Britain’s traumatic national pay cut is finally coming to an end
BRITAIN’S traumatic national wage cut could be about to come to an end – or so the Treasury would like us to believe. For once, it may have a point: while many are still suffering, there is growing evidence that pay is starting to rise for some workers.
Let me first point out that I’m usually deeply sceptical of the Treasury’s claims, especially ahead of the political jamborees that are Budgets. The childcare announcement today is being heavily spun and the housebuilding policies – including the Ebbsfleet “garden city” – are a case of too little, too late. It is also madness for the chancellor to be intensifying his Help to Buy policy for new build homes. It is not the government’s job to underwrite purchases of homes – it should allow more housebuilding by deregulating the planning rules. House prices are rocketing, and no taxpayer cash should be put at risk seeking to prop up a mad market.
The Office for Budget Responsibility’s forecasts also deserve scrutiny. It claims that productivity growth will hit 1.6 per cent this year and two per cent next year; we shall soon find out whether it has once again been guilty of over-exuberance on this fundamental metric.
All in all, while the economy is clearly bouncing back, the Budget will almost certainly disappoint by failing to unleash any of the real tax and supply-side reforms the economy so desperately needs if it is to grow sustainably in the years ahead.
But on the issue of real wages the Treasury is on firmer ground. The case should not be exaggerated, and the overall numbers still show a decline in real terms for public as well as private sector workers. But two of its claims are spot on. Real earnings growth is already positive for workers who have been in the same job for over a year (described as people in continuous employment); and the average numbers have been dragged down by new, lower paid entrants.
Around two-thirds of current full-time employees have remained in the same job for over a year; this key group is enjoying faster pay rises than the overall average. The gap is striking: in 2013, employees in full time work (excluding the self-employed and part-timers) saw their gross weekly earnings rise by 2.2 per cent; those in continuous employment saw their pay go up 3.3 per cent. Inflation on the consumer price index (CPI) was 2.6 per cent. The gap between all workers and those in continuous employment is even larger. An analysis of the data for the past few years suggests that only in 2011 did those in continuous full-time employment suffer a real terms pay cut (as deflated by the CPI, rather than the retail price index (RPI)).
The following illustration shows how the statistics can camouflage an improvement. Imagine that two workers had jobs last year, one paid £100 and the other £200. They both got 10 per cent pay hikes this year, taking their earnings to £110 and £220 respectively. On top of this, a third individual – who was previously unemployed – was able to find work this year, albeit at the relatively low wage of £100.
So last year’s labour market, where two people were employed, saw average pay of £150; this year’s labour market, where three people are employed, is characterised by an average wage of £143. On the face of it, the average salary has collapsed 4.7 per cent – but in reality all workers are better off. This is a stylised example, of course, but it demonstrates powerfully how a change in the labour market’s composition – especially new entrants and those moving between jobs – can impact average numbers and rob them of any true meaning.
There are still huge problems with the economy; but it does seem that pay cuts are coming to an end. That will be good news not just for hard-pressed workers but also for the Tories’ electoral hopes. Whether they can capitalise on this remains to be seen.
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