UK Real Wage growth has gone negative if you use the RPI

Today we arrive at the latest data on the UK labour market and in particular on what is the number one statistic which is wage growth. From this we can look at real or inflation adjusted wages and get an idea of the likely trajectory for consumer spending in the UK economy. What we do know is that inflation is beginning a march higher and is now in an area where real wage growth has faded substantially if you use the official CPI measure at 1.8% or now gone if you use the RPI at 2.6%. If we look at the February report from the Bank of England Agents then actual wage growth may be fading as well.

Indeed, the average pay settlement was expected to ease in 2017 to 2.2% from 2.7% in 2016 (Chart C), with the number of pay awards between 3% and 4% expected to fall significantly. Settlements were expected to moderate in all sectors, with the largest decline anticipated in consumer services,

Inflation up and wage growth down is not auspicious for real wages.

Executive pay

An awkward topic for the Financial Times as it considers both its readership and its advertisers. But there is an obvious issue here.

The average blue-chip CEO in the UK earned £4.3m in 2015. The average national wage was £28,000.

The size of the pay packets indicate greed and there are examples of how that is affecting how companies are run.

LTIPs pay out handsomely if certain targets are hit. But they have proved open to abuse. CEOs are suspected of prioritising share repurchases or debt-fuelled takeovers — with little regard for long-term value creation — to manipulate earnings per share, a common LTIP target. (LTIP is Long Term Incentive Plan).

There have been more than a few criticisms of this sort of thing.

There is also a compelling macroeconomic argument for change, put forward by Andrew Smithers and others, which posits that poorly designed bonus schemes have held back investment and productivity growth.

Pensioners

Much has been going on with pensioner incomes in the credit crunch era as the Resolution Foundation reports.

median pensioner income has been playing catch up with non-pensioner incomes for many years and, from 2011-12 onwards, the living standards of the typical pensioner after housing costs have actually been higher than those of the typical non-pensioner. Having been £70 a week lower than typical working-age incomes in 2001-02, typical pensioner households now have incomes that are £20 a week higher than their working-age counterparts.

Quite a shift isn’t it? Actually some care is needed as we see here.

Instead, each year new individuals reach pension age (usually with higher incomes than the average existing pensioner) while others of course die (usually with lower than average incomes).

So we have a compositional issue where we have a pensioner body which seems to be not doing so well but the median income of the overall number is being pulled higher as younger pensioners are better off. A clear if extreme example would be people retiring like Baron King of Lothbury with his circa £8 million pension pot from the Bank of England or Professor Sir Charlie Bean. Of course they also get new jobs from the establishment they served. In fact they are examples of a growing trend albeit they are of course highly rewarded.

In fact, almost one in five pensioner families now have at least one person in work.

There are clearly things to welcome here. The waves of better off pensioners are helping with the issue of pensioner poverty although of course some may welcome continuing working but some may have to. Also home owning pensioners will have benefited in paper wealth terms at least from the rise in house prices.

However looking ahead there appears to be much less bright prospects for millennials.

With millennials struggling not just in the labour market but also in relation to asset building – particularly in terms of housing – there is a growing sense that the current generation of young adults is facing a new set of living standards challenges which require fresh thinking if the generational progress that once seemed inevitable is to be restarted.

A consequence of the monetary easing and QE (Quantitative Easing) of the Bank of England of which there will be another £775 million today. Only yesterday we learned that house prices were rising at an annual rate of 7.2% putting them ever further out of reach of most millennials leaving us to mull this.

However, this generation-on-generation progress appears to have stalled in the 21st Century.

Today’s data

The quantity numbers remain very good as we see here.

There were 31.84 million people in work, 37,000 more than for July to September 2016 and 302,000 more than for a year earlier……For the latest time period, October to December 2016, the employment rate for people was 74.6%, the highest since comparable records began in 1971.

So the record on people in work is a success reinforced by the fact that we are seeing more gains in full-time than part-time work at least according to the official data. This has helped the situation with regards to unemployment.

There were 1.60 million unemployed people (people not in work but seeking and available to work), little changed compared with July to September 2016 but 97,000 fewer than for a year earlier……..The unemployment rate was 4.8%, down from 5.1% for a year earlier. It has not been lower since July to September 2005.

Actually if we move to the single month rate for December we see that the unemployment rate fell to 4.6% which bodes well going forwards.

What about wages?

Between October to December 2015 and October to December 2016, in nominal terms, total pay increased by 2.6%, lower than the growth rate between September to November 2015 and September to November 2016 (2.8%).

So solid for these times anyway but the sort of dip forecast by the Bank of England Agents.

Here is the official view of the real wages position.

Comparing the 3 months to December 2016 with the same period in 2015, real AWE (total pay) grew by 1.4%, which was 0.5 percentage points smaller than the growth seen in the 3 months to November.

Care is needed with this 3 month average in a period of rising inflation as it is already out of date. We know that inflation is higher now and of course if we look for inflation indices which do not ignore owner occupied hosuing costs we know they give a higher inflation reading. For example inflation as measured by the Retail Prices Index is usually around 1% higher in annual terms than the official measure.

If we look at the single month of December whilst it was good for unemployment it was not good for wages growth as it fell to 1.9%. So real wage growth was 0.3% on the official measure or -0.6% if you use the RPI.

Comment

The drumbeat of the UK economic recovery such as it is has been the rise in employment where there has been the sort of performance that economists have long called for. In a nutshell we wanted to be more like the German model which of course has its ironies in a post EU leave vote world. Now that we have that we are worried about a Germanic style level of wage increases. Oh well!

However looking forwards for 2017 we will see real wages fall and the truth is they already are if we allow for the leads and lags in the statistics. This poses a problem when we look at what real wages have been doing in the credit crunch era.

If we use RPI the situation is of course even worse than that.