Pay's up - but don't put out the bunting just yet Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. According to my well-thumbed Collins French-English dictionary, déjà vu literally translates as ‘already seen’. Mostly, however, we think of it as the sensation of having lived through something before, which can be disconcerting. I say this because, to quote the great American baseball player Yogi Berra, no relation to the bear of similar name, I am getting déjà vu all over again. The source of it is close to home for all of us; pay. The latest official figures brought news that regular pay in July was 3.1% up on a year earlier, its strongest rate of growth for
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Pay's up - but don't put out the bunting just yet
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
According to my well-thumbed Collins French-English dictionary, déjà vu literally translates as ‘already seen’. Mostly, however, we think of it as the sensation of having lived through something before, which can be disconcerting.
I say this because, to quote the great American baseball player Yogi Berra, no relation to the bear of similar name, I am getting déjà vu all over again. The source of it is close to home for all of us; pay.
The latest official figures brought news that regular pay in July was 3.1% up on a year earlier, its strongest rate of growth for three years. Private sector pay growth (3.2%) was at a three-year high, while the public sector (3%) has not seen stronger growth in earnings for six years.
For those of who you like these things, if regular pay growth had picked up to 3.2% across the whole economy, it would have been the strongest since December 2008.
The picture for total pay, including bonuses, was slightly less remarkable. It was also up by 3.1% in July but this was only the strongest since last December. Even so, it was better than expected.
So why the sense of déjà vu? It is because this is not the first time in recent years that pay growth has appeared to be breaking higher, only to subsequently disappoint. Just when the Phillips curve appears to be working – the lower the level of unemployment the higher the pressure for pay rises – it has gone on the blink again.
Is it for real this time, or another false dawn? Are we about to see a sustained acceleration in pay growth, to the relief of beleaguered retailers and the government, if not the firms forced to cough up?
Let me first set out the case for the prosecution. One argument for faster pay growth, plainly, takes up straight to the Phillips curve. The unemployment rate did not fall further in the latest three months but at 4% it remained at its lowest since the winter of 1974-5. Back then, by the way, annual pay growth was about 25%. And, while the rate of unemployment may not have changed this summer, its level fell by 55,000 in the May-July period.
Those who think something is definitely stirring, such as George Buckley, an economist with Nomura, the Japanese investment bank, point to other ways of measuring the acceleration in pay growth as slack in the labour market is used up. Annualised private sector pay growth in the past six months is 3.4%, he points out.
There is another factor, highlighted by the Bank of England in the minutes of its latest meeting, the outcome of which – an unsurprising interest-rate hold – was announced on Thursday. One of the factors holding pay down in recent years is that people have been more reluctant to change jobs than in normal times.
This ‘better the devil you know’ sentiment may have been good for job security but not for pay. The best way of getting a pay rise tends to be to change jobs.
On this, however, the Bank noted that things are changing. “Job-to-job flows,” it said, rose in the second quarter and were “close to their pre-crisis average and well above levels seen in recent years”. People have been more willing to take a risk on a job change and their pay may be benefiting as a result.
All good stuff, but what about the case for the defence, and the argument that we should not get too excited about pay yet? The most enduring argument of the past decade has been that the job market is not as tight as it looks, even with apparently very low unemployment.
Slack in the post-crisis period might be better measured by the nearly 1m part-time workers who would like a full-time job, together with the 425,000 temporary workers who cannot find a permanent job, or the indeterminate proportion of the 4.8m self-employed people, “gig” economy or not, who would prefer to be in employment.
The latest figures, indeed, did not give the impression of a red-hot labour market. Employment growth slowed to a crawl, rising by just 3,000 over three months, some of which may be explained by a reduction in labour supply from the rest of the European Union. Unemployment fell but there was a rise of 108,000 in the so-called economically inactive.
The pay numbers themselves also offer reasons for caution. While the latest monthly figures were strong, they benefited from the comparison with a particularly weak July last year and thus showed what looks like a quirky jump. Using the three-monthly comparison favoured by the statisticians, total pay growth of 2.6% on a year earlier only took us back to the growth rate of a couple of months ago and was lower that at the start of the year. For regular pay the three-monthly figure of 2.9% was last seen in the early spring. I am not saying “nothing to see here” but there is less in the acceleration than meets the eye.
There is, moreover, no strong sign that much is changing on the ground. NHS staff are enjoying their share of the 70th birthday present with a pay rise, and some of that is reflected in the figures for stronger public sector pay. There is not sign, however, of much of a general relaxation. Only a few days ago Cressida Dick, the Metropolitan police commissioner described as a “punch on the nose” the fact that police had been awarded a 2% pay rise rather than the recommended 3%.
The latest data on pay awards across the economy, from XpertHR, showed that they dropped back to 2.3% over the summer, from 2.5% earlier in the year. Pay awards fit the story of what we used to call a pay norm of 2% or so, which most people are happy with, rather than anything much higher.
Then of course there is the uncertainty of the next few months. The majority of formal pay settlements are agreed in the early months of the year, as are most pay reviews. It could be that by early next year the fog will have lifted and a clear Brexit path established. At the moment, however, you would say that that is less likely than the alternative of continued uncertainty. In this environment, caution over pay rises will persist.
News of higher pay is the kind of thing to lift the spirits of put-upon households and troubled retailers. But it is far too early for them, or anybody else, to put out the bunting.