Sunday, August 17, 2014
Baby-boomers take some of the rap for falling pay
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Strange things are happening. Pay should not be falling at a time when employment is booming – up by 820,000 over the past year – and unemployment is tumbling.

Yet it is. As most people will have noticed, the latest average earnings figures showed that total pay, including bonuses, was down 0.2% on a year earlier in the April-June period. This was not the first time this has happened – there was a bigger, though temporary, fall in pay in the depths of the crisis and recession in the early part of 2009.

This one will also be temporary. When the Office for National Statistics reports the next set of labour market numbers in a month’s time, I think I can guarantee that pay growth will have turned positive again. This is because part of the big distortion in the figures – both bonuses and regular pay were boosted in the spring of last year to take advantage of the cut in the top rate of tax from 50% to 45% - will have dropped out.

Most of this effect was in April, when total pay on a single-month basis was down by 1.5% on a year earlier, though some carried through into May and June.

That is the good news. The bad news is that, even as the pay picture turns positive, it will remain subdued. Getting back to 1% pay growth will take a while. Getting back above inflation, currently just below 2%, will take even longer.

I thought pay would slightly outstrip inflation this year, giving us modest real earnings growth. It did in the first quarter, when pay growth of 1.9% moved just ahead of average consumer price inflation of 1.7%. But this unwound in the second quarter, partly because of the bonus distortion, but partly because of other factors.

So what is happening? Why is pay apparently weakening when the job market is getting tighter? It would be easy to blame the official statistics, and the contrast with other surveys, notably from the Recruitment & Employment Confederation, which point to rising pay pressures.

It is important, though, to dig a little deeper into the figures. The average weekly earnings figures are affected, not just by the timing of bonus payments, but by two so-called compositional factors.

One is the fact that pay in some high-earning sectors, notably financial services, has been falling, dragging down the average. The other is changes in the mix of employment, with the strongest growth in lower-paid jobs.

The Office for National Statistics adjusts for this second effect deep in the entrails of its statistical releases. So in June, for example, wages were up by 1.5% on a year earlier in total, with regular pay up 1.2%, but in both cases the average was dragged down by this employment effect. These figures give a better idea of the wage increases people actually receive.

But they are still very weak by past standards. On this same measure, wage increases of between 4% and 5% were the norm before the crisis, and you do not have to go back too far for a time when they were very much higher. I don’t suppose anybody in the 1970s would have ever imagined that we would one day worry about too low a rate of wage inflation.

The many explanations of why it is happening include immigration- discussed here two weeks ago - the collapse of union power, the possibility that pay settlements have not yet adjusted to fast-falling unemployment and welfare reforms pushing people more effectively off benefit and into the job market. It is interesting that the claimant count, which measures the number of people claiming jobseeker’s allowance, is now just over 1m, compared with 2.08m for the wider Labour Survey measure of unemployment.

I quite like another explanation. As a baby boomer I am used to being blamed for many things, from destroying the planet to pushing house prices up to unaffordable levels and keeping them there. Now, it seem, we may also be to blame for weak wages.

There was a time, in the relatively recent past, when Britain’s occupational pension system was the envy of the world and the Saga generation retired in their fifties to travel the world or potter in their sheds.

No more. I am not saying age discrimination has disappeared from the job market – no letters please – but older workers are on the rise. In the 50-64 age group, 68.5% of people now work, compared with 60% in the year 2000. The proportion of 65-plus people working has doubled from 5% to 10% over the same period.

Now, 26% of those in employment are aged 50-plus, compared with 24% immediately before the crisis and 22% in 2000. Overall employment trends are up but those for older workers are particularly strong.

Why? The Bank of England, which had a look at this in its inflation report, cited several factors, including the rise since 2010 in the state pension age for women, the abolition of the default retirement age and – perhaps most importantly – in an era of ultra-low interest rates on savings and lousy pension returns, many people have no option but to carry on working.

The more people in work, whatever their age, the more incomes are generated, and the more growth there is. But older workers staying in the job market probably spend less of their income, are less likely to be less demanding when it comes to pay and dampen down on pay pressures, like immigrants, by increasing the pool of available labour.

If I wanted to really controversial I would say they may also be less productive than younger workers, though while that may have been true in an age of manual labour, where muscles mattered, there is no good research evidence that it is true now. Older office workers are less technologically adept than their younger colleagues but spend less time on Facebook.

I am not suggesting for a moment that older workers should carry the can for all the weakness of wages. But they are part of a phenomenon in which rising labour demand creates additional supply, whether that supply is from overseas or from changes in working patterns at home. Nor, given that government policy involves increasing the number of older workers in work, and getting them to do so for longer, is this going to fade. Ultimately it is a good thing.

So where is pay headed? In September last year I did a piece headed ‘This squeeze on pay is not about to go away’, citing research by Bill Wells, a labour market expert at the Department of Business. His theory was that pay increases were “shocked” into a 1% to 3% range by the crisis and – were likely to stay there until something new came along to shock them out of it.

At the moment pay rises are at the lower end of that range. They could move to the top of it in time, as the Bank and others expect, allowing modest rises in real wages. But modest is the word. The forces weighing down on pay are not going away.