UK real wages fell in January ending over 2 years of growth

Today sees us receive the latest UK labour market data with the main emphasis being on wages as we mull how they will compare with inflation as 2017 progresses. The phase where low inflation boosted real wages is over for now at least as we cross our fingers and hope it will not rise too far. On that front we have had some better news from the recent dip in the price of crude oil but as a ying to that particular yang there has also been this.

In case you missed it, iron ore in China is up 10% since Monday. Cheers ( @DavidInglesTV )

On the usual pattern we would know the latest inflation data but that is not due until next week whilst our statisticians perhaps drink gin, play jigsaws whilst wearing a base layer and a cycle helmet.

Public-Sector Pay

This is something which has perhaps been too much in the background. For many who work in the public-sector wages have been under an austerity style squeeze for some time now. The area has also got more complex as many such jobs have been outsourced to private companies as for example many of the staff in Battersea Park work for a company called Enable now rather than Wandsworth Council. In terms of scale here are the numbers involved.

There were 5.44 million people employed in the public sector for December 2016. This was little changed compared with September 2016 and with a year earlier. Public sector employment has been generally falling since December 2009.

Although the picture gets ever more complex.

The Institute of Fiscal Studies has looked into the wages trend and point out that it is more complex than it may initially appear.

Public sector pay has been squeezed since public spending cuts began to take effect from 2011, and it looks set to be squeezed even further up to 2020. However, this comes on the back of an increase in public sector wages relative to those in the private sector during the Great Recession.

They think that this is set to continue for the rest of this decade.

On the basis of current forecasts and policy, we expect public sector pay to fall by 5 percentage points relative to private sector pay between 2015 and 2020. This would take the raw wage gap to its lowest level for at least 20 years.

However the starting point may not be what you would have expected.

In 2015–16, average hourly wages were about 14% higher in the public sector than in the private sector, according to the Labour Force Survey. After accounting for differences in education, age and experience, this gap falls to about 4%.

This is a complex area as we mull the usefulness of some type of education. For example by interest (athletics) I know people who specialise in the physiotherapy area where attainment is higher in that graduates are recruited but some for example have never manipulated someone’s back. Of course there is also the issue of pensions.

Reforms to public sector pensions have reduced the value of the pension public sector workers can expect to enjoy in retirement, though this is still probably more than private sector workers can expect

I do not know what the IFS has been smoking here as public sector pensions look ever more valuable in relative if not absolute terms to me.

Good News

This as so often these days comes from the quantity numbers in the labour market report.

There were 31.85 million people in work, 92,000 more than for August to October 2016 and 315,000 more than for a year earlier……..There were 23.34 million people working full-time, 305,000 more than for a year earlier. There were 8.52 million people working part-time, 10,000 more than for a year earlier.

The extra number of people in work helped reduce unemployment as well, oh and in case you assumed it was an obvious link it is not always that simple due to a category for inactivity.

There were 1.58 million unemployed people (people not in work but seeking and available to work), 31,000 fewer than for August to October 2016 and 106,000 fewer than for a year earlier………….The unemployment rate was 4.7%, down from 5.1% for a year earlier. It has not been lower since June to August 1975.

 Bad News

This was demonstrated by this on the wages front.

Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.2% including bonuses, and by 2.3% excluding bonuses, compared with a year earlier.

So we see a slowing from the 2.6% reported last time. If we look into the single month detail it is worrying as you see December was 1.9% and January 1.7% giving a clear downwards trend. If we look further we see that those months saw much lower bonus payments than a year before and in fact falls as for example -3.9% and -2.7% was reported respectively. Putting it another way UK average earnings reached £509 in November but were £507 in both December and January.

Ugly News

This comes from the position regarding real wages.

Comparing the 3 months to January 2017 with the same period in 2016, real AWE (total pay) grew by 0.7%, which was 0.7 percentage points smaller than the growth seen in the 3 months to December 2016.

There has been something of a double whammy effect at play here as inflation has risen as we expected but sadly wage growth has dipped as well. So the period since October 2014 when real wages on the official measure began to rise is certainly under pressure and frankly seems set to end soon.

If we look at January alone then real wages were 0.1% lower than a year before as inflation was 1.8% and using the new headline measure ( from next month) they fell by 0.3% on a year before. Using the Retail Price Index or RPI has real wages falling at an annual rate of 0.9% in January.

Comment

There are quite a few things to laud about the better performance of the UK economy over the past few years as employment has risen and unemployment fallen. Although of course we would like to know more ( indeed much more…) about the position relating to underemployment which is one of the factors at play in the situation below.

The number of people employed on “zero-hours contracts” in their main job, according to the LFS, during October to December 2016 was 905,000, representing 2.8% of all people in employment. This latest estimate is 101,000 higher than that for October to December 2015 (804,000 or 2.5% of people in employment).

For a while this was also true of real wages although to be fair the situation here mostly improved due to lower levels of recorded consumer inflation. Sadly if the data for January is any guide that happier period is now over even using the official inflation data.Of course this also omits the ever growing self-employed sector.

City-AM

Here are my views on US interest-rates from today’s City-AM newspaper

 

 

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28 thoughts on “UK real wages fell in January ending over 2 years of growth

  1. Great column for City News, Shaun. You didn’t mention core inflation, but I believe that also supports a rate hike, even though on the surface it doesn’t seem too. The US Fed’s preferred measure of core inflation is the Personal Consumption Expenditures Price Index Less Food and Energy (PCEPILFE). For a long time it was registering lower inflation rates than the CPIX, the best core inflation measure for Canada, even if the government no longer thinks so. I have noticed that since October 2016 it has been running at the same level or higher. While the annual rate of PCEPILFE inflation was just 1.7% in January, unchanged from December, the annualized three-month rate of change almost doubled, from 1.1% in December to 1.9% in January.
    Of course, neither the US CPI-U nor the PCEPI include house prices. However, the FOMC should take these into account. Here the numbers also support a hike: the Case-Shiller national HPI had an inflation rate of 5.8% in December, up from 5.6% in November, with Zillow Real Estate Research backcasting an inflation rate of 6.0% for January. This is, by the way, nothing compared to the situation here, where the Teranet National Bank HPI was just released with an inflation rate for February of 13.4%, up from 13.0% in January. Just the same, Governor Poloz has said another interest rate cut isn’t off the table. Help me, Obi-Wan Kenobi, you’re my only hope!

    • Hi Andrew

      There is much to consider for Canada in the US interest-rate moves as the US $ has an even stronger effect in many ways that the Euro and we know the issues it has caused. But most central bankers prefer to “look through” such things these days so it will be up to the Bank of Canada now.

  2. Excellent City AM article. I agree with your position already but, trying to put my bias aside, I think your case was much clearer and more perusaive whereas Mr Blanchflower just raised a series of what ifs and worries. He’s not wrong about the uncertainties but they don’t, in my opinion, stand in the way of a 0.25% rate rise.

  3. I have answered the main points on your topic yesterday Shaun.
    You have my respect, but factually you were way off yesterday, and the anti-Scottish bilefest, from the ignorant arsehole section of your commenters means that this will be my last post on here.
    Many will be glad.
    Fuck ’em.

    • sorry to see you go but it’s unprofessional to swear

      Forbin

      PS: the show is getting better , are you sure you don’t want a seat and some popcorn ?

    • Please don’t go, I value your comments – particularly important to have someone on here tp intelligently put the Scottish side of the argument.

    • Hi therrawbuzzin

      Well not me as I enjoy the debate, and would simply reply that I mostly used statistics from the Scottish government. Whatever you choose all the best to you, however if you stay please keep it clean.

    • I went back and looked at your comments, therrawbuzzin. I don’t know who is right. I have never lived in the UK. It was striking though how much the points at argument were similar to those in the Quebec referendum in the 1990s: whether Quebec received more than it paid in, whether it could keep the Canadian dollar. I did find your link about how banks aren’t necessarily bailed out by the country they are headquartered in intriguing because I had always simply assumed that. I hope you reconsider stopping posting on Shaun’s part of the web. In any case, I want to thank you for all your comments over the years. I think we should all try to be civil on this blog page, though. Economic issues really are complicated, and reasonable people can always come to different conclusions.

  4. Hi Shaun
    As the wage numbers represent ( at the most) 50% of the working population, and the unemployment figures also represent a similar percentage of the ’employable’ population; shouldn’t we take all these statistics with a large package of salt?
    Talk here in the US is of an increasing rate of FED interest rate increases.Could of course be that the 99% Clinton voting FED want to crater the economy.

    • You did notice the US jobs report did you? Whilst I am expecting US weakness this Spring and into the summer I am certainly NOT expecting shrinkage. Crater the economy? Take pre-emptive steps to stop it overheating more like, especially with Trumps inflationary policies. The Fed not only has to look to the next 6 months but also 18- 24 months away when Trumps blunders/policies should be in overdrive.

      I should say the Fed is more of a corrective policeman to thuggish antics of Trump at the moment.

      • I assume you are referring to his talk of infrastructure spend. The budget proposals are about cutting expenditure in many areas to balance increases in military costs. Most of his rhetoric since February has been about reducing the debt. I really do think observers of Trump should look at actions rather than MSM comments. Language such as ‘blunders/thuggish’ is not objective, its emotive. However its totally in line with the extreme comments from most of the MSM over here.
        The US economy is in a far less positive position than some of the ‘official’ numbers imply.

        • Not just infrastructure, I was also thinking of his various tariffs on imports guaranteed to create immediate inflation followed up by structural inflation if companies relocate to the US from emerging markets. I don’t read MSM so have no idea what they are saying but it looks like this time they are right. The “blunders/thuggish” comment, whilst appearing emotive at the moment and certainly no more emotive than referring to an economy about to “crater” will be proven to be objective observations in 2019 if Trump continues on his not so merry way. I would prefer his infrastructure expenditure carried forward with tariffs abolished.

          As for the official numbers, well, it is these same numbers that the Fed has been using for decades and the US has done much better than the UK.

          If you are correct than we can expect to see the US cratering this fall, especially as the Fed has now raised, meantime the pound has gained in accordance with my prediction last December that there is little upside left in the dollar no matter how many rate rises occur .

          I shall remind you of this conversation in the fall and later in 2019 and we shall see whom was objectively right,

  5. Good coverage for you Shaun, equal billing against Danny, although very unequal since he is an agent of the statetous quo (read) crazy debt financed bubble. As if using a wage measure is valid in our post globalised labour markets…

    Danny is grasping at straws and old economic text book flattened straws.

    Paul

  6. In your City AM piece you (quite rightly) ask the question “if not now, then when?”.

    What this implies is that the further we are from 2008 the nearer we must be to “normalcy” but I wonder whether this is now a reasonable way of looking at things. We seem to be in a situation where there is emerging a loose inverse relationship between the equilibrium rate of interest and the debt burden – that is the higher the debt burden the lower the equilibrium rate. As the debt burden seems to be increasing inexorably it would follow that we are getting further away from “normalcy” not nearer as time passes so, in a sense, the question answers itself – never! That may seem flippant but sensible.

    That the Fed is actually raising rates does not make this hypothesis wrong as many argue that the Fed is making missteps and may well precipitate a recession. After all the metrics they use to judge economic health – the basis for the rate rises – are questionable, and many do just that, saying that the US economy is in far less robust health than it appears. The jobs report is a prime example; it seems to me little more than estimates and extrapolations with huge seasonal adjustments and you only have to scratch the surface to question the weight that it is expected to carry. The rate decisions to me are more about a PR job of retaining the 5% of credibility left than doing anything that is economically sensible.

    • Hi Bob J

      That is a possibility but in my opinion it is better for us to try to find some sort of interest-rate balance than to keep on cutting. It may even provoke some reform although of course that is usually in short supply.

  7. Inclusive of employer pension contributions, public sector salaries must surely be some 30-40% higher, not 20%. I don’t understand why pension value is never included in the figures.

    • Hi PT

      When we look forwards “pension values” are always subjective so there is some room for debate. However at current interest-rates and yields the cost of the public-sector pensions looks very high.

    • I’m actually in the process of moving from private to public sector, for various reasons. The pension scheme is, ahem, a lot more generous than I had thought, although I am taking a cut in basic pay (when considered on a like-for-like basis) to move – swings and roundabouts perhaps? Not sure if an actuarial calculation would show this balances out, although for me I guess it does.

      (BTW, I believe there is a pretty much zero chance of me receiving what is currently being offered when I finally retire, but it’s still a lot more attractive than my current scheme!)

  8. Public sector pensions look valuable on paper. A problem is that they are funded on pay as you go, in the event of a crisis they may not get paid.

  9. ” do not know what the IFS has been smoking here as public sector pensions look ever more valuable in relative if not absolute terms to me.”

    I put the same question to you Shaun. What numbers and information have you been looking at in relation to Private sector pensions to make that statement?

      • Thanks Shaun, I asked the question as I am an ex public sector employee and my anecdotal evidence compared to my friends whom worked in the private sector was that I was being shafted left right and centre by the Civil Service Pension Scheme.

        Facts:

        1. I am entitled to to 1.25% of my final salary (when I left) for every years service index linked if I ever make it to retirement age..
        2. My private sector chums are entitled to 1.66% of their final salary for every years service index linked.

        That’s FINAL SALARY, I keep reading about defined contribution pensions but can’t find any one actually on one other than those in tiny private sector companies.

        The Civil Service Pension scheme was overhauled some years ago after I escaped and employees starting after 2007 are on career average schemes, receiving 1.25% of their career average on retirement but that was then changed again in 2015 with the introduction of the latest scheme called “Alpha” more on which later.

        A couple of comments on the OECD paper:

        1. The OECD state the replacement rate for UK civil servants is 106% at page 165 of the fairy story, excuse me, “OECD Pensions Outlook”. So, excluding the favoured few Parliamentarians and BOE staff, they are alleging that the vast majority of civil servants are in receipt of pension that is greater than their salary, although it is not clear if they are including the State Retirement Pension in this number, but it matters not as the Civil Service Pension is limited to no more than 50% of your salary in the final salary scheme, (this, even they admit at page 166 of the document thereby contradicting their earlier claims at page 165!). They may be referring to the new Civil Service “Alpha” scheme mentioned above where you may build up benefits at the rate of 2.32% of your CAREER AVERAGE SALARY for every years service – http://www.civilservicepensionscheme.org.uk/media/95069/alpha_schemeguides1_colour.pdf , so what’s going on? Is the OECD mischievously using career average salary calculations for the final pension but then pretending the final pension payable is greater than the Civil servant’s final salary just prior to retirement? I note they also forgot to mention that the “Alpha” pension can go down as well as up depending on inflation as outlined in the link above. This is like comparing apples and pears.

        2.They make reference to the new “Alpha” UK civil Service scheme yielding “106%” again (although 106% of what I do not know) and go on to say this may be seen in figure 6.3 except there is no graphic for the UK in figure 6.3!.

        For the reasons above I refute your and the OECD’s allegations of high value UK civil service pensions and to misquote you after looking at the litany of misrepresentation, omissions and errors in just a few pages of the report I wonder what the OECD were smoking when they put this Alice in Wonderland paper together!!!!!!

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