!!

      Forbin

      • As an ex DWP employee specializing in appeals against the old Family Credit benefit determinations from both employed and Self employed, I can personally assure you that certainly since 1988 the poor wage cover ups have been going on with Self employed declaring earnings at a level to qualify for benefits whilst many unscrupulous employers have set wage levels below subsistence (and in later years at minimum wage level) informing potential employees at job interview of their likely wage and the benefits they can claim, providing an illustration of their likely entitlement.

        So bnever mind”it can’t go on for long” I am afraid the reality is it has already been going on for 26 years that I know of! I see no reason why they can’t keep it going for another 26 years.

  4. Hi Shaun,

    If the margin of error / exaggeration / outright lying in these figures and the general trustworthiness of the ONS and their political chums are comparable to the goings on at Tesco, how much shit are we in then?

    I may not be an economist but my uneducated guess would be “Lots!”.

    • Hi Jim M

      I have long feared what a proper accounting system would do to our banks! Meanwhile our government has played this sort of game over the past few days with the extra EU contribution. By the time the Brussels bureaucrats have been at the game the only thing we can be (fairly) sure about is that the UK will be paying an extra £850 million.

      This morning has thrown up another bit of this sort of crackpot thinking.

      George Osborne ‏@George_Osborne
      Let’s create a sovereign wealth fund for North, so shale gas receipts used for long term investment & jobs #NorthernPowerhouse

      To which I have replied.

      Shaun Richards ‏@notayesmansecon
      Dear @George_Osborne You do realise that the UK fiscal deficit in September at £11.8bn was £1,6bn higher than September 2013 don’t you?

      So we are borrowing to save?

      • Hi Shaun,

        I do find it a little alarming that, in his role as Chancellor of the Exchequer, young Master Osborne is going out to battle with global economic forces armed only with a history degree and some rather dodgy ideology. One can only suppose he’s relying on his diverse and extensive career outside of politics to inform him.

        Oh …

  5. Balance of Payments Deficits over decades bear witness to the West in general having lived beyond its means for decades. It makes sense for wages in the West to decline relative to wages in those countries with consistent Balance of Payments Surpluses.

    What, to me, is shocking, in fact despicable, is the continuing growing in wealth of the wealthiest within the West; in terms of equity, remuneration and tax avoidance.

    The West needs to learn to live within its means, and those in high places should lead by appropriate example.

      • Hi Forbin

        I should have added – but those in high places are hardly ever likely to lead by appropriate example …

        The West will never live within its means whilst ever it is ridden with Parasites (rich, poor and intermediate); mostly the product of treacherous self-serving politicians.

        Rick

    • Balance of Payments Deficits over decades bear witness to the West in general having lived beyond its means for decades. It makes sense for wages in the West to decline relative to wages in those countries with consistent Balance of Payments Surpluses.

      ————————————
      Not to me it doesn’t.
      What it means to me is that not enough people are working in exportables, tangible or intangible; remuneration level is not relevant unless we all work in that area.

  6. Hello Shaun,

    As I posit the BoE is targetting wage inflation and nothing else I don’t expect any interest rate rises . As others have noted the taxes raised are not in line with any real growth , well not for us plebs !

    I think it would be useful to plot the stella growth of the top 1% or even 0.1% groups – they have not suffered in the recession at all – just like the 1930’s !!

    Indeed it seems our leaders are powerless to stop these welchers – I do not see any evidence that they are worth their collective salt but , hey, those in power will do what ever they damm well please !!

    economically speaking as a percentage they contribute less and less as the years go on , and yet they continue to amass great wealth . The death of the middles classes continues and I posit without them then Democracy and the capitalist system will evolve into Dune !!

    Forbin

    Popcorn for the masses !!

    • Hi Forbin

      I think we have learnt a lot from Japan where economic policy has evolved into essentially driving the stock market higher and a competitive devaluation. The catch if we think in world wide terms is that Japan is exporting deflationary pressure to others. So the main player in town is pushing asset prices higher. So we have ZIRP, QE, then QQE (including equity and real estate purchases), and now even the main pension fund GPIF has been pressurised into buying more shares both Japanese and gaijin.

      Who gains the most from higher stock markets? Those with the most wealth.

      As to the Dune saga I doth my cap one more time to the prescience of Frank Herbert.

  7. Hi Shaun
    Common picture across most of the West ( including Germany). France is as yet an outlyer on real wage growth.
    Stats in the US are easier to break down and of the last month’s job numbers growth, 20% were waiters or bar(wo)men. Quite probably a large propertion of the rest were ‘part-time’. What is clear is that the largest increase in ‘new jobs’ over the last few years is in the over-65, part-time category. If you surmise that the UK has similar patterns and add to that the so-called ‘self-employed’ increase you get a pretty good idea of why average wages are not growing. Indeed the official stats are likely to overstate the ‘increase’.
    Self employment is of course a route down which previously ‘unemployed’ get state benefits without a lot of the hassles.

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