The Office for National Statistics Annual Survey of Hours and Earnings in the UK report for 2017 was released today. “How dull!” do I hear you say? You think you know what’s happened to earnings in the UK over the past decade? Think again…
The story we have heard tell in recent years has been as follows. Average wage growth has been consistently weak for the past decade, and around 2 per cent per year in recent years so any time inflation goes above the Bank of England’s target, wages start falling in inflation-adjusted terms. In fact, these real-terms cuts have been so pervasive that average wages are actually lower than they were before the 2008/09 Great Recession.
Sound familiar? Well, I’m going to tell you that that story is at best misleading and in practical terms plain wrong.
When average earnings are measured, what that means is: how much is earned by the person in the middle of the earnings threshold. Now some people will tell you that gives a false impression because those below average earnings have earned more through higher minimum wages or because taxes for the low-paid have been cut. There are some things to be said for that discussion, but in truth there’s nothing misleading per se about considering what happens to a person in the middle of the distribution as opposed to those at the top or bottom, provided that over time it’s a distribution of roughly the same people or the same sorts of people.
But suppose, instead, that what happened was as follows. Suppose that we had a set of people on different wages, with a person in the middle (person X) and the wages of person X (who is still in the middle of that original set) rose over time, but at the same time we added a lot of people with wages below person X’s original wage. Then what will happen to the “average wage”? What will happen is that, even though the average wage of the original set of people is rising, the average wage of the increased set might fall.
If someone tells you “average wages are falling”, would you expect that to mean that the average wages of a given set of people was falling? Or would you expect that to mean that, even though the average wages of the given set of people was rising, the set was being expanded all the time with extra people on lower wages? I think you would expect it to mean the former. And for the UK’s data, you would be wrong.
What has happened in the UK in the past decade is a labour market miracle. Unemployment has fallen and fallen and fallen again, even though growth has been steady at best. The way unemployment has dropped is by more and more people being added to the labour force at below the previous average wage. That is why average wages have fallen, not because wages for those already in the labour force have fallen.
That’s easy to say, but do the data back it up? Yes they do. The last ONS report, released today, contains data on the changes in average earnings for those in continuous employment — i.e. the change in salaries, over the past year, for those in the same job they had one year ago. Here is the ONS graph comparing changes in salaries for those in continuous employment with average earnings for the (changing) labour force as a whole.
We can see more clearly what has actually happened to the wages of those in continuous employment, and how recent years compare with the past if we adjust for inflation. Let’s do that.
So now things look very different, eh? The only year in which wages for those continuously employed dropped in real terms was 2011 (when, if you recall, inflation was at its highest since 1992). In fact, in real terms wages for those continuously employed rose faster in 2015 and 2016 than they were doing before the 2008/09 Great Recession. The story of wages stagnating and wage recovery never happened proves to be plain wrong.
Another interesting thing with this graph is what happens in election years. We see that in the year to April 2015, wages rose faster in real terms than at any point since 2005. Perhaps that’s why the Conservatives won a majority in 2015? And we see that in the year to April 2017 wages grew at their joint second slowest rate for more than a decade. Perhaps that’s a rarely-observed part of the reason why the Conservatives didn’t get a majority in 2017? Both 2005 (government wins with wage growth rapid) and 2010 (government loses with wage growth slow) are also election years.
The story of average wages stagnating and falling in recent years is misleading, partly the result of new additions to the labour force being added at below the average wage. When we consider wages for those continuously employed, we see a quite different picture, with real-terms wage rises in recent years being faster than before the Great Recession. Remember that next time you see a gloomy headline.
