How will the Bank of England respond to fading wage growth?

Today we find ourselves waiting for and then perusing what is has become the most important piece of economic data in more than a few countries but particularly the UK. This is because whilst the quantity numbers for the labour market such as employment have recovered strongly from the impact of the credit crunch the quality one or wages has not. In fact we find ourselves considering a boom which has lasted for three years whilst mulling real wages still comfortably below the previous peak. Booms did not use to be like that.

Putting that into numbers the previous peak according to official data was in August 2007 when the real wages series hit 118 compared to 113.2 in February of this year. The Resolution Foundation put it another way having average hourly earnings at £11.66 in real terms in October 2007 compared to £10.70 last July. Such numbers remain something of a blot on the UK economic landscape and a reason why many think that we may not be “all in it together” as the recovery passes their pay packets by. Indeed there are two factors which hint at an even worse reality. The first is the ever more shameful exclusion of the self-employed from the average earnings data especially at a time when their number has been growing. The second is that the official real wages numbers use the CPI or Consumer Prices Index measure of inflation which is currently running at around 1% per annum lower than the RPI or Retail Price Index series.

This is a situation which has impacted on most economic models in the way that HAL-9000 responded to not being told the truth in the film 2001 A Space Odyssey. With employment at all time highs as shown below and unemployment at 5.1% rather than the 7% threshold of Bank of England Governor Mark Carney wages in those models would be going through the roof except they are not.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.1%, the joint highest since comparable records began in 1971.

Just to give you an idea of how wrong such models and the accompanying official forecasts have been let me give you the opening salvo from the Office of Budget Responsibility.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

Miles out well actually if you look at their “output gap” obsession and where they expected unemployment to be they would be giving us in the words of ELO “higher and higher it’s a living thing”.

so that the ILO unemployment rate falls to 6 per cent in 2015.

Wages growth of 6% or more? It is from an alternative universe and not this one. I would give you the Bank of England position but it is easier to say that they have been in a string of alternative universes!

Today’s numbers

They were a disappointment especially after the January data had shown an improvement.

Between the 3 months to February 2015 and the 3 months to February 2016, in nominal terms, total pay increased by 1.8%, lower than the growth rate between the 3 months to January 2015 and the 3 months to January 2016 (2.1%).

The cause was lower financial sector bonuses.


The lower growth rate was largely due to lower bonuses in the financial and business services sector in February 2016 compared with February 2015.

Sadly the overall trend seems pretty clear as the peak at 3.3% late last spring has been slip- sliding away since then leaving us with only 1.8% now. This means that growth in real or allowing for inflation pay has been drifting away as well. The peak of 3% in late summer last year looks well like a peak.

Comparing the 3 months to February 2016 with the same period in 2015, real AWE (total pay) grew by 1.6%, compared with 2.0% in the 3 months to January.

The latest wages numbers were dragged lower by a weak reading for February which at 1.1% was poor and worryingly last March was very strong at 4.4% so we advance with no a little trepidation. If we note that inflation is also beginning to flicker higher than real wages are in danger of being caught in something of a vice.

Bank of England Agents

They give us a cross check on the wages situation and this morning we were told this.

Labour cost growth had remained moderate overall and had eased a little in manufacturing reflecting the recent weakness in demand growth.

Putting it all together we have been told today that financial sector bonuses are down and that manufacturing wages are fading a bit which is not a surprise I guess when you look at its output numbers.

Unemployment rises

This had to come at some point as we mull whether we had reached a measure of full employment.

There were 1.70 million unemployed people (people not in work but seeking and available to work), 21,000 more than for September to November 2015 but 142,000 fewer than for a year earlier.

By full employment I mean for these times as opposed to the past reading of pretty much everyone having a job. Gains are now likely to be slowing in this area and we await the next turn of events. Care is needed with today’s rise as this was mostly caused by a high December number which will drop out of the series soon. But of course we have seen other signs of a slowing economy which this development reinforces.

The Bank of England

Yesterday Bank of England Governor Mark Carney gave testimony to Parliament and he will have known these numbers when he said this.

BoE’s Carney: Room to cut rates if needed, ( h/t @Livesquawk )

Is that Forward Guidance Mark 16? Also we got a reminder of the first rule of politics according to Jim Hacker. Never believe anything until it is officially denied!

We don’t have an appetite for negative interest-rates

Or indeed this reported by City-AM.

Mark Carmey told the House of Lords Economic Affairs Committee this afternoon that he was “not a believer” in the concept of helicopter drops saying the policy would erode faith in the Bank of England and store up problems for the future.

Indeed he went so far as to call it a “ponzi scheme”. Does such a strong denial make it nailed on for our future? After all the “economical with the truth” Governor of the Bank of Japan has denied it too earlier today. What should we call a proliferation of official denials of the same thing?


Sadly we are now seeing more than a few signs of a slow down in the UK economy. On the 24th of March I noted a weakening of the previously strong retail sales numbers and on the 8th of April it was production which was not only fading but also declining, Today’s news of weakening nominal and real wages backs up the retail sales data and with inflation picking-up posts a question for retail sales growth as spring turns to summer.The service-sector will have to do all the heavy lifting if we are to continue to grow.

Meanwhile for all the protestations of the reverse the mood music at the Bank of England must be shifting towards mulling a policy easing such as a Bank Rate cut. The rest of the world seems to have been adjusting to that already as Mark Carney was forced to admit yesterday.

UK short-term interest rates have fallen by around 60bps since November.

Sadly nobody present had the wit to point out how much egg was on Mark “Forward Guidance is for interest-rates to rise” Carney’s face, or to ask for him to apologise to those who took his advice and remortgaged?! Mind you what is it about Bank of England Governors and U-Turns?

From Mervyn King on February 4th on becoming a director

 I shall do my best to help the rebuilding of Aston Villa Football Club as together we return it to its position as one of the top clubs in the world.

From two days ago in his resignation statement.

The issues at the club are fundamental and the solutions are radical and do not lend themselves to compromise.



29 thoughts on “How will the Bank of England respond to fading wage growth?

  1. I’ve always wondered how we can square the exceptional performance of the UK economy with such things as the earnings figures that you highlight.

    I believe that one of the reasons is one that you frequently comment on: the fact that the inflation statistics are not fit for purpose. I believe that inflation is higher than disclosed by the official indices and that this results in an overstatement of GDP growth (via in that case an incorrect GDP deflator) and, consequently, an overstatement of real earnings growth.

    As regards the earnings statistics they are, as you say, woefully inadequate as they exclude the self employed. Like I’m sure you do I regard the earnings for the “median” worker to be much lower than that reported and the inflation rate to be higher resulting in a much darker situation than that reported.

    Higher inflation will lead to negative feedback results for real earnings so it’s hardly surprising that GDP is driven lower in purely nominal terms because people are under much more pressure than is apparent, even before adjusting for inflation (wrongly reported).

    We are in much more of a mess than is reported and the BOE are merely cheerleaders for the conventional wisdom, although wisdom it is most certainly not.

    • Yes, I agree. I also believe that many on zero hours contracts are “encouraged” to become “self employed” to save the employers NI contribution. They will not be paid more, and as pointed out, they will not be included in the earnings stats.
      I am certain that inflation is higher than stated, but average earnings lower.

    • ‘Like I’m sure you do I regard the earnings for the “median” worker to be much lower than that reported and the inflation rate to be higher resulting in a much darker situation than that reported.’

      I agree Bob,good post.I keep looking around me for all the outward signs of recovery and all I see is people buying tat on the never never.There’s no significant upward pressure on wages.

      I do wonder what excuses the BoE will come out with when they have to raise rates to head off the currency crisis.
      ‘Wrong sort of inflation’ etc etc

  2. A BBC article indicates that almost all of the rise in unemployment has occurred north of the border and England and Wales remain largely unchanged. Unfortunately the article doesn’t really explain why this should be.

  3. Shaun,

    Can you clarify a couple of the points alluded to by Bob and Mick.

    The wage data stats are they mean average male full time earnings?Or mean average full time earnings?

    For a first world country,we have third world stats.

    • LoL !

      so true !

      best in class is what we should be but , you know , that would show a true picture

      no one will get elected on that !


      • Many thanks Shaun.

        Sorry if I seem lazy but I’m on here normally while I’m doing my second job.Experience has taught me it will normally take me hours to find the answers I’m after.

        So a lot easier to ask.

        Thanks again for your patience and endeavour.

  4. How will the Bank of England respond to fading wage growth?

    well shaun they’ve reacted to nothing else except help to bail the Banks out

    indeed I doubt there’s been any real wage growth as I believe its the BoE remit to raise interest rates if any wage inflation is seen!

    next scandal hits my door step again – equity release of your pension pot

    the next PPI scandal ?


  5. Hi Shaun
    It seems obvious that even a
    monkey with a wooden leg and a tin hat
    would have done something by now
    instead of 8 years of glorious inaction.
    If you add in sizeflation to the
    mix, and then factor in increase taxes
    that are coming for those on the new
    living wage, it does not augur well for
    the future standard of living for the
    A song for Carney
    Save me from the nothing I’ve become.
    Bring me to life
    Iv’e been living a lie,thers nothing inside.
    Bring me to life.


  6. Carney’s helicopter drops are reserved for the elite. Senior bankers bonuses and property subsidies for the aristocratic land owning class.

  7. Shaun, could it be that this is the logical and ultimate outcome of crippled Trades Unions and nothing to do with slowing GDP (i.e. the rate of increase is slowing slightly) ??

      • Gracias Therrawbuzzin lo que usted piensa que el egoísmo y la codicia del capitalismo terminarán destruyendo?

    • Globalisation & free trade has reduced Western workers pay. France has strong unions but even boss-napping cannot prevent companies relocating elsewhere.

      Without militant unions, semi-skilled pay in China & India has risen significantly in the past decade or so. Supply & demand.

      I’m not saying it’s right – just saying what I see.

      • Fair points – an argument against globalisation? But then we would be faced with expensive unreliable products as the respective national companies knew there was little effective competition.

        A conundrum……

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