Ten myths about the recession and wages
Reporting of pay trends in recent months has fallen back on a bunch of shared assumptions about what people have been paid last year and are likely to be paid this year. Unfortunately a lot of them are just plain wrong.
Here’s my top ten pay myths – see how many you can spot in your favourite newspaper:
Above inflation wage increases could set off a damaging wage spiral.
No. Wages are not driving inflation at the moment. The current increase is caused by the end of the VAT cuts and the recovery of new car sale and fuel prices. It’s normal for wages to increase above inflation. Since 1960, wages have increased 183% more than prices and this extra spending power has helped to fuel economic growth. If earnings had only increased in line with prices then the average wage would not be £480 as it is now, but just £186 per week – less than the current minimum wage.
Further freezes and cuts are needed to make companies profitable again.
Hardly. The gross rate of return for UK companies (excluding finance and oil and gas) – a key indicator of profitability – has fallen to 10.9% from a record level of 12.5% in 2006. The current figure is not particularly low, especially when compared to the current bank rate of 0.5% or the 9.6% return earned during the 1992 recession. While pay restraint may be needed to save jobs in some struggling companies, widespread pay restraint would put less money in people’s pockets and reduce consumer demand, which could threaten economic growth.
Wage freezes have been widespread throughout the private sector.
Not really. Incomes Data Services’ research shows that in one in three private sector companies agreed wage freezes in 2009, which were concentrated in manufacturing and construction. Two thirds of companies gave increases and the median rise was 2.3%.
Wage freezes will be just as widespread in 2010.
Unlikely. Despite UK GDP shrinking by 5.5% during the recession and RPI falling to -1.3%, pay settlements averaged over 2% in 2009. With the economy out of recession and inflation forecast to be over 2.5% in 2010, wage settlements are likely to recover.
Unions have accepted freezes because they are too weak to negotiate pay rises.
Not true. Unions have agreed wage freezes and cuts only as a genuine alternative to job losses. But they are wise to companies trying to use wage restraint to boost their profits. The union wage premium still exists – Government figures show that union members earn an eighth more than non-union members, which means an average of £1.45 more per hour.
Public sector pay freezes are an alternative to job losses.
No. Presenting pay freezes as an alternative to job losses has always been a false choice as short-term pay restraint has a limited impact, except on staff morale.
A minimum wage freeze will prevent job losses in the private sector.
Contrary. Making the lowest paid pay for the mistakes of super-rich would be grossly unfair and make little economic sense as low paid workers are more likely to spend, rather than save, their wages than median and high income earners. The recession has hit finance, construction and manufacturing harder than the minimum wage sectors.
Raising the minimum wage for young people will make it harder for them to find jobs.
A red herring. Young people have undoubtedly been hit hard by the recession. But it is a lack of vacancies for new entrants, as well as a lack of experience, that is making it hard for them to find work. Young workers’ employment has fared better in low paying sectors than the rest of the labour market, showing that the minimum wage youth rate has not led to job losses, as many employer groups predicted.
Public sector wages rocketed while private sector wages contracted last year.
Selective stats. The headline 3.8% public sector pay rise was caused by the inclusion of workers in nationalised banks. The figure excluding these workers was 2.8%. The wage contraction in the private sector was due to a restrained city bonus season. The real story here is how much the banking sector dominates average wage levels. Since 1999, public sector wages have increased by 3.5% a year compared to 3.97% in the private sector.
Public servants earn more than workers in the private sector.
Smoke and mirrors. Comparing overall public and private sector wage is like comparing apples and pears. Public sector workers have, on average, higher qualifications and do jobs that are more skills intensive. The Official Labour Force Survey shows that 53% of public sector employees have higher education qualifications, compared with 29% of employees in the private sector. Many low-paid public sector jobs have recently been outsourced to the private sector too. When similar jobs are compared “public sector pay differentials do not seem to depart strongly from zero”, according to the Institute for Fiscal Studies’ Green Budget.
It’s important to challenge these myths wherever they crop up. Taking them at face value and as justification for freezing wages across the private and public sector would only reduce consumer demand, and could threaten the UK’s fragile economic recovery.