The latest analysis of pay settlements from IDS (£) shows that the median pay award is 2.5 per cent in the three months to the end of March. While the median settlement is unchanged on the previous three-month figure, it is significant because RPI inflation has fallen to the same level, 2.5 per cent, in the year to March. If inflation on this measure falls further, and pay awards remain steady, or even show a rise, then settlements will be ahead of the all-items RPI for the first time since inflation went into negative territory in 2009.
Meanwhile, the latest figures under the Average Weekly Earnings (AWE) series from the ONS show ‘total pay growth’ of 1.7 per cent for the whole economy in the three months to February. This prompted media headlines celebrating the fact that wages have caught up with inflation for the first time in since before the economic crisis began. If we take the narrower CPI measure of inflation, this is true. The CPI was 1.7 per cent in the year to February, and since then has fallen slightly to 1.6 per cent, in the year to March. So if the AWE remains at 1.7 per cent for the three months to March, or shows an increase, then earnings growth will be ahead of CPI inflation for only the second time in almost six years.
Which measure of inflation?
There are two issues here. One is the existence of different measures of inflation. Briefly, the CPI figures most strongly in media coverage of inflation because it is the Government’s preferred measure for macro-economic management, and receives ‘star billing’ in releases from the ONS. However it excludes important items such as housing costs and as such is not necessarily the most suitable measure of changes in the cost of living. Indeed as a result the Government has developed a new measure, the CPIH, which represents an attempt to include housing costs, but doesn’t receive anything like the same prominence in the media.
At the same time, the RPI remains the most commonly-used measure for pay setting, mainly because it covers all items of expenditure. It no longer has ‘national statistic’ status, however, mostly due to the way in which it is calculated. (The alternative is the new RPIJ, which, much like the CPIH, tends to be ignored by the media.) But the RPI continues to be used to uprate a wider range of items than the CPI and as a result has a much greater influence on living costs than the CPI. Hence pay setters’ continued preference for it, in most cases at least.
Settlements and earnings compared
The other issue is the way in which settlements and earnings produce different figures. But can both be right? In short, the answer is yes, principally because they are measuring different things. Settlements are the headline increases to basic pay under the annual pay reviews at a range of organisations across the economy. They don’t include other elements such as bonuses, which are paid out at different times of the year. As well as the details of specific pay reviews, IDS publishes its summary figures on awards as a guide for employers when it comes to decisions on their pay reviews. We use the median rather than the mean because it is less influenced by outliers, ie very low or very high settlements.
The Average Weekly Earnings series is different. It is much more an economic indicator of changes in the ‘lump’ of earnings per employee across the economy (though it also involves a welcome attempt to distinguish between ‘total pay’, which includes bonuses, and ‘regular pay’, which doesn’t). Roughly speaking, it involves the ONS collecting (or estimating) the wage bill figures for some 9,000 organisations every month, and dividing these by the numbers of employees in each organisation. As such, it is affected by changes in the size or composition of the workforces of individual organisations, as well as by changes in the amount of money being paid out in earnings. Influences on the latter might include the number of hours being worked, as well as bonuses.
What might happen to pay?
For both settlements and earnings, the main driver behind the positive headlines has been the recent fall in the different measures of the cost of living, rather than any rapid acceleration in pay growth. The figures for pay settlements have recovered a little though, with more awards at 3 per cent than previously, which is significant when it comes to benchmarking pay reviews. While the average earnings figures are weaker, this is mainly due to their susceptibility to hours and workforce changes. Indeed the earnings figures may have been influenced recently by trends such as growth in employment in comparatively lower-paying sectors at the expense of higher-paying ones, and a rise in ‘under-employment’, with some people finding work for fewer hours each week than they would prefer. Now that the economy is growing again, as these factors recede, then average earnings might begin to show more strongly as well.