9th July 2014
Official figures may underestimate by more than 20 per cent how far earnings have fallen since the economic downturn but are also likely to understate their recovery in years to come because they exclude the UK’s growing self-employed workforce. The new research by the Resolution Foundation, an independent think-tank, calls for a fresh approach to measuring earnings that would include the self-employed to deal with this problem.
A new ‘all worker’ earnings measure would incorporate the earnings of the UK’s rapidly growing number of 4.5 million self-employed, who make up one in seven of the workforce but are not included in any of the official earnings figures. Current measures therefore offer only a partial picture of earnings, yet the data they provide is a crucial economic indicator for policy decisions, including the setting of interest rates by the Bank’s Monetary Policy Committee.
The Resolution Foundation research assesses the earnings of the self-employed between the pre-recession wages peak of 2008 and 2012 by extracting data from an official survey of family incomes covering that period. This suggests that in the earlier years of the downturn, to 2012, the average weekly earnings of all workers (including the self-employed) fell by around 10 per cent rather than by the 8 per cent recorded for employees.
To get a more up to date picture of what has happened to the earnings of the self-employed (and therefore an ‘all workers’ measure) up to 2014, RF uses three official datasets to create an estimate for the whole of the downturn. This suggests that between 2008 and 2014 earnings for all workers fell by between roughly 11.9 per cent and 12.6 per cent rather than the 10 per cent recorded for employees alone: corresponding to an overall decline in earnings which is between 20 per cent and 30 per cent deeper than the prevailing view.
Applying this analysis to the most recent official earnings data (for the period to April 2014) suggests that average worker earned around £469 a week – at least £10 lower than the official figure of £479.
Underlying the Resolution Foundation research is a pattern in which the earnings of the self-employed fell much more sharply than those of employees between 2009 and 2012, the years following the initial downturn, but have since broadly tracked them. At other periods the inclusion of the self-employed in official measures would give us a more positive view of earnings growth; for example, from 2001 to 2003.
The research also suggests that existing wage measures risk understating the earnings recovery in the years ahead as there are grounds to expect that the earnings of the self-employed will bounce back more rapidly than those of employees given the extent to which hours and rates fell in the difficult years. If even a small minority of the lowest-earning self-employed moved into employee jobs, this would drive up average self-employed earnings. It is also the case that the self-employed are well represented in sectors, like construction, where prospects tend to rise and fall in line with the economic cycle.
The report argues that a number of factors underlie the sharper fall in the earnings of the self-employed and the increased impact they have on overall worker earnings. Their numbers have surged over recent years - by 700,000 since 2008, far outstripping net growth in employees which has been around 260,000 over the same period. At the same time the average hours worked have fallen among the self-employed (but not among employees) reducing their weekly earnings. Changes in the self-employed workforce - more women and more workers from lower-paid sectors and age groups - are also likely to have had an impact. It’s also the case that the self-employed have greater flexibility to respond to lower demand by making ever deeper cuts to their earnings.
The Resolution Foundation argues it is vital that a more accurate and comprehensive ‘all-workers’ measure is developed which would significantly improve understanding of what is happening to earnings across the workforce, and the think-tank sets out options for how this could be done. This would complement existing earnings measures. The Resolution Foundation highlight that calculations in the new research paper are only estimates; making the best use they can of the existing data to indicate what a more complete measure might show and to highlight some of the shortcomings in existing earnings figures.
Laura Gardiner, senior analyst at the Resolution Foundation, and author of the paper, said:
“Important economic and policy decisions are informed by the official data on wages yet, because it does not capture the one in seven workers who are self-employed, it gives a picture that’s incomplete at best and sometimes misleading. What we know about earnings is central to our understanding of the recovery and the timing of interest rate rises so it’s crucial that we equip ourselves with the best possible wage measure.
“Our analysis suggests that at different times we may have both overstated and understated, often significantly, how much workers have been earning. It should be possible to construct a more comprehensive and timely way of measuring wages across the workforce and we hope to provoke a much-needed debate about how best to do this.”
Gavin Kelly, chief executive of the Resolution Foundation, said:
“Our lop-sided approach to the self-employed – celebrating them in the jobs figures, excluding them from the earnings data – is in urgent need of change. If we didn’t count the self-employed in our jobs data we’d have no idea what was really going on in our labour market. Yet when it comes to earnings all official measures overlook the plight of the UK’s 4.5 million self-employed – that’s equivalent to almost the entire population of Wales and Northern Ireland. This partial approach means we have an inaccurate picture of what has really been happening to earnings in our economy.”
'All accounted for: the case for an ‘all-worker’ earnings measure' will be published online by the Resolution Foundation on Thursday 10 July.
1. The two main measures of earnings currently used are the Average Weekly Earnings (AWE) data, published monthly, and the Annual Survey of Hours and Earnings (ASHE), both published by the Office for National Statistics.
2. The Resolution Foundation paper takes the average earnings of all workers (including the self-employed) captured in the Family Resources Survey, which is published annually but presents data more than two years old, and compares this to average earnings for employees in the same data. Taking the ratio between these two, the analysis applies it to the monthly AWE to suggest how the earnings of all workers performed up to 2012.
3. The analysis then takes the indications we have from three other datasets to tentatively suggest what the 2014 picture might look like:
a. Assuming that average self-employed earnings have grown at the same rate as average employee earnings in the most recent couple of years, we simply adjust our ‘all worker’ average earnings figure to reflect the fact that the self-employed, who are lower paid, have continued to grow as a share of workers according to the Labour Force Survey.
b. Using the Bank of England NMG survey, we compare the total pre-tax income of all working households to that of households in which the respondent is self-employed.
c. We compare, on a per-worker basis, the ‘wages and salaries of employees’ and ‘mixed income’ (which broadly reflects the income of the self-employed) components of GDP in the National Accounts.