Three reasons why it looks like wages are doing so badly – Bottom Line

The picture seemed to be crystal clear. With pay packets getting smaller, and Bank of England governor Mark Carney striking a notably dovish tone, any rise in interest rates could be assumed to be some way off. This was the mood half-way through last week, when the pound dropped more than one cent against the dollar on the back of Carney’s comments surrounding the latest Inflation Report.

 

But irrespective of which way Carney is currently directing markets, the economic fundamentals are not as clear-cut as some people think. It may seem straightforward – falling wages mean no rate hike. Yet digging into the data reveals three possible reasons as to why the official wage figures are so weak, and this makes the whole issue more questionable. Let’s take a look at them.

 

As the Office for National Statistics (ONS) laid out clearly last week, many bonus payments in 2013 were shifted from March to April for tax reasons, thus distorting this year’s pay data. Excluding bonuses, pay from April to June actually grew – it was up 0.6 per cent on a year earlier. Admittedly, this is still the lowest annual pay growth since comparable records began in 2001, but there are two more key reasons why that may be the case…

 

As the unemployment rate tumbles (down nearly half a million from a year earlier), it is worth considering that many of these new jobs will be on relatively low pay, thus dragging down average wages. Youth unemployment is also down by more than 200,000 in the last year. The Bank itself cited this as a possible factor for the low wage growth in its latest Inflation Report: “An increase in the share of young employees would typically be expected to reduce average wages, as young employees tend to be relatively lower paid,” it said. “As long as the youth share rises this would drag on wage growth.” Indeed, the ONS calculates that pay growth is much closer to the current level of inflation if the effect of new low-paid jobs is ironed out.

 

Some economists suspect that new legal obligations on employers to enrol staff in pension schemes (and, crucially, put money into those schemes) is restraining them from handing out steeper pay rises. Last week it was revealed that more than four million workers have now been auto-enrolled – that’s nearly 16 per cent of all employees, and the number is rising. This is important, because the cost of jobs has a direct bearing on all of our wages. Analysis by the Treasury last year also suggested that total compensation – which includes all employee benefits, National Insurance contributions, and so on – has been rising at a much faster rate than just wages alone, helping to explain sluggish growth in regular pay.

 

Our front page story today contains the suggestion that Carney has already agreed to keep rates anchored. Let’s hope this isn’t the case. The data on wages is complex, and a decision as important as this one requires the Bank’s boffins to be engaging constantly in sophisticated analysis and debate.