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