Pay

Deconstructing the wages data

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It might not hold quite the same broad appeal as the start of the World Cup, but today’s labour market statistics release from the ONS has been hotly anticipated nonetheless, given the centrality of this data to our understanding of the economic recovery and the timing of interest rate increases.

The overwhelmingly positive news we’ve had on employment and unemployment in previous months may even have pushed one or two members of the Bank of England’s Monetary Policy Committee to vote in favour of a rate rise at last week’s meeting (we’ll find out when the minutes are published next week).

But today’s numbers are likely to have confused the picture rather than validated any hawkish temptations, despite showing the strongest quarterly employment rise since records began.

The principal factor in this is wages. Earnings are the black spot on the otherwise-positive labour market story, having been consistently outstripped by inflation in almost every month for six years.

Although wage growth remained well below where we’d expect it to be at this point in a recovery, the picture brightened somewhat when pay (including bonuses) caught up with CPI inflation in February, and then moved just ahead in March. This was celebrated but in reality probably marked only the end of the beginning, given how far away from a rebound we are.

Inflation ticked back up slightly in April, meaning that annual earnings growth in today’s figures needed to clear a bar of 1.8% to represent a real-terms increase. In fact the figure was just 0.7%.

This poor performance of total pay in particular shouldn’t be a reason to panic that the recovery has stalled. This is because the baseline for the annual growth comparison includes April 2013, when a number of bonuses were paid later than usual in order to take advantage of the reduction in the additional tax rate from 50p to 45p. Although the preferred wage growth measure smooths this out by averaging over three months, the spike was so large that its impact has endured given no apparent clustering of bonus payments in April this year.

Indeed we calculate that, in order for total pay to show 1.8% annual growth and therefore just break even, average earnings would have had to increase by £16 (3.4%) between March and April. In fact, they grew by £2 (0.4%). By way of context, consider that the average month-on-month increase over the previous 12 months was 0.2%, and even in the pre-crisis years the figure rarely topped 3%.

This doesn’t get us away from the fact that today’s wage growth figures are disappointing overall – the measure that excludes bonuses was also far behind inflation at 0.9%. But it does highlight that wages (and in particular bonuses) needed to do an awful lot between March and April to get us to a positive place in terms of total pay.

Even taking account of last year’s tax change-driven spike confusing the wage data, it still doesn’t tell us everything we would want to know. This is because it doesn’t capture the earnings of the self-employed, who now account for one in seven workers. We know from less timely data that self-employed earnings fell sharply during the early stages of the downturn, but we have no real way of knowing what’s happened over the last couple of years and they may have bounced back from this dip.

However, recent Resolution Foundation research found that part-time working and underemployment among the self-employed have grown substantially in recent years, so there’s every reason to expect that their weekly earnings may not have wholly recovered.

The self-employed have accounted for the lion’s share of employment growth since the recession. The fact that our measure of wages in the economy doesn’t capture their experience looks increasingly problematic.

Given last year’s bonus shenanigans, Monetary Policy Committee members may not be too concerned that wages in today’s data don’t offer what little hope they have done in recent months. The main take away for us and them is the need to look at our labour market data cautiously and in the round, as our barometer of earnings in the economy is both volatile and imperfect.

This blog originally appeared on the Public Finance website

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