It is boom time for UK wages growth

Today has opened with a reminder of one of the biggest hits of Steve Winwood.

While you see a chance take it
Find romance
While you see a chance take it
Find romance

It is on my mind for two reasons. The first is that the fifty-year Gilt yield in the UK has risen back to 1% after reaching an all-time low of 0.79%. It is still remarkably cheap for the UK to borrow for infrastructure projects and the like just not as cheap as it was. On the other side of the coin the Bank of England will be trying to make it cheaper today by buying some £1.27 billion of longer-dated ( 2036 – 2071) UK Gilts as part of its reinvestment programme for its £435 billion of QE holdings. This is an extension of QE which can do little good in my opinion which will now continue until 2071 as the Bank has bought a little over £2 billion of it, Something to affect our children and grandchildren.

PPI

There was more news on this subject yesterday as Barclays joined the list of banks adding to their exposure.

Total amounts set aside for PPI redress now stand at £51.8-£53.25 billion – over 5 times the cost of the London 2012 Olympics. Banks have proved hopeless at estimating the total cost of their misconduct – with some increasing their PPI redress provisions 20 times over the past 8 years. Legitimate complaints have been rejected and banks have delayed writing to customers, meaning that the scandal has taken years to be resolved and cost billions in administrative costs. ( New City Agenda)

This has plainly boosted UK consumption and the stereotypical example would be on car sales. But it is not quite a free lunch for GDP as there have been offsetting impacts elsewhere.

  • At Lloyds, retail misconduct costs have amounted to a staggering £14 billion, compared to dividends of just £500 million.
  • RBS has not paid a penny in dividends to its shareholders, but has had to find £6.4 billion in misconduct costs and has chosen to pay £3.8 billion in bonuses.
  • If Barclays had managed to restrain its misconduct costs then it could have tripled its dividend.

People have asked me why this has taken so long? Easy, those in charge of the banks have been able to maintain their positions with the large salaries and bonuses by “managing” the news flow. In banking crises just like in war the first casualty is the truth.

Wages

After yesterday’s strong GDP reading for July we maybe should not have been surprised to see some really good wages numbers, but perhaps not this good.

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 4.0% for total pay (including bonuses), and fell to 3.8% for regular pay (excluding bonuses).

As you can see total pay growth reached 4% so what is called a big figure change and it was driven by the July number rising to 4.2%. Below are the sectoral numbers.

Of the sectors reported on, Construction and Finance and Business services are experiencing the highest pay growth, of over 5% (not adjusted for inflation) for total pay; manufacturing is experiencing the lowest pay growth, of 2.4%.

Actually construction wages rose at an annual rate of 7% in July. The numbers here have been boosted by bonus payments which have been around £30 per week for the last year. So it looks as though something has changed there and in a good way for once. I have to admit that it raises a wry smile as it fits with my Nine Elms to Vauxhall crane count rather better than the official construction figures.

Real Wages

Let me first show you the official view.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 2.1% and annual growth in regular pay is estimated to be 1.9%.

The problem with that is that it relies on the CPIH inflation measure which is 17% fantasy via the use of Imputed Rents ( it assumes homeowners pay themselves rent which of course they do not). Thus on a technical level it should not be used as a deflator at all but sadly the UK statistics authorities have abandoned such logic. Let me explain by how they present the overall picture now. They start with regular pay.

£470 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£461 per week), but £3 (0.7%) lower than the pre-recession peak of £473 per week for April 2008……..The equivalent figures for total pay in real terms are £502 per week in July 2019 and £525 in February 2008, a 4.3% difference.

Now let me show some alternative numbers from Rupert Seggins.

How close is real pay compared to where it was at the start of the crisis? That answer still very much depends on your favoured measure of prices. For CPIH fans it’s close, -1% below. If CPI’s your thing it’s -3%. If you prefer RPI it’s -8% and -11% if you like RPIX.

The problem with real wage growth is one of the main issues of the credit crunch and trying to sweep it away with the stroke of a statistical pen is pretty shameful in my view.

Employment and Unemployment

The numbers here were pretty good too.

the estimated employment rate for everyone was estimated at 76.1%; this is the joint-highest on record since comparable records began in 1971 and 0.6 percentage points higher on the year………Estimates for May to July 2019 show 32.78 million people aged 16 years and over in employment, 369,000 more than for a year earlier.

The cautionary note for employment is that the rate of growth has slowed as shown below.

In the three months to July 2019, UK employment increased by 31,000 to reach 32.78 million.

On the other side of the coin we see that unemployment continues to trend lower.

For May to July 2019, an estimated 1.29 million people were unemployed, 64,000 fewer than a year earlier and 716,000 fewer than five years earlier.

Some 11.000 lower in these numbers meaning it is at a 45 year low.

Comment

There is a lot to welcome in these numbers as we see wage growth pick-up with rising employment and falling unemployment. In the detail we see that the wage growth has been driven by bonuses and maybe there is a flattering of these numbers from timing changes. But it is also true that the change in the timing of NHS payments has fallen out of the numbers with no appreciable effect.

There are more than a few factors to consider. The wage growth has happened with little or no productivity growth as employment has risen by 1.1% over the past year. Next it is hard not to have a wry smile at the Resolution Foundation who had a conference on responding to recession yesterday. They are a little touchy if you point this out as this reply to me from their communications director highlights.

Given that the report says we’re not ready for a recession, we’re pretty glad we’re not in one . And as a pro-rising living standards think-tank, we’re obviously in favour of stronger wage growth.

Also there is an issue we have long expected. That is after countless occasions where it has been wrong, useless and misleading some were always going to cling to the Phillips Curve like a drowning (wo)man clings to a piece of wood.

For all the talk of its demise, the UK Phillips Curve shows signs of life ( FT economics editor Chris Giles )

To me this is a basic difference in approach. I adapt theory to reality whereas others adapt reality to suit pre-existing theory.

Oh and UK wage growth is now in line with the sort of rate at which the Bank of England would in the past be thinking of raising Bank Rate. So over to you Mark Carney and your Forward Guidance…..

 

 

 

11 thoughts on “It is boom time for UK wages growth

  1. Hi Shaun,

    A couple of days good news yesterday on GDP and today on unemployment and faster wage rises including bonuses of 4% as against a forecast fall to 3.7%.

    To pick up on few issues mentioned today on your blog:

    PPI is an interesting one due to the amount of money paid out, however does the amount of money paid out include the money paid to claims management companies who can take up to a third of the payment? That could make a huge difference to the actual money paid out!

    The money should help the economy however and boost retail spend but retailers aren’t seeing the benefit, so where is all this money going when personal credit is rising?

    With regards to the unemployment figures again this was a surprise, but I wonder if its now peaked as job vacancies are now falling.

    I expected the figures to boost the £ toady but there was little movement in the hours following the release and maybe the market thinks as I do unemployment has now peaked and could rise from here although Borris seeking to spend more on the police and other projects so this could still see lower unemployment.

    I always take the view the market knows best if the £ weakens they expect worse data to come.

    On other global concerns today Factory gate prices fell at a sharp rate in China and prices are being slashed will hold back inflation on a global basis. However the data is forcing down gilt yields and in turn this affects share prices which imo are overvalued;

    “Globally inflationary pressure remains subdued, so in that sense China is not an outlier,” said Sean Darby, global equity strategist at Jefferies in Hong Kong.

    “Bond yields had fallen so far so fast that they were due for a pullback, and you have some nerves setting in before the ECB,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors in Sydney.

    https://uk.investing.com/news/stock-market-news/global-stocks-weaken-as-chinas-factorygate-prices-fall-sharply-1958870

    • Hi Peter

      The PPI numbers I quoted are gross figures I believe so any money which goes to claims management companies will be included. As to retail sales they have been pretty strong, it is the high street retailers that have been suffering.

      As to China the issue of pork prices is getting more serious. From the South China Morning Post.

      “The consumer price index released on Tuesday reinforced the bleak picture as the data showed that pork prices rose 46.7 per cent in August compared to a year earlier, almost double the 27.0 per cent rise witnessed in July.

      In the same way that Vice-Premier Liu He has been assigned to handle trade talks with the US, and Vice-Premier Han Zheng appointed to oversee the mainland’s response to the Hong Kong protests, Vice-Premier Hu’s agenda is now topped by the urgent need to control soaring pork prices.”

      The virus affecting pigs is having quite an impact……

      “Prices of pork are one of the major indicators used by Chinese citizens to informally gauge their financial well-being, and at the moment, that well-being is being eroded rapidly.”

      • Well that is interesting you have a far better handle on economics around the world that I do. But I’m not an economist.

        On retail sales I thought they were slowing but you are correct the High Street is worst hit.

        As for Pork prices well all this is out of my field and forgive the pun but not sure if they are “field” bred or in pens but in any event those figures on Pork price rises are shocking I don’t know how that affects inflation in China.

  2. I must confess I was one of the PPI claimants, although a genuine one. Many years ago I wanted to buy a car and the Abbey would’t give me a loan unless I signed up for PPI. I argued with them that I was a good credit risk, but to no avail. Anyway I dug out the contract from 20 years ago (yes I keep all documentation) showing the PPI amount and sent it off.

    This was then rejected, because there was no information listing the payments from my account as their records didn’t go back that far. Despite showing my bank details on the contract.

    So they wanted evidence of payment, I duly dug out a bank statement from 20 years ago and sent it off. They then coughed up.

    If they were this tough on everyone, I’d be amazed that any payouts occured.

    It will be interesting if this latest slew of PPI claims feed into the car industry. An no, I didn’t buy a car 😉

    • anteos,

      Thanks for your input and I have a number of more observations and comments. The Legal companies who check and chase up and claim money are similar to accident claim companies the main difference its easier to deal with as with an accident claim the ambulance chasers first need to asses who is to blame then seek to assess the damage to the vehicle and lastly any damages suffered through an injury and all that takes a considerable amount of time and can go on for a long period of time particularly with ah injury which needs to allow time to assess whether there is a long term affect. I have had experience with one of those claims and it didn’t turn out very well and I hate the claims basis. Most are on a no win no fee and its the lawyers that tend to profit. Ambulance chares tend to take 25% off money recovered but it could be more.

      Its easier for PPI claims as all that needs to be done is checking to see if PPI was on the policy then whether it was miss-sold if you are self employed its usually miss-sold then to work out what you have pain in then check how much you are due back including interest. Presumably one is also can claim damages and that is where the claim companies can help.

      However the banks do come up with an offer and one has to question the third taken off in compensation as I would have thought they got their fees chasing the claim but things may have altered as it was over 20 years ago I was involved.

      The most important question I would like answered is?

      1 Of the money paid out is this net or gross including fees paid to claims companies?

      2 Where is the money paid out likely to have been spent, if personal credit is rising and retailers sales are struggling, where is the money going?

      I suppose some of the pay-outs could be spent on holidays, some on a new kitchen, however a news report last week showed someone getting a cheque for a few pence from memory and that will be difficult to assess!

      One has to bear in mind claims companies will make nothing if there is no claim so they lose out there but as with car accidents the companies who specialise in these claims tend to do very well on such claims and solicitors charge circa £200 per hour not bad money for just checking out data and its normally production line stuff low paid staff do all the donkeywork the lawyers just checking things now and again to ensure its all being done correctly.

      As fort the woman who received a few pence bet she suffered a massive let down.

    • ant

      “It will be interesting if this latest slew of PPI claims feed into the car industry. An no, I didn’t buy a car ”

      Short poem

      You didn’t buy a car,
      Did you buy a mars bar?

      Or did you drown your sorrows in the bar?

  3. Shaun
    Long enjoyed your unbiased logical approach, using just economic facts.
    The area that I find it odd that there is not more analysis is the increase in domestic employment rates & wages compared too / balanced against the drop in migrant labour entering the UK under freedom of movement and undercutting the local labour rates & living conditions

    • Hi Clive

      Thank you and welcome to my corner of the web. As to your question then I am afraid the economics establishment decided a while ago that what you are describing cannot be true. Thus reality ( which does pose that question) will find itself subverted to theory one more time. It is rather like my Phillips Curve point in the post above. Loads of examples do not kill the beast but apparently it is back after one better number.

  4. Hi Shaun – a little late to the party on this one, but could you clarify if increases in employers pension contributions are included in the wage increase calculations from the ONS?

    Jimbob

    • Hi jimbob

      I had to look it up but I think not although it is not entirely clear.

      “AWE is calculated from returns to the Monthly Wages and Salaries Survey (MWSS), a survey of 9,000 businesses covering 13.8 million employees. The MWSS captures information about each company’s total wage bill and the number of people paid in the reference period. Having been weighted to the Great Britain level, the total wage bill is then divided by the number of employees to give average weekly earnings.”

      I would say that because it represents a future benefit it does not count.

      • Thanks for checking. I was curious as if it was included, it would have represented an artificial increase in wages due to effectively additional taxation from the government arising from the new pension laws

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