Today sees the UK employment report and in particular the economic data point for these times which are the average wages numbers. Although with the apparent slow down in the economy we need to glance at the unemployment numbers in case there is another nudge higher. However before we get to today’s numbers you will not be surprised to read that wage forecasts have popped up in the Brexit Referendum debate as this from the TUC or Trades Union Congress highlights.
Firstly, being in the EU means higher wages. TUC research shows that a typical worker would be £38 per week worse off if we vote to leave. And that would be a huge blow at a time when real wages for workers are still £40 per week below their pre-crisis levels.
The first sentence has an obvious problem, try saying it in Greece for example! The last sentence I can agree with as the struggles of real wages are a theme of this website. However we also need to note that the quote has swerved from nominal to real wages.
The meat of the issue is the £38 per week claim so let us look deeper at how the TUC gets there.
Most estimate the impact of Brexit on the level of GDP some years into the future (2030), from which an impact on household income is derived. This is the basis of the Treasury’s estimated impact on household incomes of £4,300……..The average view is that GDP will be reduced by 5.6% by 2030.
Okay so we will have a weaker economy leading to lower household incomes and the TUC has back calculated this to see what would happen to wages in its opinion.
Under these conditions earnings are expected to advance by £220 if the UK stays in the EU and £182 if we leave.
Okay now there are a litany of problems with this type of analysis. In essence it relies on work by the UK establishment ( HM Treasury and the Office for Budget Responsibility or OBR) and they have a shocking record. After all if the OBR was right we would have wages growth of around 5% per annum now and there would be no real wages “gap” and it was only looking 5 years ahead as opposed to more than a decade. Ooops!
To be fair to the TUC they do further down the article admit there are problems.
the broader ‘general equilibrium’ approach that underpins these models is not uncontentious, not least in the light of failures exposed by the financial crisis
Although you do have to read to page 9 to see that. So in essence they are stating an opinion as fact and it is an opinion based on analysis which has been consistently wrong.
If we look at London First then we have made large gains as a result of EU membership.
- Of the average wage increases that British workers have enjoyed in the past 30 years, 29 per cent of that is down to EU membership (according to a central estimate).
- EU membership has increased average UK salaries by £1,800.
This has been driven by higher productivity caused according to them by EU membership. again people are entitled to their opinion but putting it as fact is much more dubious and ignores the fact that both series ( wages and productivity) are currently troubled to say the least. I have argued many times that we struggle in my opinion to have any real grip on productivity in the services sector which now must be 80% of our economy at all.
What about the self-employed?
The ever-growing number of self-employed are ignored by the average wages numbers which omit organisations with below 20 employees. This is not a consistent benchmark as something else I was looking at this week had a threshold of 10 employees. However the main issue is what has happened to their pay? Yesterday Flip Chart Rick pointed out this.
A report by the Department for Business Innovation & Skills in February estimated that self-employed pay had dropped by 25 percent since the recession.
In the past he has used work by the Resolution Foundation to suggest this.
Because self-employed incomes have fallen by so much, including them shows the pay squeeze to be even more severe than the official figures suggest.
They put it like this.
Average earnings actually fell by 13 per cent by late-2014, rather than the 10 per cent fall captured by AWE.
However whilst we do learn some more we find ourselves still stuck in the past as we could do with knowing what happened in 2015 before we even get to 2016. So here are Simple Minds with a view on the wages of the self-employed.
Don’t You Forget About Me
Don’t Don’t Don’t Don’t
Don’t You Forget About Me
We find good news on several counts. Firstly we see that we have another example of the labour market performing more strongly than output measures.
There were 31.59 million people in work, 55,000 more than for the 3 months to January 2016 and 461,000 more than for a year earlier.
The employment rate is at a record 74.2% (since 1971) and unemployment fell.
There were 1.67 million unemployed people (people not in work but seeking and available to work), 20,000 fewer than for the 3 months to January 2016…….The unemployment rate was 5.0%, the lowest since August to October 2005.
It has been a feature of the credit crunch era that quantity measures in the UK labour market are stronger than output measures for the economy. This is good news in isolation but also has the problem of a worrying implication for productivity.
What about wages?
We had relatively good news here too.
Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.0% including bonuses.
In case you were wondering what that means in practice?
average total pay (including bonuses) for employees in Great Britain was £503 per week before tax and other deductions from pay, up from £490 per week for a year earlier
The official view on real wages is shown below.
Between February to April 2015 and February to April 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.9% and total pay increased by 1.6%.
Of course that relies on the CPI or Consumer Price index measure of inflation and if we move to the RPI or Retail Prices Index we have to trim 1% or so of that. If we use the survey results of the Bank of England I analysed yesterday then worryingly we have no real wage growth at all. Tick your pick and aren’t you glad that’s so clear?!
Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.2%, compared to 2.0% in February.
There is much to consider here. The UK has some wage growth which we should welcome but once we move to real wages the picture gets more murky. Yes we have it according to official inflation data although it shrinks somewhat if we use the RPI. However if we use the survey estimates for inflation collected by the Bank of England we see that the wage growth may even be very slightly negative. Who would have predicted that after over 3 years of economic expansion? That provides its own critique for those who think they have any real clue as to where wages will be over a decade ahead. It also makes me wonder about what will happen when inflation picks-up.
Also let me make one more plea for the inclusion of the self-employed in this respect. They would likely made a solid difference especially as there are ever more of them.
self-employed people increased by 209,000 to 4.70 million (14.9% of all people in work) ( over the past year).
Here I am explaining the problems with the UK official construction data and hence part of GDP.