Dan Watkins is an entrepreneur and the Conservative parliamentary candidate for Tooting.
Since 2008, average wages have lagged inflation almost continuously – a very long shadow cast by the Great Recession. But last month we saw that annual average wage growth crept above price rises for only the second time in recent years.
If this improvement can be sustained, it will be crucial not just for the country as a whole, since rising disposable income will help further spur economic growth – but also because it’s critical that our labour market offers the hope to every individual that, by working hard and improving their skills, they can get on in life.
So I was fascinated to see new data from the Office of National Statistics late last month that suggests, contrary to the headline rate, the majority of workers have had some wage growth – of four per cent per annum – since 2010. This is a much higher number than the one or two per cent rate that the media has been reporting.
Logically, a growth in pay does seem very possible, since the UK has seen a rapid increase in employment as the economy recovers, and that usually helps boost wages too. So what is going on here?
It seems to be the mix of jobs created that has masked a better underlying position on wage growth. In addition to an increase in high-skilled jobs, a large segment of the new employment has come from people leaving welfare and entering the jobs market – one of the big success stories of Ian Duncan-Smith’s reforms.
But this “compositional” change, whereby more low paid jobs come into existence, means that average wages drop. That’s despite the fact that no-one has lost out – the newly employed are pleased to have the independence and stability that a wage brings, and nothing has changed for everyone else.
And there’s another misconception that is fed by the “average” numbers – flat average wages don’t mean that individuals’ salaries aren’t going up, and here’s why. People retire from the workforce every day – generally older, better paid workers. They are more often than not replaced by younger workers who move into the retirees’ better paid jobs, while at the other end of the market, education-leavers start work for the first time, filling in entry-level positions formerly occupied by those being promoted. So paradoxically, average wages haven’t changed, but individual workers have seen an increase in pay.
Fortunately for us, the Office for National Statistics has released data (Page Four) showing how wages have changed just for those in work for a year or more (which negates the “compositional” effects). It really does show a very different story, with annual wage growth now at 4.1 per cent, having averaged almost 4 per cent per year since 2010. Adjusting for inflation, this means that real wages have grown in four of the past five years, amounting to a total real wage rise since 2010 of almost five per cent. Given that most workers have been in their role for more than a year, this means that most people (albeit not all) have had a real terms pay rise.
As a Conservative, I’m very committed to seeing a jobs market that rewards work and aspiration for all, nowhere more so than for the lowest paid. Encouragingly, here too there are reasons to be optimistic, with three-quarters of people who enter the jobs market on the minimum wage (which will include many of those formerly on welfare) having moved into higher pay within five years. In time, we should hope to raise this towards 100 per cent, but it’s positive that the poorest paid workers are more often than not seeing wage rises over time. (And to quote another statistic from the same ONS report which is consistent with a modest increase in real pay for lower wage workers, income inequality has not grown in recent years, but in fact has stayed steady since 1997).
A final comment on the statistics. All of the above analysis considers gross wages, not take-home pay. The picture is of course better for the latter, thanks to the Government’s policy of cutting taxes, particularly for the lowest paid. Workers have seen an increase in take-home pay of £800 per year as a result of the increase in the tax-free allowance to £10,500. This is a significant seven per cent increase in earnings for someone clearing £1,000 per month (= gross salary of c £15K pa).
Of course, even these much more positive figures contain within them thousands of individuals who have struggled since 2008, and it’s thus imperative that we continue to see economic improvement to bring pay rises to everyone. But after six tough years, I feel the tide has turned and, contrary to the story being told by the Labour Party, the glass is half full rather than half empty. Staying positive will not only help retain confidence in Britain and sustain the recovery, but also show that Conservative policies do build a better economy for all.