UK Real Wages took quite a dip in April

As we looked at the inflation data yesterday it was hard not to think of the implications for real or inflation adjusted wages from the further rise in inflation. There were quite a few such stories in the media about a fall in real wages although they were a little ahead of events because the inflation data was for May and even today we will only get wages data up to April. However there is an issue here that has been building in the credit crunch era where real wages fell heavily as the Bank of England looked the other way as inflation went above 5% in the autumn of 2011. Sadly they relied in their Ivory Tower models which told them that wages would rise in response. Not only did that not happen but the recovery since has been weak and was in fact driven much more by low inflation than wage growth. This is different to past recessions as this from the Resolution Foundation shows.

As you can see the pattern has been very different from past recessions. Real pay rebounded very strongly after 1979 and did well after 1990 but on the same timescale in remains in negative territory this time around. A lot of care is required with long term data like this but this is a performance that looks the worst for some time.

The Napoleonic war period seems especially grim for real wages. If I recall correctly we were imposing a blockade on much of Europe which seems to have our economy hard as well.

Today’s data

We see that wage growth has faded a bit in the latest numbers.

Between February to April 2016 and February to April 2017, in nominal terms, regular pay increased by 1.7%, slightly lower than the growth rate between January to March 2016 and January to March 2017 (1.8%)……..Between February to April 2016 and February to April 2017, in nominal terms, total pay increased by 2.1%, lower than the growth rate between January to March 2016 and January to March 2017 (2.3%). The annual growth rate for total pay, in nominal terms, has not been lower than 2.1% since October to December 2015.

This is of course happening at the same time that inflation is rising and leads to this situation.

The rate of wage growth slowed in the 3 months to April 2017; adjusted for inflation, annual growth in total average weekly earnings turned negative for the first time since 2014.

That is rather ominous when we consider the first chart above as it means that we are getting further away from regaining where we were in 2008 rather than nearer so let us look deeper. The emphasis is mine.

Average weekly earnings, including bonuses, grew by 2.1% in the same period and are the weakest since the December to February 2016 period. Taking into account recent increases in inflation, real average weekly earnings decreased by 0.4% including bonuses and by 0.6% excluding bonuses in the 3 months to April 2017 compared with the same period a year earlier. This is the first annual decline in total real average weekly earnings since 2014.

Of course they are using the new lower headline measure of inflation called CPIH which uses Imputed Rents to estimate owner-occupied housing costs. So the goal posts have been moved a little and this happens so often these days that we should be grateful that so many goal posts now come with wheels.

Where does this leave us overall?

The situation is as follows according to our official statisticians. They are using constant 2015 prices so they are real numbers.

average total pay (including bonuses) for employees in Great Britain was £487 per week before tax and other deductions from pay, £35 lower than the pre-downturn peak of £522 per week recorded for February 2008.

Number Crunching

We can go deeper because there are numbers for the month of April on its own. In that month total pay only rose at an annual rate of 1.2% because whilst regular pay rose by 1.8% bonuses fell by 5.8%. Care is needed as if we look back April has been an erratic month for bonuses but we see that real wages were falling at an annual rate of 1.5% if we use CPI inflation. 1.4% if we use CPIH and 2.3% if we use RPI. Even if we ignore the bonus numbers we see -0.9% for CPI, -0.8% for CPIH and -1.5% for RPI.

The sectors which seem to have impacted in April are the finance and construction ones which both saw total pay fall at an annual rate of 0.5%.

Is the UK labour market tight

Conventional analysis based on such theories as the Phillips Curve will be telling us that the UK labour market is “tight”. An example of this is below from Andy Verity of the BBC.

Unemployment: a 42-year low (1.53m, 4.6%); work force: another record high (31.95m people). But tight labour market isn’t pushing up pay.

If we put some more meat on those bones there are things heading in that direction as this shows below.

The number of people in work increased by 109,000 in the 3 months to April 2017 compared with the previous 3 months, to 31.95 million, with an increase in full-time employment (162,000) partly offset by a fall in part-time employment (53,000) . The employment rate reached a joint record high of 74.8%.

This looks good and indeed is but questions remain. For example having checked I know that there is not a clear definition of full-time work it is something that responders to the survey decide for themselves. Added to this is the issue of self-employment and how much work they are actually doing.

self-employed people increased by 103,000 to 4.80 million (15.0% of all people in work).

Just as a reminder the self-employed are excluded from the official wages data. There is more reinforcement for the labour market being tight here.

Total hours worked per week were 1.03 billion for February to April 2017. This was 0.7 million more than for November 2016 to January 2017 and 15.4 million more than for a year earlier.

We are left with the concept of underemployment here I think which measures the gap between the work that people are doing and what they would like to do. Sadly the UK does not have an official measure of this unlike the US with its U-6 data. We only have flickers of insight via the growth of self-employment which needs to be sub-divided into positive and negative and the rise of zero hours contracts. In terms of influencing pay there seems to have been an associated rise in job insecurity but we have no clear measure of this.

Comment

The real wage squeeze we feared for this year is now upon us and we face the grim reality that it has been more than a lost decade for them.

Looking at longer term movements, average total pay for employees in Great Britain in nominal terms increased from £376 a week in January 2005 to £502 a week in April 2017; an increase of 33.5%. Over the same period the Consumer Prices Index including owner occupiers’ housing costs (CPIH) increased by 31.8%.

The cross-over was in early 2006. This poses all sorts of problems for the Ivory Towers who will look at the employment numbers and forecast much stronger wage growth. Of course they were usually responsible for the increasingly inadequate employment data as we note that one thing they are certainly very poor at is adapting to ch-ch-changes.

Grenfell Tower

Let me express my deepest sympathies for anyone involved in the dreadful fire there which started this morning.

 

 

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17 thoughts on “UK Real Wages took quite a dip in April

  1. Its govt.policy to debase the currency thus peoples wages. Why else would QE/ZIRP be allowed to go on for so long.

    • my take on QE ZIRP and soon BIRP is that its all to save the Banks .

      the big issue was that the 1930’s depression was/is seen as a collapse in asset prices first and foremost . Ergo the rush to prop up all assets such as shares and housing .

      In that it has worked in only forestalling the depression , not fix any fundamentals in the economy .( Western ones ) .

      nobody in power seems able to figure what to do next except keep banging on the QE button ……..

      My initial estimate is that around 2037 ( -/+ 5 years )the depression will have been avoided* but not if we keep doing *nothing* to solve the problem .

      Unless of course the plan is to invoke modern feudalism

      crazy I know

      Forbin

      * traditionally a good war did this , I truly hope we don’t go that route

  2. stagnant wages and productivity

    house price money tree gasping …..

    intentional inflation boost too…..

    the storm clouds are gathering …. how will our TBTF Banks survive ?

    Not looking good for any pollies looking for a city job is it?

    Forbin

    • Hi Forbin

      I guess those who wanted such jobs already have them as it did not seem to take George Osbourne too long did it? He is of course on a one man crusade to boost the jobs and employment numbers.

  3. “Sadly they relied in their Ivory Tower models which told them that wages would rise in response. Not only did that happen but the recovery since has been weak and was in fact driven much more by low inflation than wage growth.”

    I think you may have missed out a crucial word: Not only did that NOT happen….

  4. Great blog as always, Shaun.
    You wrote: “Even if we ignore the bonus numbers we see -0.9% [real wage growth] for CPI, -0.8% for CPIH and -1.5% for RPI.” In my opinion, a better deflator than any of these would be RPIJ. Although the last published update of RPIJ was for January 2017, Jill Leyland informed me that effectively RPIJ annual inflation rates are still published. The series “Formula Effect: All items RPI 12 month % change” (its CDID code is CRFU) is still published. Add these estimates to the annual RPI inflation rates and one gets the RPIJ inflation rates. The RPIJ inflation rate for April 2017 would have been 2.8%, a lot lower than the RPI inflation rate, but higher than the CPI or CPIH inflation rates. Using it as a deflator would have implied a real wage decline in April of 1.0%, or of 1.6% if one looks at wages including bonuses. Of course, these real wage rate declines would be even worse if stamp duty were part of the RPI/RPIJ, as it should be. The CPIH deflator gives the smallest real wage decline. Neither it nor the CPI should ever be accepted as a valid deflator for nominal wages. The CPI is a macroeconomic inflation index, and the CPIH is just a macroeconomic inflation index with imputed rent and council tax series grafted onto it.

  5. I hope I can be forgiven for potentially debasing this august forum but some facts need to be stated baldly. The employment figures are BS, the jobs created are BS, the employment measures are BS, self employment is BS, basically everything that could be BS is BS.

    I’m afraid I’m past the stage of flowery euphemisms, I can’t get a proper response form the ONS other than platitudes. The figures are flat out wrong and intentionally so.

    • Hi bill40

      Sadly the UK Office for National Statistics often finds itself obeying the whims of politicians and the UK establishment. When that is quiet then the Ivory Towers take over. Sometimes I wonder which is the worse option.

  6. “The Napoleonic war period seems especially grim for real wages. If I recall correctly we were imposing a blockade on much of Europe which seems to have our economy hard as well.”

    As Ben Elton used to say “Little bit of Politics there”.

    Could our inevitable sequestration from Europe make things worse?

    Wobbles

    • Hi Wobbles and welcome to my corner of the web

      You have me there. I was so busy thinking of the history back then I have to confess any parallels to now were a long way from my mind. As to your question it all depends on the deal that we strike with the EU.

  7. Since the 2004 EU expansion, there has been a huge imbalance in wages and cost of living. Western politicians have not been shouting about wage convergence. It remains to be seen what Brexit effects will be seen in wages and cost of living.

    I’ll risk a prediction on the job market for medical staff. NHS hospitals are already struggling with understaffing, including Frimley Park where I lived. Over here the elder generation of Eastern European specialists has restricted training opportunities of younger doctors, basically as a job protection measure. This cohort of communist era specialists will be retiring in the next decade. So I’m predicting that more trained Eastern European medical staff will be returning home as fewer travel for work in Brexit Britain.

    • So we get 350k net immigrants a year yet somehow we are short of medical staff.

      Will 700k a year cover this or should they do a point based system and target medical staff or whatever workers are needed.

      • emmigration decisions are made by the many, and highly skilled doctors have a multitude of attractive options. Britain inflicted huge student debts on their own doctors and cannot complain when they disappear down under etc …

        Farage / Trump style xenophobia sure won’t help attract the best and brightest …..
        and it is exceeding hypercritical for Britain to indulge in xenophobia given that descendents of British immigrants are numerous around the whole world, including those beating the home nations at rugby

  8. Shaun, do ivory towers burn? I do wonder whether the mood of the nation is turning into fire starters. Real wages are of course stagnant for the many but not the few. It does make me sound like a Corbynite however I am far more free-market.

    I think today’s most unfortunate event will bring out the worst in the political situation. It will highlight the appallinh housing provision, emphaissje the flawed carbon reduction and crony contracting out of real estate maintenance.

    It also seems that Cobra lockdown was knee-jerked into place for a non-terrorist event, again suggesting incompetence across the state apparatus. Throttling both physical response and the social media reporting sources.

    I can only highlight that the pigeons would be roosting if there was somewhere left for them to come home to roost.

    Paul C.

    • Hi Paul C

      Ivory Towers seem almost as resistant to things as the Alien in the film series so probably not. I do have a little experience of the building industry as my father was a surveyor and built a plastering sub-contracting company. He was firmly of the view that many of those responsible for work of that type did not have the skills or experience required. I hope that this does not apply to those responsible for the thermal cladding on that tower.

      As to pigeons roosting where I live had a problem with feral ones such that we have to put spikes on many of the pipes. I remain on the lookout for pigeons with cans of cheap strong cider smoking a few fags hanging around on street corners.

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