From the TUC

Will the cost of living squeeze ever end?

15 Nov 2013, by in Economics

This week’s labour market data made clear that the cost of living squeeze continues. Average earnings are still rising well below the rate of inflation, involuntary part-time work is at an all time high and many workers in temporary jobs would prefer full-time work. Across much of the public sector pay is still frozen or barely rising. While the number of jobs in the economy is expanding, incomes are not keeping up and the living standards gap remains significant.

Will this state of affairs ever end? This week’s Resolution Foundation debate considered the options.

There are some worring trends. As Steve Machin and Paul Gregg’s research shows, wages have become increasingly sensitive to unemployment – so tighter labour markets do not necessarily deliver higher pay, at least until unemployment levels fall far lower than would previously have been needed to drive wages up. This analysis suggests that as demand returns employers will face less pressure than in previous decades to provide their staff with pay gains.

Increased labour market polarisation is another concern. If low paid jobs are in the ascendency earnings across the economy will fall, and many workers will find they can’t access the better paid employment opportunities that they were previously able to benefit from.

But there are also some more encouraging signs. Full-time employment is growing strongly (70% of all jobs created over the last three months were full-time employee positions), and while under-employment is high the rate at which it’s increasing is starting to slow. Evidence does point to strong growth in low-paid work, it also looks as if some higher paid sectors are also doing well, which could mean that growth in lower productivity work is being counterbalanced by strengthening in higher productivity sectors.

There are also some groups of workers who are securing real pay rises, with the IDS pay database reporting settlements of (for example) 3.53 per cent at Rolls Royce, 4 per cent at Nissan and 4.8 at AstraZeneca.  While the best settlements are concentrated in parts of manufacturing, transport and energy workers in lower paid sectors are also securing pay rises which are close to the rate of inflation. Retail staff at Boots achieved a 3 per cent pay rise in June, staff at United Biscuits have had a pay rise of 2.8 per cent and restaurant and admin staff at McDonalds have achieved a settlement of 2.75 per cent (effective from September this year).  Retail staff at Sainsbury’s are not far behind at 2.6 per cent, and there are lots of other large retailers (Waitrose, Centre Parcs, Costa) clustered at 2.4 to 2.5 per cent.

Even better, there is a clear union effect, with the median pay settlements over the last six months in unionised businesses running at 2.15 per cent compared to a whole economy average of 2 per cent. Across 2012 as a whole settlements average 2.75% (unionised) vs. 2.25% (non-unionised).

But how does this picture fit with the Average Weekly Earnings series continuing to show significant  real wage falls, with earnings growth across the whole economy of only 0.7 per cent while CPI is at 2.2 per cent and RPI even higher at 2.6%.

No one is denying AWE is an important and accurate measure of the average amount that workers are recieving, but it’s also key to remember that the figures are affected by far more than the rate of annual pay rise that any group of workers can secure. The figure will also be affected by:

  • Changes in hours: if people’s hours are cut they receive less pay
  • Changes in overtime and bonus payments: if additional payments are cut overall earnings will go down even is basic salaries remain the same
  • Changes in working patterns: if people move from full to part-time work they generally earn less
  • Changes in employment sectors: if someone loses a job in a middle paid sector and takes on in  a low paid sector then the amount they earn will be less.
  • Public sector pay deals: with a quater of people working in the public sector, where rates of pay growth are being held at 1% or lower, these low rates of pay growth will be affecting the average figure (and with AWE having been negative in the public sector for two months there is clearly a depressive effect on the headline total)
  • Changes in the population of people in work: if fewer younger people are in work, and more older people are, and if older people are more likely to work part-time or reduced hours, this can also affect the figure.

It is likely that the diveregence between pay settlements and the AWE figure is being driven by changes in these factors.

So what does all this mean? Probably that it’s too early to present the current living standards squeeze as the inevitable ‘new normal’ where no employer will ever be able to pay more again. The recession and prolonged stagnation since it ended has eroded earnings as well as jobs, and it will take a strong period of growth to even begin to make up lost ground. But with full-time jobs and hours rising, and median settlements now alomost in line with inflation there are some signs of improvement.

On the other hand there is no doubt that the downturn will have created future structural challenges for the UK labour market. The rate at which middle skilled jobs increase may have further slowed and prolonged periods of low investmemt will have eroded some of our previous capacity. But at the same time there is no obvious sign of the sorts of structural shifts that the 80s recession created, with whole sectors of industry closing. There does seem to be potential for growth to bring some gains.

Of course those benefits will not inevitably be fairly shared – and the increased power of employers to hold down pay even while labour markets tighten (as the Gregg and Machin paper suggests) is a worry.

But a situation where growth bring gains in jobs and productivity still points to the potential for policy solutions to make a difference to pay and living standards. If employers can afford to pay more, but feel that a larger pool of active jobseekers means they don’t have to raise wages, then why not strengthen the minimum wage? If we know that unions are securing better settlements where they are organised, then why not act to make it easier for them to do so. If we know that full employment is important for pay as well as jobs, it needs to be a policy priority. And if labour markets are to continue to polarise then we need to do everything we can to boost productivity gains where there is potential to achieve them,  seeking to increase access to sources of finance, and incentivise companies to think longer-term, while also making sure that systems of redistribution (ie tax credits) top up the incomes of those who work in lower pay, lower productivity industries.

The cost of living squeeze is still significant, and any welcome improvements over the next year will only go a small way to closing up the huge gaps which have developed since 2008. But there may also be grounds for optimisim – growth still has capacity to generate gains, and with the right policy mix the time could be right to for a new progressive approach to ensure more people are able to benefit from them.