The coalition deceived us that wage growth has overtaken inflation, but Labour still needs a credible plan for the cost of living crisis


David Blanchflower
Tuesday 22 April 2014 15:53

The much-anticipated labour market data last week were pretty good, with the unemployment rate dropping to 6.9 per cent, which is its lowest level since January 2009. There was also other good news with a falling claimant count, rising hours and falling long-term unemployment.

Of particular note were the rises in average weekly earnings (AWE) for February obtained from a survey of employers. The survey excludes small workplaces with under 20 employees as well as the self-employed and household workers, who may well be more affected by recession and hence have lower pay rises than those working in bigger workplaces. So these estimates are likely to be upward-biased estimates of actual wages in Great Britain as well as of wage growth.

AWE data are provided by the Office for National Statistics for a single month, with the latest data being for February, which means they can then be compared with a single month a year earlier. However, this series tends to be rather volatile, so the average of the last three months compared to the same three months a year earlier is used to determine changes. The latest three-month estimates were as follows: total weekly pay £479 (+1.7 per cent), weekly bonuses £27 (+5.3 per cent) and regular pay £449 (+1.4 per cent). Total pay rises, using three-month averages, were 2 per cent in the private sector, 0.9 per cent in the public sector, 1.6 per cent in services and were especially high in manufacturing, 2.9 per cent, construction, 3.1 per cent and 3.5 per cent for wholesale, retailing, hotels and restaurants. The bonus number is especially volatile.

The Times in an editorial claimed that “wage growth has overtaken inflation for the first time since the crash”, which it turned out was entirely spin and untrue. The ONS reported in the data release that “pay including bonuses for employees in Great Britain from December to February was 1.7 per cent higher than a year earlier”. The latest data for the CPI are 2.0 per cent in December, 1.9 per cent in January and 1.7 per cent in February, so whether you take the average of the three months December to February (1.9 per cent) or the February rise of 1.7 per cent, real wages still haven’t risen. If you take the RPI the picture is even worse, given rises in December of 2.7 per cent, January 2.8 per cent and February 2.7 per cent.

The first chart shows that the cost of living crisis indisputably is far from over. I present monthly changes in prices as measured by the CPI and the RPI, along with the AWE from February 2007-2014. Over that time the CPI was up 22.8 per cent, the RPI was up 25.2 per cent, while the AWE was up 9.9 per cent. Since May 2010 the CPI rose 11.3 per cent, the RPI 13.7 per cent with the AWE 6.7 per cent. Of course, the Coalition argues that the effect of falling real wages has been compensated for by reductions in the income tax threshold, but as Ed Balls noted on Wednesday, “the personal allowance cut is more than outweighed by other changes which have happened – the rise in VAT to 20 per cent, cuts to tax credits, cuts to the childcare tax credit, other changes – so a family with children is more than £2,000 a year worse off simply because of changes to tax and benefits.” Crisis, what crisis?

The second chart provides contrasting data on earnings and price changes from the United States. I plot average private-sector hourly earnings against the All Urban Consumers CPI, which present a very different picture to the UK. Prices and wages in the US in the recession have broadly kept pace with one another. In the UK wages and people’s living standards are what has taken the strain rather than employment. So why should real wages start rising now?

Professor Steve Machin and I in a new paper conjecture that real wages are not going to move strongly positive soon. Chances are the UK has simply moved close to the US experience of broadly flat real wages over decades. It is quite clear that the UK economy is still well above full employment and there is a large amount of slack in the labour market. We see little evidence of widespread skill shortages, which would push up wages, and public-sector pay freezes with continuing redundancies continue to push down on workers’ bargaining power.

Firms have started to perform better, so their ability to raise pay levels may have increased slightly. But so far we see no evidence of any change in their willingness to pay. This does raise a key question: why, if nothing changes, wouldn’t they continue to keep any gains to themselves? It stretches credulity to believe that all of a sudden bosses will hand over pay increases to their workers when they have shown no inclination to do so for several years.

As a result of this latest jobs release Dan Hodges in The Telegraph declared, admittedly not for the first time, that as a result “Labour’s chances of winning the next election are effectively over”. That is going a bit far, but Mr Hodges is right that Labour doesn’t seem to have a credible plan to get living standards up, as they aren’t going to rise on their own.

It’s time to out tax-cut the Tories with big incentives for firms to invest and hire, including big reductions in national insurance, which is a jobs tax. I would offer firms big incentives for apprenticeships and for hiring the long-term unemployed. Labour’s present job guarantees don’t go far enough. The CBI and other employer’s organisations would likely go along with such schemes, as there would be profits in it for them. Most of that could be paid for by reductions in welfare benefits, by raising the incentive to work.

It is worth thinking about removing income tax altogether for anyone earning under £20,000 a year and pay for it by lowering the threshold at which tax starts to be paid to £5,000 for people earning over £20,000. Tax cuts at the low end would be a huge help to Labour’s natural supporters. I would also make all non-contributory entitlements earnings related. Those in the top decile of earnings like me don’t need free bus passes, fuel allowances, etc.

You could fiddle with the details, Ed Miliband and Ed Balls, but if not: why not?

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