Today sees the 2015 Budget Statement in the UK which has particular significance because it is only 50 days away from the upcoming General Election. Accordingly the claim that there will be no “giveaways or gimmicks” scores low on even a politician credibility count! However it so happens that perhaps the major piece of economic data is released on the same day and it is this which I intend to look into. We receive the labour market report which includes the crucial wages data. By receive I mean the rest of us as the Chancellor and indeed the Bank of England will have been told at 9:30 am yesterday which will of course have given the Chancellor plenty of time to include it in his Budget Statement if it provides an answer which suits his side of the argument.
Step Back In Time
If we take the advice of the delightful Kylie Minogue and go back to the first Budget Statement of this parliament we see a new institution being created the “independent” Office for Budget Responsibility. So what did it tell us about wage growth going forwards?
Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.
No sniggering at the back please! Of the disastrously inaccurate forecasts of the OBR this has turned out to be the most significant in many ways as it has been a driving force in one of its other major failures.
the cyclically-adjusted current budget deficit of 5.3 per cent of GDP in 2009-10 to be eliminated by 2014-15 and reach a surplus of 0.8 per cent of GDP in 2015-16.
It would require an enormous estimate for the economic cycle for the number below to be “eliminated”.
From April 2014 to January 2015, public sector net borrowing excluding public sector banks (PSNB ex) was £74.0 billion
This is of course interlinked with the issue of wages as one of the factors in the problems with the continuing UK fiscal deficit has been both lower income tax and national insurance receipts than expected. If we look back we see that average earnings growth was expected to recover to around 2% in the period 2010-12 followed by an acceleration to and then beyond 4% per annum.
What happened then?
For a while events unfolded as the OBR expected and maybe marginally better than that but a turn came in January 2012 when wage growth fell off a cliff and from then to now it has on average got nowhere near the 2% per annum it was supposed to build from. Even more disturbingly at a time when the economy was in other respects booming the three monthly average went negative albeit marginally (-0.1%) in June 2014.
So if this is a recovery it is a very different type of recovery and even now wage growth has barely regained the 2% per annum growth level according to the official data.
What about real wages?
We have already seen that wages have underperformed in the credit crunch era and sadly for real wages inflation has outperformed squeezing real wages downwards with the grip of a vice. The OBR in essence assumed that inflation would hit the 2% target for the CPI measure of inflation and instead it rose to over 5% in the autumn of 2011 and was still high as wages fell off a cliff in early 2012. Thus we end up in a situation which the International Labour Organisation described thus. From The Guardian.
The biggest fall in UK wages adjusted for inflation came in 2011, when they fell by 3.5%.
There has been a wide range of experiences depending for example on the inflation index used but overall real wages in the UK have typically fallen by around 10%.
Boom! Today’s Data
Sadly the hopes of a further improvement were dashed by this mornings data release.
Between the three months ending January 2014 and the three months ending January 2015, total pay for employees in Great Britain increased by 1.8%, lower than the growth rate between October to December 2013 and October to December 2014 (2.1%).
In fact we stepped backwards and if we look at the month of January 2015 on a standalone basis then wages were only 1.1% higher than a year earlier. Of course this is a reminder that in the Bank of England the OBR has a competitor for the title of worst forecasting body in the world. Here is Mark Carney from a month ago.
I think the thing that we have seen in recent months is the
start of the turn of wages
Did we perhaps misinterpret him?Helia Ebrahimi of CNBC was fairly sure that she had not.
given you’re forecasting that household incomes rates grow at their fastest pace in a decade….
Mark Carney should perhaps take care as another central bank (European Central Bank) seems to be facing genuine unrest today.
If we look to the break-down of today’s numbers it appears that falling bonus payments were responsible for the dip. This is being used as an excuse but if we are in a boom should they not be rising?! The BBC seems to be in a cherry-picking phase.
@Peston Increase in regular pay in Jan steady at 1.6%, well above inflation of 0.3% in Feb,
Also wage growth is being pulled down by austerity in the public-sector as wage growth there is only 0.6%. I will let readers decide if this is good (think public finances) or bad (think real wage growth).
What about real wages now?
According to official measures there was some real wage growth in January on an annualised basis as we compare a 1.1% growth rate of wages with the 0.3% of CPI inflation. However if we switch to Retail Price Index or RPI inflation we see that it was growing at an annual rate of 1.1% as well so on this measure real wages flatlined.
This is a measure which you are likely to hear in the Budget Statement and below is why.
The proportion of people aged from 16 to 64 in work (the employment rate) was 73.3%, the highest since comparable records began in 1971.
This is genuinely good news although even it has an undercut as highlighted earlier today on Radio Four. You see the individual called Mark they quote is officially on full-time work but the work can be cancelled at short notice.
I have even had cases where I have turned up for work and they have asked me why have you turned up today? We sent you a message you have to go home (with) no pay.
The minimum amount for a week is 7 hours from which he will earn £45.50. Not much is it as we again see signs of dislocation below the surface in the UK labour market.
We find ourselves reviewing a very familiar scene in the UK Labour market. The quantity measure of employment is excellent even if we allow for the fact that the population has grown. You see the OBR forecast higher unemployment and lower employment in what was a rose-tinted view of the future that would have many singing along with Earth Wind and Fire.
Take a ride in the sky
On our ship, fantasize
All your dreams will come true miles away
However the price measure of wages continues to be troubled and even the plummet in inflation caused by the falls in the oil price has only nudged in mildly positive. Not even that if you use RPI as your inflation measure.
What do I think? I believe that things have changed and that wage growth is now on a lower path than before although if we look back maybe that is not such a surprise as it was trending lower over time. However the Bank of England Agents report that some are making progress albeit slow.
Most settlements had remained in the 2%–3% range, although pay freezes had become commonplace in the oil and gas sector.
I will be on the evening show on Share Radio discussing the days events. The segment will start after the 5pm news.
Help To Buy ISA (1.50pm update)
Just when you thought that there was nothing else the government could go to boost UK house prices. They would not give them the money surely?! From Yahoo.
A new Isa will be available for first-time buyers. For every £200 a first-time buyer saves, the government will top up with another £50. It means that if you put in £12,000, the government will put in £3,000 more.
For foreign readers an ISA in the UK is a savings vehicle which gives tax advantages.
My critique of this strategy can be found as recently as Monday.