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.

Official statistics have shed new light on how pay has moved over the past five years. Earnings for those who have retained their jobs have grown by more than was previously understood. Those who have lost their jobs and found new ones appear to have done so on less pay and fewer hours below their previous employment.

The publication last December of the Annual Survey of Hours and Earnings for April 2013 by the Office for National Statistics (ONS) reveals new data on annual percentage changes in median full-time gross weekly earnings for those employees who have been in the same post for at least a year. The analysis by ONS of the ASHE data is for full-time staff. According to the ONS, 89 and 84 per cent of full-time staff had been in post for at least a year in the public and private sectors respectively in April 2013.

This shows that for employees in the private sector median earnings grew by 6% in 2008, 2.5% in 2009 and then between 3.5% and 4% in each of the years from 2010 to 2013. By contrast, in the public sector median earnings grew by 6% in 2008, 5.7% in 2009, and then by around 3% in 2010, 2011 and 2012 before rising to 3.8% in 2013.

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These rates of growth for those in continuous employment provide a clearer picture of pay movements in companies and are consistent with the IDS measure of  annual pay settlements (largely between 2 to 3 per cent over the period) and the regular analysis  by IDS of pay progression in the private sector.

The ASHE data also gives the annual percentage changes in median gross weekly earnings for all full-time employees, which also includes people who have changed jobs and those entering the labour market from inactivity in the year in focus. Once all those in discontinuous employment are included, the earnings increases look much more like those of the monthly Average Weekly Earnings (AWE) series. The AWE has been showing much weaker growth in earnings, though this is to do with the how this measure is constructed (see notes below).

According to the latest ASHE data the earnings for all full-time employees in the private sector run between 1 and 2 per cent over 2009 to 2012 reaching 2.3% in 2013. In the public sector the annual change dropped to 0.4% in 2011 and 1.8% in 2012 and 1.6% in 2013.

Although there is often an assumption that progression only occurs in the public sector, IDS research has shown that pay progression continues to be used in the private sector. The data from ASHE lends weight to this, again showing that since 2010 pay growth for those who have stayed with their employer has stood at around 4 per cent – a period in which settlements have been relatively subdued at between 2 to 3 per cent. The gap is likely to be down to progression and promotions rather than overtime since hours worked did not increase significantly over this period.

The impact of progression is particularly evidenced by the fact that pay growth in the public sector for those in continuous employment has held up during the Government’s imposed pay policy. Since 2010 general awards in the public sector were frozen for two years and then capped at 1 per cent, while progression was still paid in most cases (the exceptions being in most parts of the civil service and the police in England and Wales).

The fact that those in discontinuous employment can have such a large impact on the rates of change in earnings suggests that those losing their jobs have suffered the most in real terms in recent years, dropping down the pay league table when getting new employment. Many of those made redundant may have found new jobs on lower pay, at below their normal skill level or on fewer hours. This is in line with trends during and in the wake of the recession when the number of people in part-time work who would prefer full-time work rose sharply to over one million, though this has since started to come down.

New starters in a number of sectors could have started new jobs at lower pay rates than existing workers. Many of the new jobs have been part-time, particularly in the lower paying parts of the private sector.  This period has also been one in which zero-hours contracts have grown, particularly in social care, where we have also seen employers refusing to pay for travelling time between domiciliary visits.  The squeeze on local government funding is having a knock-on effect on the pay on offer to care staff.

For some time IDS has been arguing that the AWE series was not providing a particularly clear picture of pay movements because it is overly sensitive to changes in the composition of the workforce.  It may well give an accurate picture of average earnings growth rates across the economy but it masks differences at the same time.

This is important because media commentaries on the monthly AWE figures more often than not describe the monthly increase as a measure of pay rises, when it is not. The AWE is really a measure of the changes in organisations’ paybills, and NOT individual employee earnings. ASHE is a better reflection of changes in earnings, albeit that the data is less timely.

The new ASHE earnings figures help us to understand key differences. The AWE growth rates of 1 per cent or so have been a puzzle for some time, but the sharp divide between the earnings for full-time staff in continuous employment and those in discontinuous employment enhances our understanding.

It might be reasonable to estimate that up to 20 per cent of full-time employees and 30 to 40 per cent of part-time employees have experienced very large falls in earnings and that this has directly dragged down the increase in the average for all employees.

Notes on the different earnings data

  • The ASHE data on earnings is based on a snapshot of pay data in mid-April each year. This year there were 184,000 returns for individual employees. The data are provided by employers. It tends to be weak on bonus pay because the key bonus period is normally January to March. ASHE doesn’t include earnings data for the self employed.
  • The AWE series is published monthly, two months in arrears. It is based on returns from up to 8,000 companies who provide total paybill and total employees for each month. The average is calculated by dividing the paybill by the number of employees. If there is a growth in part-time employees or lower-paid employees generally then the average drops down. If lower-paid support staff in the public sector are outsourced to the private sector this raises average pay in the public sector and lowers the average in the private sector.
  • The IDS measure of pay settlements is based on talking to companies and organisations about the outcome of their annual pay negotiations and then calculating the median increase based on the aggregate figures from around 700 organisations. The review dates for pay increases vary across the economy, but January and April are the two key months.

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