As the prospect of further UK real wage growth fades what about the self-employed?

Today brings us to the labour market report for the UK. Over the period of the credit crunch the quantity numbers have performed very well and scare stories from some economists of 3 or 4 million unemployed have been replaced by record employment and falling unemployment. However we are now in a phase where we are much less sure that unemployment will continue to fall. Also the quality number or wage growth has been somewhere between poor and not so good. In spite of an economy recovery which began in 2013 wage growth has only managed about half of what we would have expected pre credit crunch.We can put this into numbers as those in the Ivory Tower of the Office for Budget Responsibility predicted this back in 2010.

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

This reminds us that the long-term trend here has been for wage growth to decline. The improvement in the real wages picture which has been extremely welcome in boosting both consumption and living-standards mostly came about because consumer inflation fell to historically low levels.

What about the self-employed?

Regular readers will be aware that the official average earnings numbers exclude the self-employed and in fact the smaller businesses. This has led to concerns expressed both by me and in the comments section that there would at least be sections of those self-employed with a poorer record for wages growth (and perhaps falls) than stated in the official statistics. This has become an increasingly important issue as the number of people self-employed has grown.

Yesterday the Resolution Foundation released some new research on this subject and it did attract attention for this.

Remarkably, this data suggests that typical earnings for the self-employed were lower in 2014-15 than in 1994-95, twenty years earlier. …….. From their peak (2006-07) to trough (2013-14), typical self-employment earnings fell by 32% – £100 per week.

Ouch! So self-employed earnings have had their own private economic depression. How does this compare with the overall picture?

A fall of 15% compares to a rise of 14% in typical employee earnings

As with ordinary earnings it found that some of this was compositional as in caused by the fact that the newly self-employed were less likely to employ others and worked fewer hours leading to this conclusion.

This analysis suggests that, over the 2001-02 to 2014-15 period as a whole, compositional effects were responsible for over 60% of the fall in average earnings (and there may be other compositional factors that we have not accounted for here), with the remainder being a purer earnings effect.

That still leaves a large gap with the official average earnings series to explain. Also the grim truth is that the credit crunch era did bring outright falls in income for the self-employed.

However, between 2008-09 and 2013-14, while there was still a negative compositional drag, the large majority (86%) of the substantial fall over this period is not explained by compositional effects.

More than a few questions are posed here and some of the answers are hard to find. Some may have been happy to switch from employment to self-employment and others may have been happy to work fewer hours, but it is hard to avoid the few that some were forced to and others were involved in underemployment. As the numbers grow this becomes a bigger issue.

the number of self-employed has grown from 3.3m (11.9% of the workforce) in 2001-02 to 4.5m (14.7%) in 2014-15

There was a flicker of better news at the end which suggested that the economic recovery had finally fed through to the self-employed.

More recently, compositional changes played a positive role and together with strong growth within groups meant a rise in average income in 2014-15

So we hope that this trend continued but we do not do so. The analysis above relies on the Family Resources Survey which has considerable lags in the data it provides.

Back in the day (2008) this was all reviewed by Martin Weale latterly of the Bank of England and recently appointed a Fellow of the ONS. In all his Ivory Tower pages of maths the little people slipped through his net.

Note that firms employing fewer than 20 employees are not surveyed.

I doubt it seemed important to him at the time….

Today’s numbers

Let us open with what remains good news.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.5%, the joint highest since comparable records began in 1971…….There were 23.23 million people working full-time, 362,000 more than for a year earlier. There were 8.58 million people working part-time, 198,000 more than for a year earlier.

Thus we see that more people are employed and the growth these days is not as heavily biased to part-time work as it was. Wages growth nudged higher than we were told last month too.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.3% both including and excluding bonuses compared with a year earlier.

In the meantime so of last month’s data has been revised higher too.

Not so good news

This comes from a nudge higher in unemployment.

There were 1.66 million unemployed people (people not in work but seeking and available to work), 10,000 more than for March to May 2016 but 118,000 fewer than for a year earlier.

Actually this was a type of sexism if you note this.

There were 765,000 unemployed women, 23,000 more than for March to May 2016 but 37,000 fewer than for a year earlier.

I would welcome readers thoughts on why male unemployment fell but women’s rose?

Real Wages

There is an issue here as in spite of the fact that in the latest 3 months wage growth was 2.3% we know that inflation is on the rise. Indeed if we look at the monthly series wage growth in August was 2%. That seems to have been driven by a big swing in bonuses payments from up 8% to -6% but nonetheless we face a position where our real wage growth fades a fair bit if this continues into September and meets an official CPI inflation rate of 1%.

If you look at Retail Price Inflation (2%) then we are now facing the distinct possibility that real wage growth has either ended or faded to a low-level.

Comment

Whilst the situation remains strong overall there is an obvious concern with the rise in unemployment which whilst small overall will matter to the 10,000 concerned. Also there is the issue that we are seeing unemployment rise for women which may be a quirk but may not. But for real wages it would appear that the words of the latest Nobel winning poet are appropriate.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin’
And the first one now
Will later be last
For the times they are a-changin’.

Will that end the apparent improvement for the self-employed?

 

 

 

 

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25 thoughts on “As the prospect of further UK real wage growth fades what about the self-employed?

  1. Great article as always Shaun.

    As an aside, I’ve noticed a lot of negative press about Carnage recently. Do you think he’s on the way out? Also do you think the next move in interest rates could be up? May seemd to indicate that she wasn’t happy with QE and ZIRP.

    • Hi Anteos and thanks

      Those questions are in vogue as I answered them on Tip TV Finance earlier and will post the video tomorrow. But as to Mark Carney there are 2 reasons against him going now.

      1. I believe he wants the IMF job which will not be available for a few years.
      2. I am reminded of the Yes Minister episode Man Overboard where the departure of one person ( Chancellor Osborne) is considered bad enough but 2?

      Of course if the legal issues should catch up with Christine Lagarde then things could change…

  2. “Note that firms employing fewer than 20 employees are not surveyed.”

    Given that the majority of the UK population actually works for SME enterprises this is quite an omission. Yes we have large employers like the NHS and BT and so on but most people work for small firms.

    I’ve mentioned previously that the self employed figures are going to be an inaccurate reflection of take home pay as many IT contractors pay themselves minimum wage and take most of the earnings through dividends. In London it is not uncommon for people to get 500-1000 GBP per day paid into their limited companies but that won’t show up in their wage packet.

    • That is a very interesting point. What about small businesses employing husband/wife/children so that they only are liable for basic rate tax.
      I suspect that it would be very difficult to know exact figures, unlike the employed sector.

  3. Hi Shaun
    As well as the self-employed and the under-employed and the employed in small companies; the statistics in the UK are inadequate in identifying the ‘quality’ of employment. Its relatively easy in the US to see in which sector employement has risen and fallen and what the percentage of ‘available workforce’ is actually in work. I would be very surprised if the UK was not following similar trends as the US. Where the rise of the ‘waiters’ was replacing higher paid, pensionable jobs , indeed without which the jobs number would have been negative for the 8 years. Where ‘white, males’ in full-time, pensionable jobs have declined at an alarming rate. Where the percentage of the available workforce actually in work or seeking work is at a 50 year low.
    Quantity numbers mean nothing to the individual when the quality continues to decline.

    • Hi JW

      The self-employed and small businesses omission gets more glaring the more I think about it. Actually HM Armed Forces are missed out too and I have no idea why as they are surely the group the government knows the most about. Then we come to the fact that we cannot provide reliable monthly numbers for unemployment or wage growth. So as you say more holes than a Swiss cheese.

  4. Self-employed are earning less than they did? If you Google “self-employed working tax credit scam”, you will find that there are a lot of people for whom it is a lucrative alternative to existing on Job Seekers Allowance with minimal if any effort. I am pretty sure that the sort people who were genuinely self-employecd before 2008 are still there and are still making as much or more than they were, the statistics are skewed by an army of quite a different sort.

    • It is not a scam though, is it?
      I mean, if 1 in 5 jobseekers is under sanction by DWP at any time, for any trivial contravention of the rules, for up to THREE YEARS, is it any wonder that you end up with six window-cleaners living in a street?

  5. Shaun,
    As others have commented, these figures on self employed look far from robust.
    I will add another thought.
    My impression was that, in the past, the self emplyed were more likely to be from the professional classes and thus relatively high earners.
    However, the increase in numbers of the self employed, would indicate that a larger range of income earners are now self employed – thus bring the average pay down.
    Without any more details the conclusions drawn by the Resolution Foundation should be treated with caution.

    P.S
    People who fund their earnings through a PSC are not technically self employed, as they are paid by their own limited company as emploees. Although, I do agree that this would have an impact on average wages, if such figures were collected!

    • Hi Nick

      You are entirely right to say that this is unlikely to be the full picture. But any sort of picture at all is better than the nothing provided by the official numbers. We find out a little more but the great shame is that our establishment have done nothing about a blatant flaw in the numbers.

  6. one point about self employed by contractors

    you now cannot claim a number of expenses such a fuel to and from work and food

    cuts my sons income by £50 per week , about 10%

    so less income means less spending for all

    funny old world innit ?

    Forbin

    dont tax popcorn any more please !

    • Hi Forbin

      How does that work as surely travel to and from a place of work for a contractor is a legitimate business expense? As to corn futures they continue to grind higher and of course we are buying it with weaker UK Pounds these days to compound that.

      • I can help with that and Forbin part of your argument is incorrect in that it has been illegal to claim travel expenses to and from an ESTABLISHED AND FIXED PLACE OF WORK for a self employed contractor certainly since 1990.

        The grounds of the regulation is that a self employed sub contractor travelling to and from the same geographic work location is the same as an employee’s journey to their normal place of work and they can’t claim the expense.

        However, if the sub contractor works at different locations most days (like a plumber or joiner at different houses/shops/factories) then the travel expenses for those journeys may be legitimately claimed as an employee would normally work at a fixed location and if the employee had to work at different locations for their employer, the employer would (normally) pay the employee’s travel expenses to those different locations.

        If Forbin’s son has been successfully claiming travel expenses to the same place of work in the past he shouldn’t argue the case now, and certainly not on the grounds that he made successful claims in the past as the Government is looking for all the revenue it can lay it’s rapacious greasy squandering claws on.

  7. ok so we impute GDP , cant count the self employed and give large tax cuts to Big Corp

    whilst screwing down the self employed and SMEs

    and CPI is a liar and RPI is deferred but ok for the Elites …….

    the only real thing we can agree on is the debt is large , how large varies …..

    oh great – which century are we living in ? sounds very lo tech to me

    or is that where we’re going ??

    Forbin

    • Don’t forget:
      1. We have no idea of the state of the banks (Deutsche Bank’s $41 trillion of gross derivatives…),
      2. We have absolutely no plan to reverse QE
      3. We have absolutely no plan to get the deficit under control
      On the other hand, we are blessed with exceptional leaders, such as Mr Carney, Mr Van Juncker and President Hollande, so you should sleep easy that it’s all under control.

  8. Great blog as always, Shaun.
    The Bank of Canada issued its version of the Inflation Report today, the October Monetary Policy Report. This is the last quarterly MPR that will be published before Finance Minister Morneau and Governor Poloz sign off on the renewal of the inflation-control agreement that will set the parameters for monetary policy for the next five years. Pace Governor Poloz, who made a flippant reply to a question I asked him at the University of Ottawa, there is no chance it will be released on December 31, which is a Saturday. The 2011 renewal agreement was released in November, and this seems to be the most likely month of release for this year’s renewal agreement as well.
    The BoC’s reports tend very much to be what you would call jam tomorrow reports. In October 2015 they forecast that real GDP growth for 2015 would be 1.1% (it was) but it would be 2.0% for 2016. In October 2016 they have downgraded their forecast for growth in 2016 to 1.1% from 1.3% in the July MPR, but they are forecasting 2.0% growth for 2017. There is only one brief mention of the possibility the US may launch countervailing duties against our softwood lumber exports, an option that became available to the Americans just days before this report came out, and no mention at all about the possibility the US Fed may raise the federal funds rate in November or December, both of which could adversely impact Canadian growth.
    The BoC was floating the idea of hiking the target rate for inflation from 2% to as high as 4%, but unless this MPR’s inflation forecasts are just an elaborate ruse, this option would seem to be off the table. CPI inflation and core inflation are both forecast to be 2.0% for 2018Q4. The average absolute difference between CPI and core CPI inflation rates over the last five years has been 0.5 percentage points, but the longest term BoC projections almost always show both series with identical projections at the target inflation rate. So these are not really projections in the conventional econometric sense. They are more like pious declarations of faith.

    • Hi Andrew and thank you

      This issue of potentially raising the inflation target is becoming fashionable as i mentioned earlier this week in reference to Janet Yellen of the US Fed. Be careful you guys do not import it via your southern borders!

      As to jam tomorrow well that is the central banking philosophy pretty much world wide. Greece will recover next year, in 2 years time UK CPI inflation will be 2% and so on…..

  9. Hi Shaun

    I saw your piece on Tip TV today with Zak Mir and Mike Ingram and you dropped what I thought was a real gem. You said that not only do the Av Earnings figures exclude the self employed but also earnings in organisations with less than twenty employees.

    Let’s face it these two factors are a huge gap and one is left with the inevitable question: of what value are the average earnings figures with these sorts of omissions?

    • Hi Bob J

      The discussion carried on and they could have done a Sir Humphrey Appleby on me ( in one of the episodes he was honest about unemployment in front of a live mic after completing an interview). Although of course I had been also honest in the interview! The more I think about it the more dreadful that omission is. It is not even consistent because when I was looking at some GDP classification data the threshold was 10 employees.

      Meanwhile I have just been listening to the football on BBC Radio 5 Live where Phil Neville assured us the game was for the taking for Manchester City. What happened next?

      • Well it was P Neville! Seems Mr G’s tactics only work when he manages a team with clearly superior players ( or one of them is LM). 4 matches on the trot without a win, the dreaded ‘support of the Board’ message will be coming soon at this rate.

        • It’s not the loss of Messi which is Guardiola’s problem; it is that the use of nandrolone is far more difficult to hide in England.
          Google “Barcelona doping” and “Operation Puerto”

          Care for a “vitamin” shake?

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