Why 2014 hasn’t been the year of the pay rise

Published on Wages & Income

A downward shift in the mix of occupations across the workforce towards lower-paying cleaning and caring roles, along with a welcome return of younger and less experienced workers to the labour market, has prevented 2014 from being the year of the pay rise, as many economists predicted.

This analysis looks at the impact of changes in the characteristics of the labour market – the so-called ‘compositional effect’ – in order to establish why it has propped up wages throughout most of the downturn and why it is now acting as a drag on wages. The analysis looks at the impact of different factors – such as age, gender, sector, occupation, job tenure, skill level and migration status – to see how they have each affected wage growth.

  • Changes in the characteristics of the workforce over time – such as age, gender, sector, occupation, migrant status and skill level – tend to pull wage growth in different directions.
  • In most years since the downturn the overall effect of these changes in the composition of the workforce has been to prop up wages. Without them, Britain’s pay squeeze would have been a third deeper.
  • But in the first half of 2014, the overall ‘compositional effect’ has acted as a drag on wages.
  • The overall compositional effect has turned very modest wage growth of 0.01 per cent during the first half of 2014 into a 0.8 per cent fall in wages.
  • The main drags on wage growth so far this year have been the changing mix of occupations, with more caring and elementary occupations such as cleaning and fewer managerial roles, rising youth employment and new job starts.
  • The growth of full-time jobs, relative to part-time ones, has provided the biggest compositional boost to wage growth this year.