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Ian Brinkley
Economic Advisor
Ian Brinkley

Wage growth may be stronger then we think - for some.

Authors: Ian Brinkley

17 April 2014

The most recent labour market and inflation statistics have taken on a huge symbolic importance because, it is said, real wage growth has resumed for the first time since 2010. This has been hailed as proof positive of the success of the Coalition’s economic policies by some, while others contend that the cost of living crisis is still alive and well. Meanwhile, City experts try and second guess when the Bank might be tempted into an interest rate rise.

Sticklers for accuracy would point out that we are not quite comparing like with like, as the figures for average earnings growth refer to the three month average to February compared with the same three months a year ago, while the change in the consumer price index compares the single month of March with the same month a year ago. Even so the underlying trends are clear: consumer price inflation is edging down and wage growth is edging up.

Taking the figures at face value, the difference is hardly earth-shattering. Average earnings including bonuses went up by 1.7 per cent and consumer price s went up by 1.6 per cent for the periods set out above.

However, figures for total pay may mislead on the underlying story. The overall figure includes bonuses, which most people do not receive. Moreover, bonus figures themselves can be distorted by what is happening to pay in a relatively small number of large financial institutions – and sometimes by what is happening to bonus payments to a relatively small group of employees within these institutions. Regular pay probably gives a more representative view of what is going on across most of the labour market.

At first glance, these statistics take the gloss off the real wage story – regular earnings went up by 1.4 per cent, still below the rate of inflation. But averages can be deceptive. We have average earnings statistics for some broad sectors of the economy and these show very different trends.

Firstly, a significant part of the private sector – manufacturing, construction, distribution and hospitality - has seen average earnings growth of between 2.8 and 3.8 per cent. Secondly, the financial and business services sector has seen negative average wage growth (down -0.4 per cent) a persistent feature of the past twelve months. The dominance of finance may however mask what is happening to pay in the non-financial business service sector. Thirdly, the public sector excluding the publicly controlled banks has seen regular pay increase by about 1.5 per cent, reflecting the implementation of pay policy. So at the very least we can say that a significant part of the private sector is seeing real wage increases.

We should also identify a small but very important group – the 1 million plus employees covered by the National Minimum Wage. The NMW has been increasing faster than average earnings, and is scheduled to rise by 3 per cent this year – so those at the bottom end of the labour market will have seen a return to real wage growth before many other employees.

We have another measure of earnings, the Annual Survey of Hours and Earnings (ASHE), although it is not as timely. This showed average weekly earnings growing by 2.6 per cent in the year to April 2013, and it is likely that when figures become available will show somewhat higher growth in the year to April 2014. This is also more consistent with pay settlement data. However, analysis of ASHE by Income Data Services (IDS) shows a divide has opened up between those in continuous employment of at least a year and those newly recruited. Median earnings for full time workers in continuous employment where growing at between 3.5 and 4 per cent in 2013 in sharp contrast to new starters. Those already in work will benefit from progression as well as cost of living increases, but given plentiful applicants for many posts it may also be that some are being offered at lower wage rates than in the past.

The best guess is that underlying average earnings growth is stronger than suggested by the headline figures using the weekly average earnings measure, and many people in the labour market will have already seen real wage growth. For others however facing very low or no wage rise this year, the cost of living crisis remains a daily reality. Both optimists and pessimists have evidence to support their position. But if wage growth is stronger than we think, then the weakness of recent productivity figures is even more of a cause of concern.