Sunday, June 21, 2015
Booming job market gives Britain a pay rise
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.

Apart from a Greek crisis that is in danger of giving a whole new meaning to the term brinkmanship – the usual idea is to stop before you go over the edge – the past few days have brought some other interesting developments.

Though the latest figures show that Britain has edged out of deflation after just a month, the combination of negligible inflation and a strengthening of pay growth means real wages are growing at their fastest since 2007; before the crisis hit home.

Some said this would not happen for a very long time, or that the return of real wage growth last year was merely a product of very low inflation. But the latest rise in average earnings, 2.7%, is enough to outstrip inflation even when it returns to the 2% target.

It runs alongside what the Office for National Statistics says is the longest spell of sustained retail sales growth since records began almost two decades ago. In May, retail sales volumes were 4.6% up on a year earlier. Low inflation has certainly helped here. A drop in petrol prices of more than 10% over the past 12 months has had the predictable effect of increasing the volume of spending, not just on fuel but on other products as well.

The earnings figures provide me with a peg to address three things. One is that the job market is changing as its recovery matures. The second is the sustainability of stronger pay growth when overall productivity is weak. The third is what the numbers tell us about the consumer recovery.

Let me take these in turn. Though the average earnings figures were the most eye-catching element of the latest labour market numbers, they were not the only information of note.

We have an economy which has generated a rise in employment of 424,000 and a fall in unemployment of 349,000 in the past year. There are more than three-quarters of a million unfilled vacancies, which is why many employers complain of problems in recruiting.

Behind these headline figures, something rather interesting is happening. One of the refrains of recent years has been the casualization of employment; the rise of self-employment, part-time jobs and zero hours contracts.

This has been a caricature for some time. Over the latest 12 months there has been an increase of 453,000 in the number of employees working full-time. Sharp-eyed readers will notice that this exceeds the overall rise in employment over the period. This is because, as well as a smaller increase in the number of part-time employees (92,000), there have been falls in self-employment (91,000), unpaid family workers (14,000) and people on government schemes (15,000).

The death of the traditional full-time job - working for somebody else - was greatly exaggerated. Over the past two years, to offer a slightly longer comparison, three quarters of net new jobs created have been for full-time employees.

Some will bemoan the decline of self-employment over the past year, and it is too early to declare it as a trend, but it seems likely that at least some people who were going it alone have been lured back to the security of being a full-time employee as opportunities became available. There is still plenty of scope for entrepreneurs but we may be seeing the beginnings of a decline in involuntary self-employment.

Companies do not recruit, of course, unless they have jobs for people to do. And in general they do not pay higher wages unless they need to do so to recruit and retain staff or because it is justified by higher productivity. Though there is clearly an element of the former in what is happening at the moment, we should not ignore the latter.

This brings me on to my second point. Though the overall numbers for productivity remain weaker than they should be, something is stirring. I have noted before that the sectors and sub-sectors in which jobs are strongest are typically those where output is also rising strongly.

The construction industry increased employment by 1.3% in the year to the first quarter. Earnings growth has also started to pick up quite strongly in the building industry. But output, we now know, showed a hefty 4.4% annual rise in the first quarter, suggesting productivity is on the up. The same is true for wholesaling and retailing – employment up 2%, output 4.7% - real estate, 0.3% and 1.7% respectively; transport and communications, 1.4% and 4.7%, and several other parts of the economy.

The process clearly has further to go, indeed a long way to go. The productivity numbers are still weighed down by North Sea oil and financial services, and by the fact that availability of finance continues to inhibit the growth of younger, high-productivity businesses. But there are signs of change. Even with these factors, the aggregate figures point to productivity growth of between 1% and 1.5%, which is a step in the right direction.

Finally, the latest earnings figures offer an opportunity to bury a myth I often hear repeated, which is that the British economy has been carried along by “debt-fuelled consumption”. The remarkable thing about the past few years is how little household debt has risen, not how much.

Bank of England figures show that household debt stands at £1,434bn, overwhelmingly in the form of mortgages. It has risen by £43bn, or just 3%, from its pre-crisis peak just ahead of the collapse of Lehman Brothers in 2008. In the previous seven years, for comparison, it rose by £602bn, or 76%. Unsecured credit has fallen by nearly a fifth from pre-crisis levels.

And, while lending to households has picked up recently, it is running at a modest 2.5% growth rate, compared with 15% or more at times in the pre-crisis period. For its effects on consumer spending, it is dwarfed by rising incomes.

Tucked away in the official GDP (gross domestic product) figures is a series for compensation of employees, overwhelmingly wages and salaries. It picks up both the growth in earnings and the effects of rising employment. What matters for spending power in the economy is not just the pay rises received by individual workers but the number of people in receipt of wages.

In the first quarter, compensation of employees was up by 4.2% on a year earlier, having risen by 3.2% in 2014 and 3.1% in 2013. Though some of this – a diminishing proportion – was eaten up by inflation, most provided the basis for the growth in consumer spending, which has been running at around 2.5% recently. When incomes are rising, people still need to borrow to move house, and many choose to take out finance to buy cars and other big-ticket items. Overwhelmingly, however, spending is out of rising incomes.