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.

Japan continues to see wages stagnate

A feature of the credit crunch era has been weak wage growth and in particular weak real wage growth. More than a few countries such as my own the UK have not seen real wages fully recover to their pre credit crunch peaks. If we look back we see that the assumptions of the Ivory Towers ( in the UK for example wage growth of ~4% and real wage growth of ~2%) were already built on rather shaky foundations as real wage growth was already fading. Sadly the Ivory Towers learned little as I note last week at its Inflation Report press conference the Bank of England was criticised for consistently over-estimating wage growth. Or if you like another Forward Guidance failure.

However the real front line for the malaise in real wage growth is to be found by looking east to Nihon or the land of the rising sun where there has been trouble for some time. The problem was described by the World Economic Forum back in June 2013.

According to a survey by Reuters in February, 85% of responding firms said they would maintain current wage levels or make further cuts this year. Japanese companies typically resort to wage cuts for workers with so-called life-long employment contracts rather than lay-offs to adjust for cyclical downturns or due to tougher price competition from abroad. As a result, the unemployment rate has been low, but wages continue to decline. Due to the strong protection of permanent workers, firms typically have redundant permanent workers, thus have no incentive to increase their wages.

People sometimes ask me about full employment but Japan has in some areas gone further and had a type of over employment. In the time I was working there people were employed to count numbers crossing walkways or to open lift doors. A nice service but not especially necessary. However there is another feature of the Japanese labour market which keeps wages low.

Worse yet, only a third of the Japanese labour force (typically older and male labour) has a permanent contract. The majority of the young and female labour force is working under a temporary contract with much lower salary and practically no job security, which creates a kind of caste system in the labour market.

Enter Abenomics

This was supposed to be something of a cure-all for the Japanese economy with higher inflation and GDP (Gross Domestic Product) growth boost wages. also the third arrow of Abenomics was supposed to be reforms to help deal with the labour market issues above. Regular readers will be aware that I doubted both routes from the beginning as Prime Minister Abe was an “insider” who in his previous term was guilty of what is called pork barrel politics. However places like Bloomberg and the Financial Times supported the new programme of Abenomics and have regularly produced headlines describing success even when the numbers do not describe that at all.

2016 was a better year

NHK News takes up the case.

Japan’s labor ministry says average monthly wages adjusted for inflation rose in 2016, the first increase in 5 years.

The data is the preliminary result of a nationwide survey.

The ministry says the average monthly wage, including bonuses and overtime pay, was about 315 thousand yen, roughly 2,800 dollars. That’s up 0.7 percent in real terms from the previous year.

The good news is that there was a rise albeit a small one. However there are several issues raised as we are 4 years or so into Abenomics and this is way below what was promised. There is also a clear fundamental flaw as wages were supposed to rise with higher inflation but instead we see this reported.

Lower consumer prices pushed the adjusted figure higher.

So exactly the opposite of what was intended! If we move to The Mainichi we see little sign of the promised reforms either.

The average monthly pay of full-time workers in 2016 increased 0.8 percent to 411,788 yen from the preceding year, while that of part-time workers was down 0.1 percent to 97,670 yen.

December

If we move to the data for the month of December we see an all too familiar pattern. From Reuters.

Japanese wages, on an annual inflation-adjusted basis, dropped in December for the first time in a year, government data showed on Monday, a setback for hopes that consumer spending can increase and help lift economic growth.

The decline was caused by a rise in the cost of living, which outpaced nominal pay hikes, officials said. Higher prices for items such as fresh vegetables have increased living costs.

Higher inflation driving real wages lower is somewhat awkward for Abenomics which plans for exactly the reverse! If we look at the numbers cash earnings were 0.1% higher than a year before so inflation did not have to be much to push real wages lower. The worst sector to be in was the utility one where wages fell by 2.8% and the best was the real estate sector where they rose 4.5%. This meant that real wages fell by 0.4% on a year before and December with its high level bonus payments meaning it is the peak month ( around 60% higher than the average) is the worst month for this too happen.

Prospects

Earlier I quoted from a wages survey from 2013 so how is that going now? From Reuters.

Nearly two-thirds of Japanese companies do not plan to hike their workers’ wages this year, a Reuters poll showed, a blow to Prime Minister Shinzo Abe’s campaign for higher pay to spur a recovery and a way to end two decades of deflation.

The Reuters Corporate Survey, conducted Jan. 4-17, also found that most wage gains over the past four years since Abe came to power have been minimal and that nearly one-quarter of firms have implemented none at all.

Indeed Reuters appears to have been reading me.

On the other hand, prices may increase as oil prices rebound, which will curb (inflation-adjusted) real wages and hurt households’ purchasing power,

Also this next bit makes grim reading for those in the media who have proclaimed success on the wage front in Japan.

The Corporate Survey also asked companies how much they have raised wages since 2012. Some 23 percent said they have kept overall wages unchanged, while 51 percent have raised them around 0.5-1.5 percent. Only 26 percent said wages had risen by about 2 percent or more.

Comment

Back on the 15th of May 2015 I pointed out my fears in this area.

If we look at real wages I note the number of references in rising wages in Governor Kuroda’s speech. Except real wages fell by 2.6% in the year to March which means that they have fallen in every month of the two years of QQE now.

There has been an improvement on an annual basis which you can see if I give you the real wages data, 2013 -0.9%,2014 -2.8%,2015 -0.9% and 2016 +0.7%. So it is possible to argue that there is an improving trend. Except the elephant in that particular room is that it is lower inflation which has driven that ads opposed to the higher inflation Abenomics is so keen on. Also you can see that the overall number for real wages is lower.

If we look back wages rose in Japan at the end of the last century but have fallen this and it is hard to avoid the thought that the numbers below have impacted here. From The Economist.

The number of 20- to 29-year-olds in Japan has crashed from 18.3m to 12.8m since 2000, according to the World Bank. By 2040 there might be only 10.5m of them. Cities like Tama are therefore playing not a zero-sum game but a negative-sum game, frantically chasing an ever-diminishing number of young adults and children.

It also looks at the Okatuma region.

Children have become so scarce that the large primary school is only about one-quarter full. Residents in their 70s outnumber children under ten by more than five to one

The Bank of Japan can do all the “yield curve management” it likes but even if it ends up buying the Japanese government bond market how will that improve the real economy and in particular wages? Still it could be worse you could be one of the footballers invited to play at the Fukushima TEPCO plant.

welcomes professional soccer players at Daiichi to show progress made at the power station

 

UK real wage growth is even worse if you factor in house price growth

After yesterday’s higher inflation data and it was across the board as the annual rate of hose price inflation increased as well we move to the labour market today and in particular wages. Unless we see a surge in wage growth in the UK real wages are set to fade and then go into decline this year but before we get to them we have another source of comparison. Something which immediately has us on alert as it will cheer the Bank of England.

Wealth

This is what the Bank of England would call this from the Financial Times today.

The value of all the homes in the UK has reached a record £6.8tn, nearly one-and-a-half times the value of all the companies on the London Stock Exchange. A rapid rise in the value of the housing stock, which has increased by £1.5tn in the past three years, has created an unprecedented store of wealth for Londoners, over-50s and landlords, according to an analysis by Savills, the estate agency group.

It will be slapping itself on the back for the success of its Funding for (Mortgage) Lending Scheme or FLS which officially was supposed to boost bank lending to smaller businesses but of course was in reality to subsidise bank property lending.  The FLS does not get much publicity now but there is still some £61 billion of it around as of the last quarterly update, since when some has no doubt been rolled into the new Term Funding Scheme. Oh yes there is always a new bank subsidy scheme on the cards.

Whilst the Bank of England will continue to like the next bit those with any sort of independent mind will start to think “hang on”.

As well as rising sharply in nominal terms, housing wealth has grown in relation to the size of the economy: it was equivalent to 1.6 times Britain’s gross domestic product in 2001, rising to 3.3 times in 2007 and 3.7 times in 2016.

Only on Tuesday night Governor Carney was lauded for his work on “distributional issues” but here is a case of something he and the Bank of England have contributed to which is a transfer from first time buyers and those climbing the property ladder to those who own property.

If we move to wages then the UK average is still around 6% below the previous peak which poses a question immediately for the wealth gains claimed above. Indeed last November the Institute for Fiscal Studies suggested this.

Britons face more than a decade of lost wage growth and will earn no more by 2021 than they did in 2008 ( Financial Times).

There has been an enormous divergence here where claimed housing wealth has soared whilst real wages have in fact fallen. That is not healthy especially as the main age group which has gained has benefited in other areas as well.

The income of those aged 60 and over was 11 per cent higher in 2014 than in 2007. In contrast, the income of households aged 22-30 in 2014 was still 7 per cent below its 2007 level. The average income of households aged 31-59 was the same in 2014 as in 2007.

As an aside some of the property numbers are really rather extraordinary.

The value of homes in London and south-east England has topped £3tn for the first time, meaning almost half the total is accounted for by a quarter of UK dwellings. This concentration of wealth is most evident in the richest London boroughs, Westminster and Kensington & Chelsea, where housing stock adds up to £232bn, more than all of the homes in Wales, according to analysis based on official data.

Another shift was something I noted yesterday which was the fall in house prices seen in Northern Ireland where wealth under this measure has declined sharply. Has that influenced its political problems? However you look at it there has been a regional switch with London and the South-East gaining. Also there is a worrying sign for UK cricketer Jimmy Anderson or the “Burnley Lara”.

Likewise, homes in Burnley, Lancashire, declined in value over five years, even as most of the UK market boomed.

One area where care is needed with these wealth numbers is that a marginal price ( the last sale for example) is used to value a whole stock which is unrealistic.Before I move on there is another distributional effect at play although the effect here is on incomes rather than wages as Paul Lewis reminds us.

As inflation rises to 1.6%/2.5% the policy of freezing working age benefits for four years becomes less and less sustainable.

Before we move on the Resolution Foundation has provided us with a chart of the nominal as in not adjusted for inflation figures.

 

Today’s Data

The crucial number showed a welcome sign of improvement.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.8% including bonuses and by 2.7% excluding bonuses compared with a year earlier……average total pay (including bonuses) for employees in Great Britain was £509 per week before tax and other deductions from pay, up from £495 per week for a year earlier

So a pick-up on the period before of 0.2% and at we retain some real wage growth which helps to explain the persistently strong retail sales data.

Comparing the 3 months to November 2016 with the same period in 2015, real AWE (total pay) grew by 1.8%, which was 0.1 percentage points larger than the growth seen in the 3 months to October. Nominal AWE (total pay) grew by 2.8% in the 3 months to November 2016, while the CPI increased by 1.2% in the year to November.

There is obviously some rounding in the numbers above and the inflation measure used is around 1% lower than the RPI these days.

If we move to the detail we see that average earning also rose by 2.8% annually in the year to the month of November alone and the areas driving it were construction (5%) and wholesale and retail (4.2%). Sadly the construction numbers look like they might be fading as they were 8.8% but the UK overall has just seen tow strong months with 2.9% overall wage growth in October being followed by 2.8% in November.

Employment and Unemployment

The quantity numbers continue their strong trend.

There were 31.80 million people in work, little changed compared with June to August 2016 but 294,000 more than for a year earlier…….There were 1.60 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for June to August 2016 and 81,000 fewer than for a year earlier.

The next number might be good or bad.

Total hours worked per week were 1.02 billion for September to November 2016. This was 1.2 million fewer than for June to August 2016 but 4.8 million more than for a year earlier.

The fall may be troubling but as the economy grew over this period ( if the signals we have are accurate) might represent an improvement in productivity.

It is nice that the claimant count fell in December “10,100 fewer than for November 2016” but I am unsure as to what that really tells us.

Comment

We have seen today some good news which is a pick-up in the UK official wages data. This will help real wages although sadly seems likely to be small relative to the inflation rise which is on its way. However if we widen our definition of real wages we see that the credit crunch era has brought quite a problem. This is that the claimed “wealth effects” from much higher house prices make them look ever higher in real terms as we return to the argument as to how much of the rise is economic growth and how much inflation.

My view is that much of this is inflationary and that once we allow for this then we start to wonder how much of an economic recovery we have seen in reality as opposed to the official pronouncements.

Also we have my regular monthly reminder that the wages figures exclude the self-employed and indeed smaller businesses.

Of UK wages, robotics and the gig economy

Today we advance on the UK wages data knowing that the pick-up in inflation we have been expecting is now coming to fruition. Albeit that today’s wages numbers only bring us up to date of the 3 months to October so we will be experiencing lagged data. Yesterday also reminded us of two things. Firstly how poor the economics profession has become at predicting inflation and that there is invariably an “Early Wire” of them in currency markets as some find themselves being more equal than others. Interestingly the economist Douglas McWilliams has put up a defence this morning.

….and most people think Cebr forecasts are usually right!

Our Doug seems to be a passionate supporter of one of the new forms of measuring GDP or Gross Domestic Product if this from Business Insider in March 2015 is any guide.

Douglas McWilliams, one of the world’s leading economists and a former advisor to UK Chancellor George Osborne and London Mayor Boris Johnson, was allegedly filmed smoking crack in a drugs den in Britain’s capital city.

He is also is facing trial for allegedly assaulting a prostitute on New Year’s Eve after she refused to take crack with him.

Sometimes you really could not make it up.

Meanwhile we see two things from the world of football. Firstly that price inflation is rampant and secondly that capital controls in China may not being doing so well. From BBC Sport.

Chelsea have reportedly accepted a bid of £60m for Oscar – he’ll leave for China in January.

The war on cash

This seems to have developed a new front in what might be called the South China Territories but has been immortalised in song as a land down under. From news.com.au

Speaking to ABC radio on Wednesday, Revenue and Financial Services Minister Kelly O’Dwyer flagged a review of the $100 note and cash payments over certain limits as the government looks to recoup billions in unpaid tax……“The whole point of this crackdown on the black economy is to make sure we close down any potential loopholes,” she said. Despite the broad use of electronic forms of payment, Ms O’Dwyer warned there are three times as many $100 notes in circulation than $5 notes.

What could go wrong? Well there are echoes of the disaster that demonetisation has become in India here.

There are currently 300 million $100 notes in circulation, and 92 per cent of all currency by value is in $50 and $100 notes.

Also there is the issue that this is also presented as a boost to banks and savers will then have to put more money with them as another move favours the “precious”. Oh and I would wager that the unofficial economy in Australia is a lot more than 1.5% of GDP.

Robotics

As we look to the future of wages growth it is hard not to wonder about the effect of improved robots on the situation. Just over a year ago Bank of England Chief Economist Andy Haldane offered this view.

For the UK, that would suggest up to 15 million jobs could be at risk of automation.  In the US, the corresponding figure would be 80 million jobs.

For some jobs this will depress wages although of course it may well boost others. There is a cautionary note which is that Andy has a very poor forecasting record which I am sure any respectable AI style robot could improve. The Resolution Foundation has also considered possible benefits from this general trend and theme.

Given high employment, terrible productivity performance and low investment, the UK arguably needs more automation, not less.

Today’s UK numbers

There was in fact some good news from the wages series.

Between August to October 2015 and August to October 2016, in nominal terms, total pay increased by 2.5%, slightly higher than the growth rate between July to September 2015 and July to September 2016 (2.4%).

So both a higher number and an upwards past revision. This was driven by the fact that wages rose by 2.8% in the month of October alone driven by an 8.6% rise in construction wages and a 4.4% rise in the wholesale sector ( retail and hotels). This meant that real pay would have risen in October as inflation also dipped slightly but the more general pattern is stationary.

Over the same 3-month period, real AWE (regular pay) grew by 1.7%, the same as the growth seen in the 3 months to September

Of course the wages numbers look much worse if we use the RPI or Retail Price Index as our inflation measure where we find ourselves knocking around 1% off the numbers above.

The next number can be seen in two ways.

Total hours worked per week were 1.01 billion for August to October 2016. This was 5.0 million fewer than for May to July 2016 but 7.3 million more than for a year earlier.

Some are reporting this as a post EU vote hiring freeze. It does show a possible change in our previously booming employment position but of course with GDP growing does in fact show a rise in likely productivity.

Whilst the unemployment rate remained at 4.8% there was in fact a small but welcome fall in unemployment.

There were 1.62 million unemployed people (people not in work but seeking and available to work), 16,000 fewer than for May to July 2016 and 103,000 fewer than for a year earlier.

However the claimant count or registered unemployment did rise by 2400 in November which may be a sign of something but this number is not only experimental it comes from a series which no-one has any great faith in.

Comment

There is much to consider in all of this and the undercut to another pretty good set of UK labour market is those who are excluded such as the self-employed who do not appear in the average earnings numbers. Some insight into conditions in the gig industry have been provided by Izzy from FT Alphaville as shown below.

The interviewer stressed I would be earning a standard rate of £7 per hour plus a £1 per delivery bonus for every order completed, but frequently emphasised that I would probably be taking home as much as £12 per hour because of surge incentives. …………In total I did five shifts, and earned an average of £8.10 per hour. The London living wage is supposed to be £9.75, according to London authorities. The national required living wage is £7.20 but goes to £7.50 in April next year.

There were various other issues such as compulsory weekend shifts and Izzy’s view that to get surge wages you had to be available 24/7. As to efficiency the app drained her phone battery quickly and there was also this.

Outside of the office lay heaps of bikes atop of each other, most of them cast loosely aside the building. There appeared to be absolutely nowhere to secure a bike properly — which I thought strange for a cycling courier service.

Actually this resonated with me but from a different industry as my brother has worked as a driving instructor on as franchise basis where companies produce earnings forecasts which are somewhere between misleading and outright fantasy in practice. Both have a type of fixed cost as Deliveroo requires the rider to but branded corporate clothing and driving instructors have a period to which they must commit to pay the weekly franchise fee.

If we return to the official picture then the Resolution Foundation has provided some perspective with this.

 

 

 

 

 

As the prospect of further UK real wage growth fades what about the self-employed?

Today brings us to the labour market report for the UK. Over the period of the credit crunch the quantity numbers have performed very well and scare stories from some economists of 3 or 4 million unemployed have been replaced by record employment and falling unemployment. However we are now in a phase where we are much less sure that unemployment will continue to fall. Also the quality number or wage growth has been somewhere between poor and not so good. In spite of an economy recovery which began in 2013 wage growth has only managed about half of what we would have expected pre credit crunch.We can put this into numbers as those in the Ivory Tower of the Office for Budget Responsibility predicted this back in 2010.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

This reminds us that the long-term trend here has been for wage growth to decline. The improvement in the real wages picture which has been extremely welcome in boosting both consumption and living-standards mostly came about because consumer inflation fell to historically low levels.

What about the self-employed?

Regular readers will be aware that the official average earnings numbers exclude the self-employed and in fact the smaller businesses. This has led to concerns expressed both by me and in the comments section that there would at least be sections of those self-employed with a poorer record for wages growth (and perhaps falls) than stated in the official statistics. This has become an increasingly important issue as the number of people self-employed has grown.

Yesterday the Resolution Foundation released some new research on this subject and it did attract attention for this.

Remarkably, this data suggests that typical earnings for the self-employed were lower in 2014-15 than in 1994-95, twenty years earlier. …….. From their peak (2006-07) to trough (2013-14), typical self-employment earnings fell by 32% – £100 per week.

Ouch! So self-employed earnings have had their own private economic depression. How does this compare with the overall picture?

A fall of 15% compares to a rise of 14% in typical employee earnings

As with ordinary earnings it found that some of this was compositional as in caused by the fact that the newly self-employed were less likely to employ others and worked fewer hours leading to this conclusion.

This analysis suggests that, over the 2001-02 to 2014-15 period as a whole, compositional effects were responsible for over 60% of the fall in average earnings (and there may be other compositional factors that we have not accounted for here), with the remainder being a purer earnings effect.

That still leaves a large gap with the official average earnings series to explain. Also the grim truth is that the credit crunch era did bring outright falls in income for the self-employed.

However, between 2008-09 and 2013-14, while there was still a negative compositional drag, the large majority (86%) of the substantial fall over this period is not explained by compositional effects.

More than a few questions are posed here and some of the answers are hard to find. Some may have been happy to switch from employment to self-employment and others may have been happy to work fewer hours, but it is hard to avoid the few that some were forced to and others were involved in underemployment. As the numbers grow this becomes a bigger issue.

the number of self-employed has grown from 3.3m (11.9% of the workforce) in 2001-02 to 4.5m (14.7%) in 2014-15

There was a flicker of better news at the end which suggested that the economic recovery had finally fed through to the self-employed.

More recently, compositional changes played a positive role and together with strong growth within groups meant a rise in average income in 2014-15

So we hope that this trend continued but we do not do so. The analysis above relies on the Family Resources Survey which has considerable lags in the data it provides.

Back in the day (2008) this was all reviewed by Martin Weale latterly of the Bank of England and recently appointed a Fellow of the ONS. In all his Ivory Tower pages of maths the little people slipped through his net.

Note that firms employing fewer than 20 employees are not surveyed.

I doubt it seemed important to him at the time….

Today’s numbers

Let us open with what remains good news.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.5%, the joint highest since comparable records began in 1971…….There were 23.23 million people working full-time, 362,000 more than for a year earlier. There were 8.58 million people working part-time, 198,000 more than for a year earlier.

Thus we see that more people are employed and the growth these days is not as heavily biased to part-time work as it was. Wages growth nudged higher than we were told last month too.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.3% both including and excluding bonuses compared with a year earlier.

In the meantime so of last month’s data has been revised higher too.

Not so good news

This comes from a nudge higher in unemployment.

There were 1.66 million unemployed people (people not in work but seeking and available to work), 10,000 more than for March to May 2016 but 118,000 fewer than for a year earlier.

Actually this was a type of sexism if you note this.

There were 765,000 unemployed women, 23,000 more than for March to May 2016 but 37,000 fewer than for a year earlier.

I would welcome readers thoughts on why male unemployment fell but women’s rose?

Real Wages

There is an issue here as in spite of the fact that in the latest 3 months wage growth was 2.3% we know that inflation is on the rise. Indeed if we look at the monthly series wage growth in August was 2%. That seems to have been driven by a big swing in bonuses payments from up 8% to -6% but nonetheless we face a position where our real wage growth fades a fair bit if this continues into September and meets an official CPI inflation rate of 1%.

If you look at Retail Price Inflation (2%) then we are now facing the distinct possibility that real wage growth has either ended or faded to a low-level.

Comment

Whilst the situation remains strong overall there is an obvious concern with the rise in unemployment which whilst small overall will matter to the 10,000 concerned. Also there is the issue that we are seeing unemployment rise for women which may be a quirk but may not. But for real wages it would appear that the words of the latest Nobel winning poet are appropriate.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is
Rapidly fadin’
And the first one now
Will later be last
For the times they are a-changin’.

Will that end the apparent improvement for the self-employed?

 

 

 

 

Are the principles of the Elephant Curve affecting UK wage growth?

We advance today on a new set of labour market data for the UK which will inform us more about the state of the post EU leave vote economy. However the last few days have seen the beginnings of a shift in the labour market landscape. It was only on the 8th of this month I looked at the numbers for Zero Hours Contracts but since then we have seen signs of ch-ch-changes. From the Trades Union Congress or TUC.

The TUC has welcomed the decision of pub chain JD Wetherspoon to become the latest major UK employer to offer permanent hours to staff on zero-hours contracts.

The details are below.

Founder and chairman of JD Wetherspoon, Tim Martin, said a trial earlier this year to offer guaranteed hours have proved so successful, it was being rolled out UK wide.

Mr Martin said: “We’ve already offered guaranteed hour contracts to a percentage of our workforce and they’ll all be offered one in the next three months.”

This is significant as Weatherspoons is/was a large user of ZHCs.

The pub chain employs 24,000 people on zero-hour contracts.

This is I believe more than Sports Direct. This means that we may be seeing something of a trend.

Wetherspoon joins Sport Direct and McDonald’s in offering staff on casual contracts the opportunity to become permanent employees.

In general I think that this is a good thing. However care is needed because back in the day when I was an impecunious student I worked in a pub a couple of evenings a week to earn some money and whilst the work was regular there was no permanent contract in fact only a verbal one.

Some Perspective on Wages

The UK ONS published some research in its monthly review which showed that the UK labour market is very tight.

As discussed in a previous edition of the Economic Review, there is evidence to suggest the UK may have experienced a significant tightening of labour market conditions in recent years.

Why do they think this?

In mid-2015, the unemployment-to-vacancy ratio dipped below its 2002 to 2007 average in mid-2015 for the first time since mid-2008, reflecting both falling unemployment numbers and rising vacancies for several years. It has more recently reached 2.2 in the 3 months to June 2016 – its lowest level since November to January 2005.

This matters as they consider the 2002 to 07 period to be stable on this front and of course it was the boom time. Just to give an idea of the credit crunch impact it rose to 5.7.

The ONS lose the plot a little here so let me help out by borrowing a chart used by Graeme Wearden of the Guardian.

If you look at the period since last summer you see that the rate of wage growth has been falling. It peaked back then at 3.1% on a rolling 3 month basis or 3.4% on a monthly basis yet in a tighter labour market we now have this.

Between May to July 2015 and May to July 2016, in nominal terms, regular pay increased by 2.1%, lower than the growth rate between April to June 2015 and April to June 2016 (2.3%).

Wage growth has slowed as another Ivory Tower leans like it is in Pisa and then falls. Indeed if we look back to what now seems like a golden period which is 2002 to 2007 then let me tell you what wage growth was then. It opened at 3.8% dipped for a while but saw peaks of 5.3% in February 2005, 5.5% in April 2006 and then the peak of 6.6% in February 2007. Actually on a single month basis February 2007 reached 7.6%. Could it be much more different?

This is one of the reasons that places like the Bank of England and the Office for Budget Responsibility have got the credit crunch so wrong and produced economic forecasts which would be laughable if the subject matter was not so serious. They assumed the wages world described above would return whereas it has not.

Why might this be?

There has been a lot of debate over the “Elephant Curve” of Lakner and Milanovic. Or more formally the Lakner-Milanovic global growth incidence curve

elephantcurve140916

Now this has been argued to show that the poorest are locked out of economic growth then that the middle classes in places like China are booming. Next though we get the crux of the matter for us in the UK and indeed west because it shows a poor run and indeed some decline in parts for the bit covering the developed world’s middle-class. Then, surprise surprise, a booming global elite!

Now this is contentious to say the least as it is too easy to blame globalisation for everything and this from Torsten Bell of the Resolution Foundation is true as well.

To fetishise globalisation as the cause of all our ills is to let too many domestic policy makers off the hook for decisions they make, for problems they leave unaddressed and for the lower incomes working people experience as a result.

If we move away from the exact numbers as there are issues around compositional changes over time for example and move to the principle I think that the Elephant Curve is definitely onto something. Maybe not everything but something….

Today’s data

The UK employment situation remains pretty stunning in the circumstances.

There were 31.77 million people in work, 174,000 more than for February to April 2016 and 559,000 more than for a year earlier.

It gave the UK another joint highest employment rate and led to this as well.

There were 1.63 million unemployed people (people not in work but seeking and available to work), 39,000 fewer than for February to April 2016, 190,000 fewer than for a year earlier and the lowest since March to May 2008.

So far so good then although there was a rise in the claimant count.

For August 2016 there were 771,000 people claiming unemployment related benefits. This was:2,400 more than for July 2016 and 21,300 fewer than for a year earlier.

So a rise although care is needed as this is an experimental statistic because of the shambles over Universal Credit or as it is officially put.

estimates are still being developed by the Department for Work and Pensions.

For further perspective this is the series critiqued back in 1983 in Yes Minister by Jim Hacker.

Real Wages

There is good news that these continue to rise.

Between May to July 2015 and May to July 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.7% and total pay increased by 1.9%.

However the picture is by no means as happy if we use the Retail Price Index measure of inflation which is now just under 2% in its main variants. As we expect it to rise we are likely to soon see an end to real wage growth using it unless we can manage an increase in wages. Using the official measure will take longer because it is invariably lower but in time that seems on the cards as well. That is sad because as the Resolution Foundation point out we have yet to get back to the previous peak.

Wkly earnings unchanged between Jun-July, suggests no imm. referendum effect. They remain £21 below pre-crisis peak

Comment

We have seen today that the UK labour market continues to look very strong on a quantity level albeit with a rise in the ( unreliable) claimant count. As we look to other measures we get a more worrying picture as wages are the dog that has not barked. The economic future will be grim if real wages do turn lower without reaching their previous peak. I think that the Elephant Curve has flaws but also has a point as we have to face up to the fact that the economic world has clearly changed and that maybe we should be pleased to have wage growth both real and nominal at all. If we lost it would that provide another verse for the song Turning Japanese?

 

The UK labour market gives a different view on construction output

Today sees the latest labour market data for the UK and as well as employment and unemployment numbers we get the most crucial metric of these times which is the average earnings data. However having noted that the BBC Breakfast business section informing everyone that we will get post Brexit data the picture is in fact more complex than that as the main numbers only cover June so we will only get a flicker, maybe. That is unless you wish to base your analysis on the long discredited claimant count numbers. I still remember the Yes Minister episode from 1983 which cast doubt on them. So what we will really get is a much clearer idea of the effect on the uncertainty caused by the run-up to the referendum.

What has been the impact of migrants on the UK labour market?

The Resolution Foundation has looked at the impact and decided this.

The increase in inward migration experienced over the course of the past decade coincided with a stagnation and then a fall in earnings, which some have linked.

They give us an idea of the change that took place.

It is now estimated that there are approximately 8.1 million migrants (or non-UK born individuals) living in the UK, up from 3.5 million in 1993

We learn something about wages as well.

On pay, migrants from the countries that joined the EU in 2004 earn around £8.30 an hour, compared to approximately £11.10 for natives. Workers from the EU ‘original’ countries earn the most, while the earnings of native workers and workers from the rest of the world are similar.

However they conclude this.

The result of our version of this approach shows that, in aggregate, migrants have had no effect on the wages or employment prospects of natives. However it is wrong to say that migration has had no effect at all on native wages because this overall picture masks the fact that across the distribution of natives of different educational levels or in different occupations there has been some effect, albeit very small.

Later though we get something which is rather awkward for that conclusion. The numbers below cover the 15 occupation sectors where we see the most migrants present. The highest percentage is in food manufacture and production where 25.5% of the workers are migrants.

Pay in these sectors averages £9.32 an hour, significantly below average native wages of £11.09. We know that lots of workers in these sectors are migrants from the EU ‘accession’ countries, whose average earnings are £8.33, £2.76 below that of natives

Sadly there is a fair bit of politicking in the report which as ever I have avoided. However I am l not convinced by the argument that you can be sure of a result by running an Ivory Tower style regression analysis. If you have a large increase in labour supply as it looks like food production has seen and then relatively low wages I am unclear as to how you can argue that effect is “small”. I would suspect that someone who had worked in that area might not think so. Care if needed though because there are quite a few areas that are much less affected and it is also true that this did not cause lower wages on its own but looks like something which gave them a nudge lower.

Today’s numbers

Firstly we saw a rather familiar trend in employment continue.

There were 31.75 million people in work, 172,000 more than for January to March 2016 and 606,000 more than for a year earlier…..The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.5%, the highest since comparable records began in 1971.

On the other side of that coin we also saw this.

There were 1.64 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for January to March 2016, 207,000 fewer than for a year earlier and the lowest since March to May 2008.

So the quantity situation continues on a positive path and the number below hints at a good quarter for productivity as measured by output per hour as we recall that GDP growth was 0.6%.

 ( Hours worked were ) 1.2 million (0.1%) more compared with January to March 2016

If we move to the wages numbers they were slightly better as well.

Between April to June 2015 and April to June 2016, in nominal terms, total pay increased by 2.4%, little changed compared with the growth rate between March to May 2015 and March to May 2016 (2.3%).

Moving to real pay we see this.

Between April to June 2015 and April to June 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.9% and total pay increased by 2.1%.

Thus we learn that the picture running up to the Brexit referendum looks of the Goldilocks variety with employment rising, unemployment falling, real wages rising and probably productivity improving as well.

As to the one post Brexit number we got here it is.

For July 2016 there were 763,600 people claiming unemployment related benefits. This was: 8,600 fewer than for June 2016 (the first monthly fall since February 2016) and 27,100 fewer than for a year earlier.

So a fall except I stick with my point from earlier in the article that whilst we learn something from this care is needed. However it is hard not to have a wry smile at this from the Guardian an hour or so before.

Economists polled by Reuters are expecting a 9,500 jump in claims last month, following a rise of 400 in June.

Single month analysis

We can drill down further to single months but this also comes with a dose of caution. What we see on this basis is that wages growth was unchanged in June at 2.2% whereas employment did this 74.2% (April) then quite a surge to 74.7% in May then 74.6% in June. So it was better than the previous quarterly high but was a dip on May.

June did see a rise in the unemployment rate to 5.1% so maybe some pre Brexit uncertainty but it did come with the employment numbers described above.

Comment

Let me open with something which highlights the fact that we cannot take official numbers as gospel. Remember the lower construction output data? From @NobleFrancis

Construction employment in April-June 2016 was 2.0% higher than in January-March & 5.4% higher than a year ago.

I have made the point that these are inconsistent and they are. Here are the replies I got from him and another source of data in this area.

Lag indicator? Mix of work – building employs > infrastructure? But I don’t disagree with you  ( @brickonomics)

it would still be odd to see rising employment despite lags. ( @NobleFrancis )

So we know less than we sometimes think. We can say that the run up to the referendum was not “the end of the world as we know it” but we have a mixture of signals here. We could see upwards revisions to construction output which changes the narrative there and the numbers today are overall good. But the silver lining does come with a cloud which is the hint of more unemployment in June.

As to the Bank of England Agents they expect flat employment over the next 6 months and this for wages.

Growth in total labour costs had edged higher in manufacturing, but was little changed overall, with the majority of pay awards remaining in a range of 1%–3%.