Published:

23 comments

Building shield

Writing in the Telegraph, Allister Heath celebrates the fact that “Britain has become an extraordinary job-creating machine,” but adds that “our spectacular success at boosting employment has come at a price.” Wages are still stagnant – indeed, worse than stagnant, once you take inflation into account. Looking at the latest statistics, this how the numbers stack-up:

“…even when bonuses are stripped out of the equation, base pay rose by just 0.6pc. With inflation on the consumer price index at 1.9pc, and on the retail price index at 2.6pc, real wages are quite clearly collapsing.”

Heath provides a number of explanations – one of which is the so-called ‘mix-effect’:

“…as the labour market continues to boom, many of the people who are now finding work have lower average productivity than those who already have jobs. This may be because they are younger – youth unemployment is finally tumbling – or because they have been out of work for a while, or even because they are older workers choosing to work in downgraded roles rather than retiring. “This is what economists call the ‘mix effect’: nobody is actually losing out, and everybody is better off, but the arithmetic depresses averages and wrongly suggests that everybody is being impoverished.”

As previously argued on the Deep End, bringing people out of long-term worklessness is a good thing – even if it does have the statistical effect of lowering labour productivity and average wages. Of course, merely getting people out of welfare dependency doesn’t guarantee that they’ll make ongoing progress in their personal economic circumstances, but leaving them on the scrapheap pretty much guarantees that they won’t.

Heath highlights another broadly benign explanatory factor:

“Under the auto-enrolment retirement reforms, which started to kick in 2012 and which will eventually become hugely significant, bosses have to add their workers into a pension scheme, in a move intended to alleviate the demographic time-bomb. “Until 2017, employees will have to contribute 1pc of their wages, with employers having to add in 1pc. This will then go up respectively to 3pc and 2pc; and then from 2018 workers will be asked to chip in 5pc and employers 3pc. The scheme is voluntary but the vast majority of workers who have become eligible so far have chosen not to opt-out.”

There’s surely a case for including employer pension contributions in the calculation of wage levels. As long as it’s money going from an employer to an employee, the type of account or scheme it goes into is of secondary importance. At a time when we can no longer put off the need to make provision for the future or afford the burden of mass worklessness, it is important that key economic indicators should not misrepresent success as failure.

Furthermore, in relation to labour productivity and wage levels, we need to be able to see what is happening to the great mass of ordinary working people i.e. people who are rarely out-of-work, doing mainstream jobs for middling levels of pay. There’s no doubt that the recession had a big negative impact on them too, but the vital question is whether their prospects are now recovering.

According to Allister Heath there is “evidence that people who have been employed for long periods of time are faring better in terms of pay.” If this is true and it doesn’t just apply to senior management and the higher professions, then this really would be good news. It would also represent an end to the stagnation of median earnings – a trend which took hold several years before the recession.

Certainly, there’s one group of people with an important job to do – the government statisticians on whom we rely for numbers that shed more light than heat.

23 comments for: The wage stagnation we really ought to worry about

Leave a Reply

You must be logged in to post a comment.