A reality check on hopes that Britain’s pay squeeze has ended

Published on Jobs, Skills and Pay

Last week’s data on average weekly earnings (AWE) showed that annual pay growth in September had overtaken CPI inflation for the first time since 2009, sparking cautious (and not-so-cautious) proclamations that the six-year squeeze on earnings might finally have come to an end. Today comes a sobering reality check. According to the ONS’ Annual Survey of Hours and Earnings data – a source which is thought to better reflect wage levels than AWE, but one which is less timely – average (mean) weekly pay in the year to April 2014 fell by 1.8% after accounting for CPI.

This is perhaps not so surprising when we remember that the AWE measure suggested that total pay had fallen by 2.3% in April. The recovery in the AWE measure recorded since April might provide some cause for optimism that, bleak though the latest ASHE data is, it simply harks back to the final throes of the pay squeeze era. We’ve since turned the corner and things will surely look better next year. Yet there are a number of reasons why today’s data remains of concern.

First, the April AWE measure looked so bad because pay had previously spiked in April 2013. This flowed from the decision by some higher earners to carry payments over into the 2013-14 tax years in order to take advantage of the reduction in the additional rate of tax from 50p to 45p. April 2014 was always going to look bad by comparison. But we didn’t see the same sort of spike in the ASHE data for April 2013 – though it’s not clear why. So today’s 2014 data marks a fall not on a 2013 spike, but on a figure that was itself still falling year-on-year.

Secondly, the ASHE data lets us look at wage experiences across the earnings distribution. It shows that the terrible pay performance in 2014 was not a product of especially sharp declines in pay among high earners who reported artificially high pay in April 2013. Instead, as the chart below shows, falls were relatively steady across much of the distribution, with those at the 20th, 30th and 40th percentiles recording the biggest pay falls (the very lowest earners appear to have been protected by a real-terms cut in the minimum wage that was not as large as the cuts faced by others). Inequality in wage growth – absent for most of the downturn – may just have made a comeback in 2014.

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Thirdly, and perhaps more fundamentally, both the April figures and last week’s data for September point to a common problem – namely very weak nominal pay growth. Today’s ASHE figures suggest that average weekly pay fell by 0.1% in cash terms between April 2013 and April 2014 – only the second time this measure has gone backwards since the dataset was first captured in 1997. Look again at the real-terms growth reported last week and we notice that nominal pay growth still stood at a paltry 1.3%. Yes, nominal pay had picked up a little, but the main reason wage growth turned positive was because inflation had fallen significantly below target (to 1.2%). And in fact, the 1.3% figure relates to regular pay, if we look at total pay instead – which is the better comparison with the ASHE data because it includes bonuses – nominal pay growth was just 1%, implying that the pay squeeze continues.

Inflation is expected to continue falling over the coming months, meaning that real pay might be expected to grow even if such low levels of nominal pay growth are maintained. And projections from the Bank of England and others suggest that they will pick up – pointing to a period in which real earnings might rebound relatively strongly. Such a rebound depends on a number of factors coming together – by no means guaranteed. Even if such an outcome does arise, real-wage growth of 2% in a world of sub 1% inflation is likely to feel very different from the pre-crisis norm when inflation hovered around 2% and nominal pay growth averaged 4%.

And don’t forget, the road back is a long one. Median weekly pay across all employees was 11.1% lower in 2014 than in 2008 (measured against CPI inflation), meaning it was back to its level at the turn of the century. Among men, the fall is 13.1% (it is 9.6% among women, meaning that the gender pay gap has continued to narrow – but for all the wrong reasons). For younger workers (22-29) the cumulative fall stands at 13.8%. It’s likely to be the end of the decade before wages return to their pre-crisis peaks.

Pay growth may well be about to return. Today’s release includes details of strong pay growth among those who have been in their job for longer than a year, reflecting the recent importance of changes in the shape of the workforce on the overall level of wages. As our recent work has shown, such compositional changes provided a boost to pay for much of the downturn, but have dragged over the last 12 months following a surge in employment among younger, lower-skilled and less experienced workers. As these factors drop out of the year-on-year comparisons so the pay growth data should pick up. Nevertheless, after falling so far and for so long, the reverberations of the squeeze of recent years are set to resonate for some time to come.