The heat is on in terms of UK economic statistics as it was only yesterday that we were updated on UK inflation and this is now followed by the labour market report. These are of course linked on the issue of real wage growth which has been one of the bugbears of UK economic life in the credit crunch era which has been the performance of real wages. After being driven downwards by the surge in inflation to over 5% in 2011 which the Bank of England chose to overlook we have seen very little recovery so far in real wage growth in spite of the fact that the last couple of years has seen a solid and sometimes good rate of economic growth. Indeed such progress as we have seen has in fact been more due to a falling rate of inflation rather than improvements in wage growth.
The Resolution Foundation
They have produced a report which gives us a benchmark to past performance.
The underlying nominal pay growth figure – although likely to be at its highest level since early 2009 – is still a way off its pre-crash average of around 4 per cent.
As you can see there is some optimism there for wage growth which they back up here with some detail.
Our analysis suggests that real regular pay will top 2.5 per cent year-on-year growth in this week’s numbers (covering the three months to April this year), up from 2.1 per cent last month. This would be the highest rate since before the crash, and one experienced only a handful of times since 2002. Private sector pay looks set to be even stronger – at least 3 per cent real growth.
As they tend to be somewhat downbeat on such matters it does appear that the wage situation is turning for the better in the UK. They confirm that it does represent a hopeful change as indicated below.
Real pay growth well above the pre-crisis trend of 2 per cent will be a cause for celebration in parts of the media. And make no mistake pay growth at this healthy rate is very welcome.
Where the Resolution Foundation finds itself on much weaker ground is its faith in the forecasts of the Bank of England.
it is concerning that in its latest Inflation Report, the Bank of England forecasts nominal pay growth in the final quarter of this year to be no higher than the figure we think will be released on Wednesday.
Have they not spotted that the Bank of England is an appalling forecaster?! Just on the subject of wages it has predicted a surge in February then changed its mind somewhat in May.
A Deeper Perspective
One way of looking at things is that wages growth issues preceded the credit crunch. The way that the Resolution foundation look at this is to say that 1997 to 2002 was strong but that 2002-07 indicated a slow down and that since 2009 it has been a squeeze. A bit more than a squeeze I would say but here are their numbers for it.
male median pay fell by nearly 11 per cent between 2009 and 2014 compared to 7.6 per cent for women. The gender pay gap has narrowed, but not in the way we’d have wanted. Younger people have been hit even harder, with an eye-watering cumulative fall in median pay of nearly 13 per cent over just five years for workers in their twenties.
The exact numbers vary with the pay and inflation numbers chosen but the underlying theme does not.
The Output Gap
One of my themes is that output gap theory has failed in the UK. For example according to it the inflationary upsurge of 2011 should not have happened. Even its supporters seem to agree with me as “output gap” has morphed into “labour market slack” in the same way that the leaky Windscale nuclear reprocessing plant became Sellafield.
If we add the strong employment numbers that the UK has experienced the output gap has failed one more time as wage growth should have picked up ages ago.
We have the second month in a row of spring cheer.
regular pay for employees in Great Britain increased by 2.7%, the highest annual growth rate since the three months to February 2009.
total pay for employees in Great Britain increased by 2.7%. The last time the annual growth rate was as high as 2.7% was for June to August 2011.
If we look into the detail we see that it was the construction sector (4.1% wage growth) and wholesaling,retail and hotels (5%) which drove the better numbers. There was also quite a noticeable divergence between the 3.3% growth in the private-sector and the 0.3% growth in the public sector.
Real wage growth
It is nice to be able to report that we finally have some and whilst it is flattered by the dip in inflation in April we have for that month alone real wage growth of 2.7% compared to the official measure of consumer inflation and 1.8% compared to the Retail Prices Index.
Bank of England Agents
Their view of wage growth does hint at a possible improvement too.
Most contacts were still planning for moderate future pay awards, sometimes including an element of catch-up after subdued real pay growth in recent years. Recruitment and retention issues were leading to some higher increases in pay, particularly in construction and professional services.
Indeed if the latest Minutes from the Bank of England are any guide it too has re-gained some optimism about wage growth.
There had been mounting evidence that pay growth had picked up relative to a year earlier. And it was possible that underlying pay growth in the private sector, after accounting for the negative impact on average pay levels of the composition of employment growth, could be running at an annual rate somewhat stronger than the AWE measure.
Although the Minutes seem confused as to whether inflation drives wages or the other way around. Perhaps that is why they keep changing their mind.
This has of course been strong according to the official figures leaving us wondering if it has been achieved at the cost of a lower price (wages) for employment. We certainly do have a much lower level of wages than the official expectation.
Back in June 2010, the fledgling Office for Budget Responsibility projected that average wages would be around 6.5 per cent higher in real terms by 2015.
Instead they are around 10% lower but the employment or quantity situation is very good in the circumstances.
Total hours worked per week were 998.3 million for February to April 2015. This was: • 1.1 million (0.1%) more than for the 3 months to January 2015 • 14.8 million (1.5%) more than for a year earlier • 84.5 million (9.2%) more than 5 years previously.
We find ourselves in the UK with a labour market where finally we have reached a point in time where both the quantity (employment) and price (real wages) measures are good. Let us enjoy this period of in this instance spring sunshine and hope for “More,More,More”. It of course poses quite a problem for the “deflation nutters” I mentioned yesterday who were expecting wages to spiral downwards in hot pursuit of inflation. Whereas it has turned out that the hot pursuit was on the model of the Sheriff who pursues the Bandit in the Smokey and the Bandit films.
The UK economy should be receiving a boost from this real wage growth and perhaps this was picked up by the latest NIESR GDP forecast of a quarterly economic growth rising from 0.3% to 0.6%. However we also need to be cautious on two counts. Firstly inflation is now on the upswing which will erode any real wage growth. Also such growth as we have seen has been erratic as the last 3 monthly numbers indicate as they have gone 1.1%, 4.4% and now 2.6% for April. Fingers crossed!