Today there are several influences which will combine. Later we will receive the employment report from the United States which will tell us whether average hourly earnings have picked up from an annual growth rate of 2.1%. Half an hour later I will be at the Royal Statistical Society discussing the UK inflation measurement landscape. Whilst they are for different countries the principle that you need a good inflation measure to deflate wages and tell you what they can buy is vital. From it we can get the concept of real wages. At the moment the UK has a proliferation of inflation measures from the official CPI (Consumer Price Index) to the unofficial or not a National Statistic RPI or Retail Price Index. Here we have an immediate issue as CPI is running at an annual rate of 0.1% and RPI at an annual rate of 1%. So UK real wages are what exactly and that is before we get to the new planned headline measure called CPIH (where H is for housing costs) at 0.4%, or the new version of the RPIJ also at 0.4%? With wage growth having been so low for so long such variations matter quite a bit and that is before we try to look back and decide how much real wages have fallen since the credit crunch.
The National Living Wage
In a move which of course also had political ramifications the new UK government announced plans for a national living wage in its Budget. The Office for National Statistics reported on it yesterday.
The National Living Wage (NLW) was announced in the 8th July Budget, with the aspiration that it should provide a higher wage floor in the labour market, lifting the earnings of the low paid. It will apply to non-apprentices aged 25 and above from April 2016. In contrast to the National Minimum Wage (NMW) – which is set by the Low Pay Commission the intention is for the NLW to be pegged at 60% of median hourly earnings for those aged 25 and over by April 20201.
What would it be now?
In April 2014, the NLW counterfactual was £7.36 while the NMW was £6.31, 86% of the NLW.
Sorry for the word counterfactual which gets everywhere these days and its use is certainly inflated. But the good news is that the wages of the poorest would rise. Of course we do not know how much it would influence employment although was have had some recent hints with firms looking to employ under-25s who do not qualify.
But the flaw here is that 60% of median earnings has the implication that such earnings will rise and of course we have been through a period where they have often stagnated.
The Living Wage
This is defined differently as this from the Living Wage Foundation indicates.
The Living Wage is calculated according to the basic cost of living in the UK
This gives us the figures shown below.
The current UK Living Wage is £7.85 an hour….The current London Living Wage is £9.15 an hour
So we see a 49 pence per hour difference across the country and a £1.79 per hour difference in London where the cost of living is much higher.
How is it calculated?
The uprating of the Living Wage figure each year takes account of rises in living costs and any changes in what people define as a ‘minimum’.
it rose by 20 pence per hour in November which was a 2.6% increase which was considerably higher than any of our inflation measures so let us take a closer look. We see that some of the factors at play here are rising quite a bit faster than headline inflation measures as shown below.
The results are then uprated by 5.1 per cent in 2013 and 3.1 per cent plus £2 a week in 2014 to take account of standardised increases in council rents, set nationally,
One of the themes of this blog is inflation in the housing market and we are seeing some here in the official sector. I regularly cover both house prices and private-sector rents but we see that the pain is spreading. Another cost has pushed higher too.
The following childcare costs were calculated. In 2014, the calculation was based on a simple uprating of the 2014 by 3.3 per cent.
Actually a cap to general increases in wages is applied to the Living Wage such that it cannot rise by more than an extra 2% leading to this situation.
Based on the above calculations, the ‘reference’ level of the Living Wage, reflecting actual minimum living costs, is £9.20 in 2014, but the applied Living Wage, resulting from the capped increase, is £7.85.
There is a theoretical issue here which is that perceptions of the situation below are likely to change.
The Minimum Income Standard the UK shows how much money people need, so that they can buy things that members of the public think that everyone in the UK should be able to afford.
What about private-rents?
The ONS has published some new research today because its numbers for rents differ considerably from those calculated by the VOA ( Valuation Office Agency) and those calculated by the private-sector. The difference is large.
Overall, the sample average rent grows by around 35% between 2010 and 2015, 11% of this can be explained by index growth while an additional 17% is explained by changes in the composition of the sample between years.
There is a missing 7% here! But let us move on to what the ONS is driving at.
This is because more rental properties in more affluent areas are now included in the sample.
Okay so what happens?
In total, rents rose from around £810 per month at the start of 2010 to around £930 per month by March 2015. Around £45 of the £120 per month (or 40%) increase in rent can be attributed to changes between the samples, rather than growth within years.
In case you are wondering this is what is called chain-linking where the basket is adjusted each year. But I am sure that most of not all readers can see the problem with this. If you are one of those paying the extra £120 you may be wondering why £45 per month effectively disappears?
What we are discussing in the difference between an inflation measure and a cost of living index and it is nice of the ONS to produce research which puts it into context in an important area. It is most evident in London as shown below.
The impact of this is that between 2010 and 2015, the average rent for unfurnished flats in London has increased by more than half, but no individual category has grown by more than a third.
As so often we come back to the issue of quality of the statistics. Are the collectors that good at telling us the composition of the market? It is all very well to tell us that people are renting in more affluent areas but do we really know the conditions. My part of town (South London) has a very cheek by jowl situation as regarding low and high quality housing stock. Wandsworth has gone from 1.8% of the London sample to 6.7%.
Let me put this in another form, here is the official measure.
The OOH component annual rate is 1.8%, down from 1.9% last month.
Now here is a private-sector estimate from Home Let
The Index reveals that the average rent on new tenancies agreed in the three months to July 2015 across the UK was £977 a month, (£761 a month excluding Greater London). The average UK rent price was 11.8 per cent higher than in the same period of 2014.
Quality must have shot up must it not?
I wanted to bring together today some different concepts which are much more interrelated than the mainstream media will have you think. It is also true that official pressure heads in that direction to as in the Johnson Report which recommended that CPIH be the main UK inflation measure. But as you can see there are a lot of doubts about measurement in this area and I have omitted so far the fact that the data is from 2010 because 2008/09 are a shambles! Oh and that the whole series has been rewritten once already as it was in an alternate universe.
If we return to linking this to a minimum wage we need to consider that we appear to be in a phase of time where inflation hits the poorest the most.
On our preferred measure, among the lowest-spending households experienced average annual inflation of 3.3% between 2003 and 2013, compared with 2.3% for among the highest spending households. These differences compound over this period, and consequently the prices of products purchased by the former group have risen by 45.5%, compared with just 31.2% for the latter.
That’s quite a lot when you are in a position where you have not got much. Lets hope that the lower oil price has helped redress a little of this. But as you can see rents and housing costs seem to be on the march.