UK wage growth shows the first sign of weakness for a while

Today brings the UK labour market into focus as we hope for more good news. However we have seen over the past day or so some reminders that the credit crunch era left long lasting scars for some. In isolation the UK has recovered well in terms of employment and getting people back to work but has done much less well overall in terms of what they are paid for it. In particular the Resolution Foundation has taken a look at one rather unfortunate group.

This report looks at the specific fortunes of the “crisis cohort” those who left education between 2008 and 2011. By analysing outcomes for those unfortunate enough to enter the labour market in the aftermath of the 2008-09 recession, this paper estimates how severe an impact
the downturn had on people who left education in its midst, and how long-lasting these effects were.

These individuals were of course guilty of nothing and were only involved via an accident of the timing of their birth. The Resolution Foundation discovered these effects.

We find that people starting their careers in the midst of a downturn experience a reduction in real hourly pay of around 6 per cent one year after leaving education, and that compared to people who left education in better economic conditions their wages do not recover for up to 6 years. For those with lower levels of education, the chance of being in work falls by over 20 per cent, while for graduates the chance of being in a low paying occupation rises.

The find something which resonates with past Bank of England research on this subject.

The chance of a graduate working in a lowpaid occupation rose by 30 per cent, and remained elevated a full seven
years later. Indeed, we find that people ‘trading down’ in terms of the occupations they enter after leaving education, coupled with pay restraint in mid-paid roles, are main drivers of poor pay outcomes for those entering
the labour market in a recession.

The issue I have with this is that we are looking at a period when being a graduate was not what it had been in the past due to the expansion of numbers in the Blair era. So that may well also have been in play but not fully considered. Whatever the cause there was a strong effect on wages.

This helps explain why the impact on pay was more enduring in the recent downturn. People’s hourly wages took 50 per cent longer to recover (to the rates of pay enjoyed by those leaving education outside the downturn).

Thus not only did wages fall they took longer to recover to levels seen by those lucky enough not to start work and graduate as the credit crunch hit. A clear issue for thos affected.

However we did get one thing right in the sense that pre credit crunch we wanted to be what was considered to be more Germanic. In this instance that meant more flexible wages ( as in potentially down) in return for a better employment trajectory.

On the other hand, youth unemployment did not rise as high as in the early 1990s, and came down much faster.

Many now seem to have forgotten that as it has turned out to be a success but at a price in terms of wages especially for those unlucky enough to be born at the wrong time. Although as this from BBC economics correspondent Andy Verity illustrates some are keener on lower unemployment than others.

The unemployment rate is now down to 3.8%. But is lower unemployment always a good thing? Not necessarily – if eg you’re a business and you can’t get the staff.

Today’s Data

The drumbeat of the UK data series for around the last seven years continues to beat out its tune.

Estimates for January to March 2019 show 32.70 million people aged 16 years and over in employment, 354,000 more than for a year earlier. This annual increase of 354,000 was due entirely to more people working full-time (up 372,000 on the year to reach 24.11 million). Part-time working showed a small fall of 18,000 on the year to reach 8.59 million……..The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.6%) and the joint- highest figure on record.

The bass line was in tune as well.

For January to March 2019, an estimated 1.30 million people were unemployed, 119,000 fewer than for a year earlier and 914,000 fewer than for five years earlier…….

the estimated unemployment rate: for everyone was 3.8%; it has not been lower since October to December 1974 (for men was 3.9%; it has not been lower since March to May 1975, for women was 3.7%, the lowest since comparable records began in 1971)

As you can see the unemployment performance is a case of lets hear it for the girls.

Also as I regularly get asked here is the other category.

The UK economic inactivity rate was estimated at 20.8%, lower than for a year earlier (21.1%) and close to a record low.

Wages

Here there was a more nuanced version of better news.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.2%, before adjusting for inflation, and by 1.3%, after adjusting for inflation, compared with a year earlier.

If we put to one side for a moment the attempt to sugar coat the real wages numbers, there is a fading of nominal wage growth here. We should welcome the fact that the annual rate of growth is still above 3% but there is an issue as it has fallen back from 3.5%. Why? Well weekly wages peaked at £530 in January and fell to £529 in February and £528 in March. Various areas contributed to this as the annual rate of pay growth in finance fell from 5% to 1.8% over the same period and growth in the wholesaling,retail and hotel sector actually went negative ( -0.3%). This was due to weak and in some cases negative bonus payments ( I am not sure how that works…) being recorded so it is a case of what that space.

I did say I would return to real wage growth and let me present it in chart form to illustrate the issue.

Those who have had a hard time in the credit crunch provide yet another reason to make the case for an RPI style measure of inflation I think. It also shows that choosing your inflation measure is a genuinely big deal and something that establishment’s love to manipulate.

Comment

One of the ironies of the credit crunch era is that the economics establishment regularly gets worked up about things it wanted. Of course some of those reporting the situation are too young to remember that but not all. We see that we got the better employment situation we wanted but that especially for those who joined the job market at what turned out to be the wrong time real wages shifted onto a lower path from which they have yet to recover. Sadly the main response from government has been to try to change the numbers via the use of the fantasies involved in Imputed Rents which are never paid, rather than dealing with reality. Also the way that the self-employed are ignored in the wages data is becoming a bigger and bigger issue.

4.93 million self-employed people (15.1% of all people in employment), 180,000 more than a year earlier.

As to the current situation it may no longer be quite so Goldilocks as whilst employment growth continues we face the possibility that wage growth is slowing again. Perhaps in spite of its many fault as a measure it is related to this.

In contrast, output per worker in Quarter 1 2019 increased by 0.7% compared with the same quarter in the previous year.

If you want the full picture it is the difference between the two numbers here.

It indicates that in Quarter 1 2019, all three economic indicators were above their pre-downturn levels, with GDP being 12.7% higher while both hours and employment were equally 10.2% higher.

Putting all this another way it is yet another punch hammered home on output gap style theories which must now be in boxing terms on the canvas again. What happened to the three knockdowns and you are out rule?

 

 

 

 

17 thoughts on “UK wage growth shows the first sign of weakness for a while

  1. I’m sure I’m not the only one who has noticed that wages for any jobs that require qualifications, especially those previously considered “the professions” are now relatively speaking the worst paid. This upside down world cannot be simply explained away by the swelling of graduate numbers caused by Blair’s Degrees for everyone policy, as even jobs that require qualifications below a degree are similarly affected.

    It would however, fit in with the increasing control of our society by those out to destroy our economy, both the family and the middle classes and our sense of nationalism, increasing surveillance, control of opposition and opinion by “hate” laws, the adoption of crazy green laws and initiatives, uncontrolled mass immigration, political correctness, the breakdown of law and order, a police force unwilling to tackle real crime yet apply unlimited resources to “hate crimes”, increasing interference and micro-managing of financial markets by central bank and state interventions.

    In short, capitalism and free speech are being replaced by communism and totalitarianism, who was behind Bolsheviks and the last imposition of those polices – the very same people.

    • Hello Kevin,

      Shaun does not touch politics as such . However I’m not surprised that our current Capitalist/Free market systems are under strain and attack.

      From my POV once fossil fuels are acknowledged to have reached maximum production and therefore will decline , so will Western freedoms . Most of human recorded history since 30th century BC has shown that totalitarianism has been the normal state of affairs ( Kings, priests warlords , etc) apart from Athenian democracy with was based on the wealth of its silver mines ( that fact does not get much airing ) and restricted to adult males. Once the wealth was going ( used to fight wars and support the navy ) it was in trouble and constantly re-jigged until it was conquered by the Macedonian army of Phillip II in 338 BC .

      Current far left politics in my view have mostly won out . The issue is that once you have gained the advantage you then run out of ideas ( think of the UKIP – once it got the single issue enacted it had to have a reason to exist ( well not really but human nature kicks in here )) so the current left have to go to new extremes to justify their existence – hence PC culture and attacks on who were once considered liberals ( and still are , at least compared to the recent past) .

      Both the far left and right are very similar in that they are both anti democratic and authoritarian in nature and rule by diktat. They both require deamons to fight against to justify their existence ( usually forever ) even if individuals tell you that the battle will be won once ” xzy” is done , it never is.

      And on top of this is the insane belief that medieval power sources will power a new techno future “golden age ” …….. ( sighs )

      Forbin

      • I have ventured into those very same silver mines over at Lavrion on the east coast of Attica and they tell of a grim legacy of slave labour and, judging by some of the size of the tiny tunnels, child slave labour. Don’t get me wrong, I think Athenian democracy was a wonderful thing and I still get a thrill when I stand on the Pnix in Athens and realise that this is exactly where it started. We have to realise that ‘things were different then’ and not rush to judge their society by today’s values. I would add that that statement applies to our recent past as well as so many people want to apologize for historical events over which we had no control and again ‘things were different then’ and what is unacceptable now was once the norm.

        I’m off to Athens fairly soon as they have some great museum exhibitions coming up and the reconstructed trireme is now moored in Zea marina and open to the public. Can’t wait!

        • unfortunately we will not be allowed to burn it

          well at least until the lights go out on a cold cloudy wind free winters day

          expect more hopium about green energy this summer – when demand is low and solar is highest

          Forbin

          • Forbin, you hit a nerve there. The leader of the socialis New Democratic Party in Canada, Jagmeet Singh, was so panicked by the Green Party winning a by-election in a seat held by the NDP that he came out against fracking for natural gas altogether. I know Shaun doesn’t want this to be a political blog, but the opposition to fracking, which seems to be swelling rather than fading, is a threat to our economic growth. The UK is a crowded place and Britons have a couple thousand years of architecture to protect, so I can see in a way why fracking is a bigger deal there. Canada isn’t and Canadians don’t, so the level of opposition is surprising.

  2. Hello Shaun,

    Wasn’t the recent rise in wage there just to pay for the new pensions that everyone and their dog must have ?

    It mean that it wasn’t a rise at all but an increase in costs .

    As that rise is passed to the pension companies and will drop out of the figures we will see pay rises go back to current norms , ie low to none existent.

    Forbin

    • They already are non-existent; food inflation, when shrinkflation is accounted for, is definitely into double figures.

      Princes’ corned beef, 340g now 325g
      Club biscuits, 8 pack now 7 pack

      It’s ubiquitous.

  3. Some of the press statements talk about the wages being the “bright spot in the UK economy” but I beg to differ:

    1.The rise in wage growth has slowed form the previous month on their own data

    2. Real wages allowing of inflation still below 2008 levels on their own data

    With inflates data also being dodgy which many on this forum have discussed before and Shaun has highlighted as well I am sceptical over the published data.

    One has also to consider wage growth will vary tremendously and in different categorises of workers.

    It may be the case many wages allowing for inflation far worse than the figures portray and the a considerable amount of workers far worse off and other data such as shop closures and poor retail spend bears this out.

    • Copied from BBC business live:

      11:14
      Wages ‘bright spot of UK economy’
      Those earnings figures have pleased Tom Stevenson, investment director for Personal Investing at Fidelity International. He said:
      Quote Message: Wages are still the bright spot of the UK economy. The murky outlook is leading businesses to hire now with the option to fire later rather than make irreversible investments in new kit. Perhaps it is still too soon to get ahead of ourselves, though – a week before new inflation data, there’s a question mark over how real the earnings growth is. Rising wages are bound in due course to feed through into wider price rises.
      Wages are still the bright spot of the UK economy. The murky outlook is leading businesses to hire now with the option to fire later rather than make irreversible investments in new kit. Perhaps it is still too soon to get ahead of ourselves, though – a week before new inflation data, there’s a question mark over how real the earnings growth is. Rising wages are bound in due course to feed through into wider price rises.”
      …….

      What about the rise in Nat insurance payments and reduction in net payments in the wage packet?

      Shaun

      Are the wage figures data gross wages or after deductions of tax and insurance which makes a difference on how people view the data and how it is affecting the average worker?

      • Hi Peter

        The statement from Mr.Stevenson are really rather curious. The bright spot for the UK labour market is and has been, clearly employment. Also the lesson of the last decade and more is that “hire now with the option to fire later” is pretty much the opposite of what has happened.

        Here is the answer to your question or if you want it more simply the numbers are gross and not net.

        “AWE is published monthly and is designed to capture changes in average earnings of employees in Great Britain. Average weekly earnings for any given month is the ratio of estimated total pay for the whole economy, divided by the total number of employees. “

  4. Whilst I agree with the concerns about wage growth and innaccurate inflation figures, I would far rather have high employment than unemployment. Joining the labour market in a downturn might affect your earnings for a while but being unemployed affects it more, plus it damages mental health, accumulated wealth, social bonds . . .

    • Hi Doubting Dick

      I completely agree and would add that the countries which had high rises in unemployment have often seen it persist. Even Spain with its much better recent economic performance still has an unemployment rate of 14.7%. That’s a lot of people still and means that many were unemployed for a long time. I too would rather have lower wages for a bit.

  5. Great blog as usual, Shaun.
    You conclude from the chart by Rupert Seggins that it provides “yet another reason to make the case for an RPI style measure of inflation”. However, the lower real wage growth, or if you like, the higher inflation of the RPI-style measures considered, the RPI itself and RPIX, comes mainly from the formula effect. The RPIJ eliminates the formula effect and doesn’t differ so much from the non-RPI-based measures over such a long period: I estimated the average annualized inflation rates for the measures for the period between 2007Q4 and 2019Q1 were: RPIX (3.08%), RPI (2.78%), CPI (2.34%), CPIH (2.17%), RPIJ (2.16%) and HFCE deflator (2.12%). In my view, although I believe the CPI and the CPIH are the only measures the ONS has ever used for its published real AWE series, neither is legitimate. The UK CPI is just the UK HICP, a macroeconomic index, not a household-oriented index, appropriate to the deflation of nominal wages, while the CPIH is a duck-billed platypus of an index. The RPIX excludes mortgage interest, so it is a household-oriented measure with an exclusion that makes it more appropriate for use as a target inflation indicator, but less appropriate as a deflator of nominal AWE. The inclusion of the HFCE deflator in Seggins’s chart was interesting. I certainly wouldn’t favour it myself, but National Accounting reasoning was invoked so often by the CPAC in deciding on an appropriate OOH component, one wondered why they didn’t simply decide to abandon the CPI and rely on the HFCE deflator. It would have been more logical.

    • Hi Andrew and thank you

      Your numbers are interesting especially the way that RPIJ ends up lower than CPI which looks like it is the ongoing effect of the various attempts to lower mortgage rates. Firstly the lowering of Bank Rate and later the Funding for Lending Scheme. That being so it shows how a relatively small component ( 2.4%) can have an effect if you hit it hard enough! It is also awkward as the Bank of England has depressed inflation in one way ( mortgage interest) and created it in another ( house prices). Oh what a tangled web…

      As to the measures I did not mean to make a case for RPI in statistical terms but more to point out that it fits with the experience of many people. That does not make it right but it does hint at some credence for it.

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