How is the UK’s pay recovery being shared?

After 12 straight months of real-terms growth, the question on pay has shifted from ‘when will it return?’ to ‘how strong and sustainable is it’? Until now, we’ve been unable to dig any deeper to consider the additional question of ‘who’s gaining?’ but we’ll get some early clues from official data out this Wednesday. Could we see a bounce-back in the wages of younger workers who were hit hardest by the downturn? Might we see the return of rising earnings inequality? And how evenly is the recovery being felt across the country?

Following the eventual ending of six-year pay squeeze in the final months of 2014, we have since had six months of above-trend ‘catch-up’. That’s owed much to the collapse in inflation over the same period – with CPI bumping along at roughly zero since February – and there are signs of this rebound starting to ease, as the chart below shows. With inflation expected to head back towards its 2 per cent target relatively rapidly in 2016, progress towards closing the £43 peak-to-trough pay gap that had opened up by 2014 (and which still stands at £29 today) looks likely to be gradual.

While there is clearly a long way to go, pay growth does at least look to have turned the corner. The question for the coming years must therefore be: how is the recovery being shared? It’s a question that the monthly Average Weekly Earnings release doesn’t shed much light on. Timely though it is, the breakdowns it offers are limited.

Much better is the Annual Survey of Hours and Earnings which, as its name suggests, only comes out once a year. The good news is that the 2015 update is due out on Wednesday. While we should always exercise caution when looking at single-year changes, it will give us a first glimpse of variations across different groups of workers in the strength of the pay growth that took place in the 12 months to April.

First and foremost, we’ll be looking for differences across the earnings distribution. The pay squeeze was felt remarkably evenly in this regard, as reflected in the next chart. Earnings at the bottom were relatively protected by a minimum wage that was declining in real-terms but less sharply than was the case elsewhere in the distribution. Earnings at the top fell a little more strongly, though the story here is complicated by the apparent movement of pay into different financial years by some high earners in order to minimise their exposure to the additional rate of income tax.

While earnings inequality may have been the dog that didn’t bark over the course of the squeeze, differences were much more marked in relation to age, sex, region and occupation – as the final chart details.

Typical (median) pay fell almost twice as much among men as among women for instance. Economies as diverse as London, the North West and Northern Ireland suffered much sharper reductions than the average – contrasting particularly with Wales, the North East and Scotland. It was a similarly mixed bag in terms of occupations, with higher paid professional workers suffering similar cumulative falls to lower paid carers and leisure workers; while reductions were smaller – and of a similar magnitude – across lower paid elementary staff and higher paid managers and senior officers.

But the clearest divergence of experience occurred in relation to age. Median pay fell by 10.9 per cent among workers aged 22-29 over the period, compared with just 2.5 per cent among those in their 50s and an increase of 1.3 per cent for workers aged 60 and over. As a result of these trends – and longer-term shifts that pre-dated the downturn – the typical hourly wage of a 22-29 year-old was lower in April 2014 than at any time since 1998. Across all employees, pay was back to its 2002 level.

After such a sustained fall in pay, the recovery of 2015 has of course proved very welcome. The combination of rising employment, low inflation and low interest rates have helped to boost living standards and raise consumer confidence. With some if not all of these favourable tailwinds set to weaken in 2016, sustaining the feel-good factor is likely to prove more challenging. Central to this challenge will be the need to ensure that growth is shared across society.

Wednesday’s data will be far from definitive on this, but it will provide the first indication of the extent to the solid pay recovery of 2015 served to start the long journey back towards pre-crisis earnings for those hit hardest by the squeeze.