What is real wage growth in the UK economy?

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

Today’s data

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.

Comment

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).

City-AM

Here I am explaining the problems with the UK official construction data and hence part of GDP.

http://www.cityam.com/243281/uks-construction-conundrum-can-we-trust

 

 

 

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29 thoughts on “What is real wage growth in the UK economy?

  1. Hi Shaun

    Quite apart from the exclusion of the self employed which, as you say, drives a coach and horses through the statistics, why do we not use median rather than average earnings? There are bound to be distortions by using the average figure which must include bonuses and overtime payments.

    The survey results on inflation by the BOE don’t just cast some doubt on the real wages statistics but, to my mind, they also cast doubt on the GDP deflator and, by implication, the GDP statistics themselves, that is they overstate growth and overstate real wages.

    • Even worse if you look at GDP/capita and take a stab at real ‘self-employed’ numbers. Doubtful that median of real wage growth is positive since 2008.

      • ‘Even worse if you look at GDP/capita and take a stab at real ‘self-employed’ numbers.’

        JW you’ll never get a job on the BoE if you keep stripping the numbers back to reality.

  2. The statistics and forecasts trotted out in this referendum campaign are an absolute disgrace and i am furious at the way the politicians promote them as facts. Unfortunately joe public does tend to take them at face value even if the most cursory investigation would reveal them as absolute drivel. I am sure that readers of this blog will be well aware of that, however, most voters are not that financially savvy. the market panic around the referendum is also beyond comprehension (almost) as no one knows what the outcome will be in a couple of years time when the dust has settled. it is almost as if the markets look for something to frighten them and no sooner do they get over one panic (e.g China) than the next one sets in. Where are the cool heads these days?

    on a related topic, I note that Osborne now predicts he will have to slash interest rates if Brexit occurs – having previously said they would have to go up to frighten the mortgage payers. I fail to understand his logic and even if they were reduced further I would not calling it slashing rates. He has forgotten – there’s nothing left to slash!

    • Pav , the markets are always looking for reasons to go up or down – its all a confidence game with the big players winning what they can at every turn

      why do you think they’re reported so much ? to keep you looking behind that curtain

      Forbin

    • as for Osbourne I think once they realized that actually a 3-4% interest rate and lower housing costs are actually what voters want they had to change tack

      to be frank the remain in campaign has been more of a Laurel & Hardy comedy at best and at worst out right scaremongering lies

      no wonder the average public member is confused !

      Now the TUC as Shaun pointed out is joining in , did they not consider their fellow unionists in Greece ?

      Economically speaking Norway, Iceland and Sweden are doing relatively ok outside but can we say the same for Greece, Spain and Portugal?

      It will be interesting times which ever way the vote goes …….

      and a second vote is assured ! after all this IS the EU

      Forbin

    • They also talk about the pound going down in the same breath as exports being cratered. They also talk about house prices going down. They talk about the NHS losing 52000 staff.
      The whole thing is nonsense and inconsistent in the extreme.

      • I know what you mean.I remember when the solution to our problems was a lower £.Now we’re getting it it’s for the wrong reasons.

  3. I am shocked at all the cynicism here. I just wish that they hadn’t rounded down to the nearest pound for the 2030 figures, as I like to see the exact detail.

  4. I think we also need to discuss the tax credit effect on employment numbers and the 5% fiscal deficit.

    Being fully employed by using your credit card for wages is hardly sustainable.

    • Hi Dutch

      It is true that there is an issue with tax credits subsidising wages. What might you expect to see? Higher employment (check). Problems with wage growth (check). Higher fiscal deficits (check ). Hopefully the new higher minimum wage will help with this.

  5. Britain outside the EU, begs a question on immigration numbers. Fewer immigrants mean higher wages – but given that everyone pays more to cover higher wages, the effect on real wages is less. Anyway – their grip on illegal immigration is not strong.

    Certainly everybody’s real wages would take a boost outside the EU due to cheaper food costs outside the common agricultural policy.

      • Valid point, especially as the cap benefits the land owning gentry …. they wouldn’t want to have free competition vs the commonwealth

        • @ ExpatinBG

          While I agree there are a good number of very large landowners and corporations who manage to cream off some considerable sums via CAP and not all have livestock, that is only one part. A great many more landowners on a much smaller scale claim CAP and for them, it is often vital to them staying afloat and actually producing food.

          Where UK out of the EU might do well is to modify the CAP rules to suit UK better – e.g it is only claimable by actual farmers with livestock/crops and not the “idle” landowner simply claiming as a “rent”. It certainly does need to be more realistic.

  6. “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.”

    PROBLEM!!!!
    The Govt. estimates of net immigration ~ 90,000 every quarter.
    We have only covered 35000 with the govt figures.

      • Well, of a population of ~ 63m, slightly over half are counted in the employment figures, and a good many more working-age adults are self-employed (4.7m), working age disabled, (1.76m of whom just over half are unemployed) over 55s who are not counted and we hit ~ 40m working age people, just under 2/3 of the population.
        Whilst I would assume that more couples with children than the present demographic average come to the country, I would also assume fewer elderly, and that this will balance out.
        So, imv, we should be looking at 60,000 of the 90,000 people to be working-age adults.

        • Something else to consider in how to count “migrant unemployed” as opposed to “non participant” is culture. Many of the EZ and east European countries hold to values of women staying at home, being home makers.

          The man is expected to make a sufficient living for the family. Thy will likely bring that belief system with them, although, of course, the very fact they have chosen to leave their home country would be an indicator to being more open minded, but would they be THAT open minded?

  7. I’m not a finance expert by any means but I wonder if wages have not dropped even more dramatically than the figures imply. I was toying with the idea that perhaps we are looking from the wrong frame of reference. What if house pieces actually reflected the real value of the asset. Due to globalisation wages have not been able to rise as quantative easing and monetary stimulus has devalued the money supply. So our wages have all actually gone backwards by the percentage by which houses have been rising. I’m not sure if this all works out but just a thought bubble on my part.

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