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?
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
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.
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.