Ben Chu: So real pay is rising for the first time in years? Here's how to figure out who's really better off

Economic View: It is premature to herald a pay recovery based on a single month's figures

Four morose men are drinking in a pub when Bill Gates walks in. "Cheer up lads," exclaims one of the men. "The average wealth of the five of us has just gone through the roof."

It's an old joke, but it's worth retelling because it hammers home a truth in a way that a million statistical expositions never will. Averages, as the joke demonstrates, can be misleading. They tell us something, but not everything. When we're talking about rises and falls in wealth and incomes, the shape of the distribution matters as much as the headline average.

Bill Gates's enormous wealth does not make his fellow drinkers any better off. It's a good lesson to recall as the fanfare heralding "rising real wages" rings in our ears.

Yesterday's report from the Office for National Statistics (ONS) showed that average, annual total-pay growth between December and February was 1.7 per cent, matching the annual rate of consumer price inflation in February. It is a welcome moment given that pay growth has lagged rises in the cost of living for most of the past four years, pointing to falling real (inflation-adjusted) wages.

The trends are encouraging too. Pay growth seems to be rising, up from increases of less than 1 per cent last year. And inflation seems to be moderating too. Earlier this week the ONS reported that inflation dipped further to 1.6 per cent in March, having been as high as 2.8 per cent this time a year ago.

But we should beware simple averages when it comes to pay rises. It's crucial to bear in mind that what we are looking at in these particular pay figures are mean average total pay. In other words: all the pay packets in the economy added up and then divided by the number of workers.

If pay for the top 1 per cent of earners is rising fast while the pay of the rest of the workforce remains stagnant, this measure of the average will rise. What happens if we examine the worker bang in the middle of the pay distribution, also known as the median average, which is a rather better gauge of what is happening to average pay?

The ONS does look at median pay too, but it reports this figure less regularly. Rather than monthly results, it spits out a figure every December which refers to pay in the previous April.

What the first chart demonstrates is that median-pay increases have frequently been lower than the mean-pay increases over the past decade. This gap was especially large in the years leading up to the 2008 financial crisis. There was also a sizeable divergence in 2011, although the median-mean gap has fallen since then. This gap matters since it implies wage inequality is growing – it reflects the fact that pay for the financial-sector workers and chief executives has been rising much more quickly than for the rest of the working population. To put it crudely, Bill Gates has been getting richer but the rest of the people in the bar haven't.

George Osborne made a speech in Washington at the weekend in which he asserted that the link between economic growth and employee compensation is as strong as ever and that, as the economy recovers, living standards will inevitably rise. The Chancellor cited the fact that when one factors in all forms of remuneration, such as employers' contributions to company pension schemes, the share of Britain's national income going to workers – as opposed to corporate profits – has remained constant in recent years.

Yet when he spoke of "employee compensation" he was talking in aggregates. As the second chart shows, when one examines the progress of median pay (adjusted for consumer price index inflation) over the past decade, it has lagged behind both mean pay and also growth in the wider economy. The gap between mean pay and GDP growth may, as the Chancellor says, be mostly explained by other forms of workers' benefits. But a clear gap has opened up between the performance of the total economy and the pay of those actually in the middle which cannot be so easily explained away.

It is possible that the Chancellor is correct that average living standards will pick up as the economy grows. However, he and we won't be able to judge this until we see what happens to median pay. It is certainly premature to herald a recovery based on a single month's mean average figures. The Resolution Foundation think-tank fears the pre-crisis pattern of weak median pay relative to broad economic growth will reassert itself over the coming years.

There are other complications, too, in this story. None of the various surveys the ONS uses to compile its headline pay figures covers the self-employed, who have soared to a record 15 per cent of the workforce in recent years. It is therefore hard to say what has happened to pay in this group, although there is some evidence that many people registered as self-employed are struggling.

The rate of real wage growth also changes considerably depending on which inflation measure (consumer prices or retail prices) is used for the adjustment. And when one is talking about living standards it is preferable to look at total household incomes, which takes into account taxes and benefits received, rather than pay. The ONS says median incomes of non-retired households fell by 6.4 per cent between 2007/08 and 2011/12. This is all context of course – but as Bill Gates's drinking companions could tell you: context is important.

Sport
David Moyes and Louis van Gaal
football
Sport
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
rugby
News
Liam Payne has attacked the media for reporting his tweet of support to Willie Robertson and the subsequent backlash from fans
peopleBut One Direction star insists he is not homophobic
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvSeries 5 opening episode attracts lowest ratings since drama began
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
News
Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
people
Sport
Greg Dyke insists he will not resign as Football Association chairman after receiving a watch worth more than £16,000 but has called for an end to the culture of gifts being given to football officials
football
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
News
people
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

COO / Chief Operating Officer

£80 - 100k + Bonus: Guru Careers: A COO / Chief Operating Officer is needed to...

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments