UK Real Wages have fallen by over 2% as the unemployment rate looks to have passed 5%

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On Friday we got some insight into the state of play of UK output and GDP in April with the caveats I pointed out at the time. This morning has seen us receive the official figures on employment, unemployment and wages which shed with caveats further insight as to where we are. So let us take a look at the opening line.

Early indicators for May 2020 suggest that the number of employees in the UK on payrolls is down over 600,000 compared with March 2020. The Claimant Count has continued to rise, enhancements to Universal Credit as part of the UK government’s response to the coronavirus (COVID-19) mean an increase in the number of people eligible.

There is quite a bit going on in that paragraph and it is hard to avoid a wry smile at us being directed towards the Claimant Count that was first regarded as unreliable and manipulated back in the 1980s in the Yes Minister TV series,

Sir Humphrey: We didn’t raise it to enable them to learn more! We raised it to keep teenagers off the job market and hold down the unemployment figures.

There is also an episode where Jim Hacker tells us nobody actually believes the unemployment ( Claimant Count) numbers. The tweek to the Universal Credit system is welcome in helping people in trouble but does also add more smoke to the view.

Employment

We can dig deeper and let us start with a little more precision.

Experimental data of the number of payroll employees using HM Revenue and Customs’ (HMRC’s) Pay As You Earn Real Time Information figures show a fall in payroll employees in recent months. Early estimates for May 2020 from PAYE RTI indicate that the number of payroll employees fell by 2.1% (612,000) compared with March 2020.

Let me give our statisticians credit for looking at other sources of data to glean more information. But in this area there is an elephant in the room and it is a large one.

The International Labour Organization (ILO) definition of employment includes those who worked in a job for at least one hour and those temporarily absent from a job.

Regular readers of my work will be aware of this issue but there is more.

Workers furloughed under the Coronavirus Job Retention Scheme (CJRS), or who are self-employed but temporarily not in work, have a reasonable expectation of returning to their jobs after a temporary period of absence. Therefore, they are classified as employed under the ILO definition.

As the estimate for them is of the order of 6 million we find that our employment fall estimate could be out by a factor of ten! Breaking it down there are all sorts of categories from those who will be unemployed as soon as the scheme ends to those who have been working as well ( sometimes for the same employer) who may be getting an official knock on the door. Also the numbers keep rising as HM Treasury has pointed out today.

By midnight on 14 June there’s been a total of: 9.1m jobs furloughed £20.8bn claimed in total

So the best guide we have comes from this in my opinion.

Between February to April 2019 and February to April 2020, total actual weekly hours worked in the UK decreased by 94.2 million, or 8.9%, to 959.9 million hours. A decrease of 91.2 million or 8.7% was also seen on the quarter.

In terms of a graph we have quite a lurch.

I doubt many of you will be surprised to learn this bit.

The “accommodation and food service activities” industrial sector saw the biggest fall in average actual hours; down 6.9 hours to 21.2 hours per week.

With hotels shut and restaurants doing take out at best I am in fact surprised the numbers have not fallen further.

Unemployment

The conventional measures are simply not cutting it.

For February to April 2020: the estimated UK unemployment rate for all people was 3.9%; 0.1 percentage points higher than a year earlier but unchanged on the previous quarter.

We can apply the methodology I used for Italy on the 3rd of this month where we discovered that a flaw  meant that we found what we would regard as unemployed in the inactivity data.

The single-month estimate for the economic inactivity rate, for people aged 16 to 64 years in the UK, for April 2020, was 20.9%, the highest since August 2019. This represents an increase of 0.7 percentage points on the previous month (March 2020) and a record increase of 0.8 percentage points compared with three months ago (January 2020).

If we count the extra inactivity as unemployed we have some 349,000 more or if you prefer an unemployment rate of 5.1%. This begins to bring the numbers closer to reality although we are not allowing for those who will be unemployed as soon as the furlough scheme ends. Also we are not allowing for the scale of underemployment revealed by the hours worked figures.

Wages and Real Wages

I doubt anyone is going to be too surprised by the fall here.

Estimated annual growth in average weekly earnings for employees in Great Britain in the three months to April 2020 was 1.0% for total pay (including bonuses) and 1.7% for regular pay (excluding bonuses).

It is quite a drop on what we had before.

Annual growth has slowed sharply for both total and regular pay compared with the period prior to introduction of the corona virus lockdown measures (December to February 2020), when it was 2.9%.

We see that bonuses plunged if we throw a veil over the double negative below.

The difference between the two measures is because of subdued bonuses, which fell by an average negative 6.8% (in nominal terms) in the three months February to April 2020.

If we look at April alone we get an even grimmer picture.

Single month growth in average weekly earnings for April 2020 was negative 0.9% for total pay and 0% for regular pay.

Already real wages were in trouble.

The 1.0% growth in total pay in February to April 2020 translates to a fall of negative 0.4% in real terms (that is, total pay grew slower than inflation); in comparison, regular pay grew in real terms, by 0.4%, the difference being driven by subdued bonuses in recent months.

So even using the woeful official measure driven by Imputed Rents we see a real wages decline of 1.8% in April. A much more realistic measure is of course the Retail Prices Index or RPI which shows a 2.4% fall for real wages in April.

On this subject there has been some research from my alma mater the LSE giving more power to the RPI’s elbow.

Aggregate month-to-month inflation was 2.4% in the first month of lockdown, a rate over 10 times higher than in preceding months.

I will look at this more when we come to the UK inflation data but it is another nail on the coffin for official claims and if I may be so bold a slap on the back for my arguments.

 

Comment

Today’s journey shows that with a little thought and application we can do better than the official data. Our estimate of the unemployment rate of 5.1% is more realistic than the official 3.9% although the weakness is an inability to allow for what must be underemployment on a grand scale. Shifting to real wages we fear that they may have fallen by over 3% in April as opposed to the official headline of a 0.4% fall. So we get closer to reality even when it is an unattractive one.

Staying with wages the numbers are being influenced by this.

Pay estimates are based on all employees on company payrolls, including those who have been furloughed under the Coronavirus Job Retention Scheme (CJRS).

Also Is it rude to point out that we are guided towards the monthly GDP statistics but told that the monthly wages ones ( a much longer running series) are less reliable?. Someone at the UK Statistics Authority needs to get a grip and preferably soon .

 

 

 

 

35 thoughts on “UK Real Wages have fallen by over 2% as the unemployment rate looks to have passed 5%”

  1. Hello Shaun,

    they’re just whistling past the grave yard of the UK economy…….

    I don’t think we will get any real idea until September and we all know predictions are difficult – especially about the future

    Petrol price was still 101.9 p /ltr so no recovery seen there then.

    Forbin

    Reply ↓

    • Many of the shops doing a phased opening which suggests if they don’t get a good footfall the rest wont open.

      There have already been tens of thousands of job cuts announced the last few weeks even before the furlough ends and these will feed into figures the next fww months.

      I agree will get a better picture in late Summer and Autumn.

      What was mentioned in the press a few days ago was the average Joe Public didn’t think the collapse in the UK economy would hut them and the media said that was “delusional” and sooner or later there will be a reality check.

      Yet equities bounce back yet again this morning probably on the back of interest rates going nowhere but down.

      Reply ↓

  2. Hello Shaun,

    It’s all Animal Farm legs isn’t it ?

    monthly GDP statistics – Good !
    monthly wage statistics – Bad !

    Forbin

    Reply ↓

    • Hi Forbin

      It would seem so. I do wonder from time to time why this point isn’t made in other places as it seems so obvious.? If anything the monthly wage data should be more reliable and yet it is hidden to some extent whilst the monthly GDP data is paraded.

      Reply ↓

      • They can always fiddle GDP with extra govt spending on unemployment benefits – take that out and it will look similar to wages!

        Reply ↓

  3. Wages fall, rents & house prices continue to rise, unemployment increases, poverty at record high, richest 10% bailed out and richer, lockdowns continue, street protests become common.
    What could possibly go wrong?
    Pass the cake, Marie Antoinette….

    Reply ↓

  4. Surreal times we live in when those with guaranteed wages from the govt be it in the public or private sector don’t want to go to work and do their jobs, yet us self employed are keen as mustard but there is next to nothing out there.

    I have no idea where work will come for the masses, as most wont be bothered to go shopping as its like a zombie apocalypse out there which creates job losses; the govt have rigged land prices for too long so there cant be a private sector building boom as not many can afford 300/400k for a 3 bed semi.

    Those with debt (ie those funding the pre CV19 economy) will look to pay it down instead of going out which creates more job losses.

    Oil prices are decimated and will continue for a while with the above happening; when there is a spike due to companies closing production it leads to inflation and even less spare money so less jobs.

    And road building, govt projects have huge lead times to get off the ground, (which is one reason why HS2 will continue).

    Still house prices are holding up so the economy must be alright!

    Reply ↓

    • Hi Arthur

      There are plenty of issues and in my locale many are still working from home, those that are working anyway. I think in the future more will do that which poses a question for public transport. Yes the same public transport that the establishment have been desperate to get us all on is now a version of persona non grata. On a personal level it will raise a wry smile if we finally get the 2 tube stations in Battersea and the demand has vanished.

      On a more positive level Battersea Park running track has opened again. Apart from being unclear why it was shut it will allow the personal trainers to start rebuilding their businesses.

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  5. Wage inflation was already petering out before the latest figures and with unemployment set to spike not many employers are going to want to increase pay, in fact as we have leaned BA wants to cut pay and by significant amounts.

    Oil may be down but other costs are going up due to extra costs in social distancing but I think its too early to say where inflation is going yet.

    However if costs of products fall and so do some other factors such as house prices will we enter deflation?

    Reply ↓

    • Hi Peter

      I agree that there are dangers ahead for pay and wages. I would counsel caution about the deflation meme as now the oil price drop is over the truth is that there are signs of inflation around. As to asset prices it is hard to say with the central banks so desperate to keep pumping then up/

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  6. Haven’t really seen any large house price falls recorded yet since estate agents cannot visit properties to value new business and prospective buyers cannot for the same reason, so my prediction of lump sum payments to first time buyers is somewhat delayed, but I’m pretty certain it’s coming. Probably next year now.

    BREXIT is also getting very difficult to predict, not sure whether there is going to be a last minute capitulation by Boris after talking tough up until now or he will follow through with his WTO threat and the central banks will then destroy us following our departure.

    Interesting times.

    Reply ↓

    • On YouTube, I keep getting ads for some stupidly priced flats in Hoxton (a part of East London no taxi driver would go to “at this time of night” back in the 80s. They are now coming with Stamp Duty paid, furniture, even mortgage holidays. The cracks are appearing, but housing is notoriously sticky and it took three years for the 89 bust to hit bottom in 92 on house prices.

      Reply ↓

      • 1989 prices were an absolute bargain in comparison to today.

        And the recession/job losses in the early 90s will be insignificant in comparison to whats coming.

        What a country we live in when ordinary people need the above to happen to afford a simple house.

        Reply ↓

  7. Danny Blanchflower doesn’t think ONS fit for purpose after release of todays data on unemployment:

    Reply ↓

      • He did argue about austerity however and the UK government are trying as much as possible to avoid mass unemployment.

        Quite how they do it is another matter.

        Reply ↓

        • He was one of the initial money printers, he doesn’t believe in personal responsibility hence his profligate viewpoint. He is one of the BoE’ers that was responsible for 2008 economic collapse, thus the current economic collapse which was inevitable once QE and ZIRP began.

          He believes in destroying a currency and eventually the financial system to avoid raising interest rates which enables the generation that caused the financial disaster to pass the problem onto their kids, grandchildren, great grandchildren and no doubt beyond.

          As its financially beneficial to him and his sponsors.

          Reply ↓

          • “He is one of the BoE’ers that was responsible for 2008 economic collapse, . . . “?
            The economic ‘collapse’ was due to the incompetence of US bankers?
            “As Axel Weber remarked, afterwards:
            I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions…. The industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them…” 1h. 10m. in.
            http://www.lse.ac.uk/lse-player?id=1856

            “The root problem of 2008 was a failure to recognize that the highly leveraged money center banks had used derivatives not to distribute subprime mortgage risk to the broad risk bearing capacity of the market as a whole but, rather, to concentrate it in themselves.”
            https://equitablegrowth.org/misdiagnosis-of-2008-and-the-fed-inflation-targeting-was-not-the-problem-an-unwillingness-to-vaporize-asset-values-was-not-the-problem/

  8. I’ve read about “unscrupulous” employers using the furlough scheme & then paying workers off when it comes to an end.
    I don’t generally have a positive attitude towards employers, but it strikes me that a compassionate employer, who does have to let staff go, may use the furlough scheme to help tide over employees facing redundancy, in order to give them a chance to find further employment.
    I think we’re in for a shock when this scheme does end, in terms of the numbers not returning to work.

    Reply ↓

  9. Great blog as usual, Shaun.
    You write regarding real wages: “[E]ven using the woeful official measure driven by Imputed Rents we see a real wages decline of 1.8% in April. A much more realistic measure is of course the Retail Prices Index or RPI which shows a 2.4% fall for real wages in April.” Here I would have to disagree with you. If one uses the CPI rather than the CPIH as a deflator one also gets a 1.8% decline. If one uses RPIJ as a deflator one gets 1.9%. (I am assuming the formula effect stays at 0.6%, its January 2020 level in calculating RPIJ.) Taking RPIJ as the standard there is almost no difference between its real wage inflation measures and those generated using CPI and CPIH as deflators. They are of course macroeconomic measures completely inappropriate to the task of deflating real wages and it is just an odd conjuncture, including a subdued housing market, that causes them to be giving about the same result. After January 2020, the difference between the RPI inflation measure is always 0.6 percentage points higher than the RPIJ inflation measure, by assumption.
    Although I don’t agree with the Eurostat ruling on the use of the Carli formula in HICPs, there is no question that the RPIJ comes closer to the true measure of inflation than the RPI. The only G20 countries that admit to using the Carli formula as their principal formula for calculating elementary aggregates are India, Indonesia and Saudi Arabia. (The People’s Republic of China, never the most transparent of nations, may also use it, but won’t admit to it.) There were once many more countries that used the Carli but they have all switched to something else, with the Jevons or Dutot formulas being most commonly used. You can’t really talk about a herd mentality since there is no agreement among G20 NSIs about what they want to use, but there certainly is about what they don’t want to use.
    I do find it strange that real wages are down so much in the UK, since they are up strongly in Canada, mostly due to higher paid workers keeping their jobs while lower paid workers lose theirs. Is the same thing not happening in the UK?

    Reply ↓

    • Hi Andrew and thank you

      Wages numbers are often affected by movement in the structure of wages as we saw recently in the US and in the earlier stages of the credit crunch. The UK is seeing some of that now which should tend to wash out. As to the Canadian data it may well be that factors like this have flattered the numbers.

      “Over March and April, the impact of the COVID-19 economic shutdown on employment was most immediate and severe on industries where working from home was less practical and on lower-wage workers. Employees who earned less than two-thirds of the 2019 annual median wage of $24.04/hour experienced a 38.1% drop in employment, compared with a decline of 12.7% for all other paid employees (not adjusted for seasonality).” ( Canada Statistics)

      By the time we aremore sure it will be too late 🙂

      I am glad you still feel that you can have a stab at calculating RPIJ. It should be part of the future debate and is a far better measure than the official CPIH which is only giving a similar answer by fluke.

      Reply ↓

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  12. It is the inevitable endgame that has been playing out over the last twelve years. Wages have dropped, because so many are down to 80% on furlough, but the employment figures stay up with the kind of fiddling we saw in the USA recently. The virus has forced employers to think about whether there are better days ahead – after all, they have held on for twelve years already, manybrelying on cheap borrowing. Most will not see any immediate advance, so the jobs will finally go. Plenty will go from the low-paid end too, especially as the hospitality sector has just threatened mass redundancies if the 2m rule isn’t relaxed.
    Bonuses have gone – ours basically vanished in April being off on full pay, but it is not an issue for me personally as I only qualified for a bit anyway. In contrast, today I filled out a company survey about working from home – I said I did more and saved £220 pcm on the train (it is about £3800 grossed up per annum). So, I think we will see more realignment there, which will provide more cash for consumption. You can see how much has been pent up by the queues outside Primark being reported yesterday, although that supports the idea that people are still cautious.
    However, this drop in real pay even on a fiddled inflation measure followed by a swift rise in unemployment is going to be the main feature. This will keep consumption demand down and despite all the ZIRP, people are going to minimise their borrowings.

    Reply ↓

    • Hi Dave

      I have heard more than a few people point out what they are saving in commuting costs ( and indeed time). Employers may not be bothered much with that but they may want to reduce costs and have staff doing more work from home. That will crater the finances of public transport which the establishment have been plugging for decades.

      One of the reasons I started using Boris Bikes was health and I do not mean from cycling necessarily but avoiding all the bugs on tubes and buses, Many more will be thinking that now.

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    • People shop “on their way home”, especially if they’re working late.
      More working from home will hit the take-away sector.
      In the UK that’s a big part of the High St.

      Reply ↓

  13. If we are paying people 80% of their salary to stay home, and they are not producing anything, it causes inflation (reduction of purchasing power).

    If we think real wages are low now, I would hate to see what they will look like in a year or two so when this cheap money makes it way into the real economy.

    UK is on a road to stagflation.

    Reply ↓

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