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As earnings soar, the only way for wage growth is down

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As earnings soar, the only way for wage growth is down Posted by David Smith at 09:00 AMCategory: My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission. What I am about to say today should reassure many people but disappoint others, which is perhaps inevitable when the theme is pay. It should reassure the many who saw the latest official figures showing an increase in average earnings of 8.8 per cent over the latest 12 months and who are wondering why they have not seen a pay rise of anything like that. It should also reassure the Bank of England and the Treasury, concerned about rising inflation and the echoes of wage-price spirals of the past, in the days when the UK really had a serious inflation

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As earnings soar, the only way for wage growth is down

Posted by David Smith at 09:00 AM
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My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.

What I am about to say today should reassure many people but disappoint others, which is perhaps inevitable when the theme is pay. It should reassure the many who saw the latest official figures showing an increase in average earnings of 8.8 per cent over the latest 12 months and who are wondering why they have not seen a pay rise of anything like that.

It should also reassure the Bank of England and the Treasury, concerned about rising inflation and the echoes of wage-price spirals of the past, in the days when the UK really had a serious inflation problem.

It will, however, disappoint those who think pay has entered a new era after the subdued increases of recent years. The backdrop to this is a long period of muted growth in real wages. Official figures show that average earnings adjusted for inflation rose by 27 per cent between early 2000 and early 2008, when the financial crisis hit. They have spent most of the time since below pre-crisis levels, and even now are barely above the pre-crisis peak.

Let me start with the reassurance, and then come on to the disappointment. Drilling down in the average earnings data showing total pay, including bonuses, up 8.8 per cent and regular pay by 7.2 per cent over a year, you might think that something extraordinary has been happening in recent months. It has not.

Average weekly total earnings in June were £576. That compares with £569 last December, so a rise over six months of 1.2 per cent, which is nothing to write home about. For regular pay, £541 a week on average in June, the increase over six months was 1.3 per cent.

What this tells us is that the big increase in pay occurred last year, because of the distortions caused by the pandemic. When, in April-June 2020, many millions of people went on to the coronavirus job retention scheme, and as furloughed workers received 80 per cent of normal pay – most employers did not top up to 100 per cent – measured pay slumped.

That slump, to an average of £528 for weekly earnings in the second quarter of last year, had some odd but predictable statistical consequences. It meant an inevitable recovery in wages as furlough numbers fell last year. It also meant, strangely, that the two-year increase in average earnings, 7 per cent, is below the one-year increase of nearly 9 per cent.

The one-year comparison, which includes the massive distortion because of what was happening a year earlier – the so-called base effect distortion – is not the only reason why the figures do not match most people’s experience. There is also a compositional effect in the numbers. In simple terms, people in higher paid jobs such as professional and business services could carry on through the restrictions of the past 18 months – working from home – while many others in lower paid jobs, for example in hospitality and non-essential retailing, could not.

The National Institute of Economic and Social Research, in its latest monthly wage monitor, predicts that by September measured growth in total pay will drop to just below 4 per cent. I would go further. Based on what has been happening over the past six months, average earnings growth is likely to be down to between 2 and 3 per cent by the end of the year, at a time when inflation, according to the Bank, will be heading up towards 4 per cent. The real age squeeze in not over.

There is other supporting evidence for the fact that less has changed than meets the eye. More timely figures from HMRC, based on pay as you earn data, suggests that the annual growth in wages and salaries is already past the peak and dropping quite sharply. From a peak of 9.7 per cent in April it was down to 6.4 per cent last month.

Data on pay awards from the specialist consultancy XpertHR shows that the median settlement averaged 2 per cent in the May-July period. This was the same as in the previous three quarters. There is perhaps greater variation in awards than usual but no sign of great strength.

What is genuinely happening to average earnings has implications for the political hot potato of the state pension triple lock, the government’s manifesto commitment to raising the basic state pension in line with inflation, average earnings or 2.5 per cent, whichever is higher.

Reports suggest that ministers intend breaking the commitment, because of the distorted average earnings figures, and will use the 2.5 per cent figure for increasing the pension next April. I agree that the distorted earning figure should not be used, but this seems an odd way to do it.

I am no great fan of the triple lock but 2.5 per cent is a leftover from the time when that was the inflation target, for a different inflation measure. If the government wanted to retain the spirit of the earnings link, it would raise pensions in line with underlying pay growth. The Office for National Statistics says it is between 3.5 and 4.9 per cent for regular pay.

That is the kind of tricky decision that people come into politics to make. Let me end by addressing the argument that we have moved into a new era for pay, and that roughly a million job vacancies and labour shortages, covering everything from chefs and waiters through to HGV drivers and, as I discovered the other day, dentists and dental nurses, are driving pay inexorably higher.

Vacancies are at record levels at present, but it is only fair to point out that over the years many hundreds of thousands of vacancies often co-existed with high unemployment. Workers are not homogeneous, and there is often a mismatch between job vacancies and the people available to fill them.

That mismatch is particularly high at the moment. Brexit is undoubtedly a contributory factor, with an unknown number of EU workers having left the UK with no plan to return. But their loss will not boost wages in general, any more than their presence depressed wages. Apart from a marginal effect at the very bottom of the pay scale, this was always a myth, as all the reliable evidence demonstrates.

Shortages as a result of Brexit, which were always inevitable, are having an impact, and not just on Nando’s chicken supplies. But the situation of HGV drivers being offered large sign-up bonuses is not typical.

Covid is also a factor. It has, for example, increased young people’s appetite to stay in education – and students are taking on fewer part-time jobs than they used to – while also persuading some older workers to call it a day. While the size of the cohort is growing, employment in the 65-plus age group is falling.

But this is not, to repeat, a new dawn for wages. Stronger wage growth requires a sustained increase in productivity and an across-the-board increase in the bargaining power of labour. In the absence of them we will look back on the apparent recent explosion in earnings for what it is; a statistical blip.

As earnings soar, the only way for wage growth is down
David Smith
David Smith is economics editor of The Sunday Times. His website is http://economicsuk.com . His latest book is Something Will Turn Up.

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