The UK wages situation is one of spring sunshine after a cold hard winter

Today I wish to look at something which has become a good news story for the UK economy but comes after something of a long nuclear winter. This is the situation regarding real wages or wages after allowance is made for consumer inflation. Right now the situation has brightened considerably as shown below.

Comparing the 3 months to September 2015 with the same period in 2014, real AWE (total pay) grew by 2.9 per cent, compared with 3.0 per cent in the 3 months to August. Nominal AWE (total pay) grew by 3.0 per cent in the three months to September, while the CPI decreased by 0.1 per cent in the year to September

We see that there has been quite a considerable pick-up in wage growth in the UK which has fed straight through into real wages because the official measure of consumer inflation has been pretty much zero in 2015 so far. If we look back to September 2014 we see that the 3 monthly average of wage growth had just crawled above 1% to 1.1% compared with the 3% this September. So we have had a period of much better wage growth combined with zero inflation as economics forecasting models do an imitation of HAL 9000 in the film 2001 A Space Odyssey yet again.

If there is an economics equivalent of “Open the pod doors please HAL?” I would suggest giving it a wide berth!

How did we get here?

This is a much less pleasant subject because the burst of sunlight has followed a long grim winter. So long in fact that it might find itself being called temporary in official circles! The Bank of England’s Chief Economist Andy Haldane put it this way last week.

Finally on wages, real wages have yet to return to their pre-crisis peak. Rather, they are still 6% below that level. Since the crisis, we have seen one of the largest and longest squeezes on wages since at least 1850.

He will have been using the Consumer Price Index and the numbers would be worse if you use any of the variations of the Retail Price Index. Troublingly we see that a structural change has taken place over this period.

Put differently, labour’s share of the national income pie has fallen since 2009, from around 58% to 53%

Also the average figures hide the fact that some have done much worse.

Declines in median real wages among the young have been roughly twice as large as among the old. And workers in sectors such as construction, health and social work have seen far-larger declines in their take-home pay.

So as well as average falls we have seen a shift as some have been hit much harder meaning that some have actually done fairly well. That group is understandably silent and is a theme of these times. However overall there does appear to have been a shift away from labour as shown below.

Had UK wages tracked productivity since 1990, the median worker today would be 20% better off.

Rather Marxian of course but we have discussed on here many times that there has been a shift between “capital” and “labour” which will take quite some time to reverse even if we started right now.

Today’s numbers

We have received the latest annual survey this morning which is called ASHE or Annual Survey of Hours and Earnings which has a larger sample size than the monthly estimates we receive. Sadly it still has the main flaw.

ASHE does not cover the self-employed

Such a glaring error that only seems to bother me. But as it is more comprehensive that what we normally get let us dive in. Firstly we get confirmation of what we already thought.

In April 2015 median gross weekly earnings for full-time employees were £528, up 1.8% from £518 in 2014. This follows an annual growth of 0.2% between 2013 and 2014.

Considering we were in an economic recovery the year to April 2014 was pretty poor for wages and interestingly the year to April 2015 was only a little better than the credit crunch average of 1.5%. But it did mean this welcome piece of news emerged.

Adjusted for inflation, weekly earnings increased by 1.9% compared to 2014. This is the first increase since 2008, and is due to a combination of growth in average earnings and a low-level of inflation.

It has been quite a wait for a real rise in wages has it not? The Fab Four got it right here I think.

Little darling, it’s been a long cold lonely winter
Little darling, it feels like years since it’s been here

Here comes the sun, here comes the sun
And I say it’s all right

Little darling, the smiles returning to the faces
Little darling, it seems like years since it’s been here

A Space Oddity

This caught my eye.

Median gross weekly earnings for full-time employees increased by 1.8% in the public sector, and by 1.6% in the private sector. Private sector earnings have remained consistently at around 85% of public sector earnings since 2009.

I thought that there was supposed to be a 1% cap on pay rises in the public-sector? It does not seem to be the NHS as the list sent me by Laurence Hopkins has 7 category rises but 5 falls and one unchanged. As he points out it was not Zebra Crossing Monitors either as they saw a fall of 7.6%.

Of course the public-sector has all sorts of issues as those observing the fun and games with the modernisation of the gym at the  Battersea Park Millennium Stadium will have seen. Still if you spend more for the same thing that is an increase in GDP right? Er……..

We have some more fun with public-sector number crunching later.

Private sector earnings have remained consistently at around 85% of public sector earnings since 2009…… Private sector earnings were £501 in April 2015, compared with £589 for the public sector.

Okay but it morphs into this.

Av public sector pay 3.5% less than private sector allowing for factors such as age, sex, occupation & org size.

There are so many things one could reply with to that but for now I will content myself with pointing out that there are a litany of issues with such quality judgements especially with numbers where the quantity is less certain than we might like to think.

Highs and Lows

There is no surprise in this bit.

In April 2015, London topped the regional list for median earnings for full-time employees, at £660 per week.

But as we narrow things down we switch from no surprise to wondering about the state of play in Derbyshire.

In April 2015 full-time employees working in the City of London had the highest median gross weekly earnings (£921) and those working in North East Derbyshire had the lowest (£389).

Also Wales had a rough year as median wages actually fell albeit by only 0.1%.

Comment

The latest wages data feeds into a speech given this morning by Ben Broadbent of the Bank of England. In it he confirmed something that has been argued on this blog for years but is relatively rare elsewhere.

 the MPC isn’t concerned solely with inflation.

They will be following the wages data closely. But we should take great care with taking too much notice of their Open Mouth Operations as Ben confirms.

If there is any value in listening to people like me…

However if we return to the numbers I will let readers choose whatever measure of house prices that they like to compare with this number.

For the year ending 5 April 2015 median gross annual earnings for full-time employees were £27,600, an increase of 1.6% from the previous year.

This fits in with the arguments I have made in today’s edition of City-AM.

http://www.cityam.com/228985/q-consumer-price-index-cpi-inflation-negative-house-price-rises-strong-cpi-failing-capture

Oh and here is a bit of international perspective which is my reply to being asked what the year to April 2015 represents in Euro terms.

UK weekly earnings rose by roughly 16% in terms in the year to April 2015 using numbers..

 

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15 thoughts on “The UK wages situation is one of spring sunshine after a cold hard winter

    • Hi Forbin

      The famous words of Norman Lamont. there also the episode of him and the black eye?So if nothing else he tried to work his way through the colour spectrum.

      As it turned out he was right although he did not last in the Chancellor’s job for that long after. This time around let us cross our fingers as we will need plenty of luck for it to move from a phase to a basis for a long-term recovery.

  1. Hi Shaun

    I am somewhat dubious about these figures.

    The AWE is just that – the average – but what is the median, which I would have thought is a far more meaningful number? I have asked this before and you replied but I’m not sure what the answer was.

    Secondly there may be areas which are subject to severe labour shortages; construction comes to mind and where wages are going up quite quickly but which flatter quite substantially the average quoted. Good for some; not so good for the majority.

    Also the economy appears to be softening and I do wonder how long this “good” news may last.

    On the whole I would not say that these statistics enlighten us much as to the state of earnings but, to be fair they do show an approximate direction of travel which is good news, at least for some – but we cannot tell for whom!

    • ‘On the whole I would not say that these statistics enlighten us much as to the state of earnings but, to be fair they do show an approximate direction of travel which is good news,’

      I think that’s a fair comment Bob.Same for a lot of stats eg CPI/RPI

    • Hi Bob J

      The ASHE survey uses the median figures you ask for and is one of the reasons why it attracted my interest today. By contrast as you say the monthly number for average earnings we get are an average. I hope that this was the answer I gave last time…

      Anyway for now ASHE backs up what we thought but there will be a fair wait until we are more sure and it is only ever more sure…..

  2. Hello Shaun

    Regards wages decline for the lower income groups ( those below 150K a year ) this is to be expected as we move towards the final goal of de-industrialiaztion and the elevation of the top 1% beyond the tax regime

    We shall see if I was correct in positing that the BOE was targeting wage inflation , I feel they still are and would like to take action but are held back by the FED and the likely hood that if rates ever got near historic norms then the Banks would collapse

    They will eventually of course but by then we will be in a very different world

    Frobin

    • ‘ but are held back by the FED and the likely hood that if rates ever got near historic norms then the Banks would collapse

      They will eventually of course but by then we will be in a very different world ‘

      That last comment-post Paris-echoes around the room but noone hears it.

      I do wonder that if we can’tnormalize rates now,then when can I can’t see hwo the road we’re on is going to provide a better oppurtunity.

      They can’t raise rates because the economy will collapse(some economy) and we won’t get real sustainable growth until we normalize rates.

      Catch 22.Yossarian lives.

      • Doctor to Yossarian
        ‘Catch 22 ..anyone who wants to get out of combat isn’t crazy so I can’t ground them(for being crazy).’

  3. ‘Declines in median real wages among the young have been roughly twice as large as among the old. ‘
    Interesting stat that one Shaun.

    This is the issue is one that few will talk about.For example,working age households suffered far more in the downturn as their incomes aren’t index linked.That’s aside from winter fuel payments.

    On a broader tack ,young people,paying £50,000 for a worthless degree so they can join the queue and buy a house at 10 times their salary.Final salary pensions gone.Inflation to pay off their mortgage debt-gone.Seriously what’s in it for our young people except the bill they’ll get for pensions they will never enjoy?

    • I’m sure each generation is a bit less content than the previous one in recent times. The pressures the young are under are manifesting themselves with the rapid increase in the numbers experiencing mental health problems. Some of this must be down to how they view their prospects; I know the prospect of owning my own home was a big motivation for me and many of my peer group in the 1980s. It wasn’t easy, and mortgage rates were much higher but at least it felt achievable back then and as you say, you knew inflation would take care of some of the debt in a few years.

      • It’s still achievable now. I was there in the 80’s too and although house prices are greater in real terms now than in the 80’s interest rates are also much lower so the final proportion of salary taken in the monthly payment is about the same now as in the 80’s. The problem, as I’ve said before is that rates only have to nudge slightly up to cause a major economic headache, it is certainly a much more fragile environment than in the 80’s.

  4. ‘ ASHE does not cover the self-employed

    Such a glaring error that only seems to bother me.’

    It bothers me too.Especially when a large chunk of new self employment is done to obtain tax credits which is funded by a 5%+ fiscal deficit.

    • Hi Dutch

      It bothered me enough to make it number two on the list of priorities I sent to the Bean Review of UK Economic Statistics (Number one was dealing with owner occupied housing costs in the consumer inflation numbers). How can we possibly claim to have a full grip on the situation until we know where they stand?

      Let us see how the UK establishment responds…

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