Why wages have fallen
Even the Daily Mail was sceptical about the government’s claim yesterday that real wages went up in 2010 and 2012. And it was a really bad idea to publish this research on the same day that the Institute of Fiscal Studies published their own more thorough analysis. (Incidentally, while newspapers have the Treasury analysis, it does not appear to have been published online by the Treasury.)
The Treasury figures only consider full time workers who have held the same job. There does not appear to be any breakdown by income. Anecdotally, I would suspect that it is not uniform across income ranges, and that better paid full time workers have been more likely to have had pay increases – at least in the private sector – than lower paid workers – but it will of course vary.
The obvious retort is that this analysis excludes all the workers most likely to have suffered a cut in the real value of their pay. The IFS figures show that all income groups have suffered cuts in their living standards with bigger percentage cuts at the bottom and the top of the income scale.
But this discussion does underline a point that policy wonks take for granted, but is not widely understood.
This is that changes in average pay are not simply due to how hourly pay rates that go with particular jobs change, nor how much overtime or other variable elements of pay such as bonuses and commission are paid.
Changes in how the workforce is made up also have a big effect – what economists call compositional effects. Even if the hourly pay that goes with every job goes up, people still suffer a cut in pay if they move from a higher to a lower paid job. If across the economy secure well-paid jobs are being replaced by insecure low-paid jobs then average wages fall.
As we highlight today there has been a big growth in self-employment. As average pay for self-employed men is £17,000 and women £9,800. (page 132 of this pdf – including regional figures) this has certainly not driven the right kind of rebalancing of the economy.