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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.

In his speech announcing the latest Comprehensive Spending Review, the Chancellor returned to the topic of progression pay in the public sector. He said: ‘Progression pay can at best be described as antiquated; at worst, it’s deeply unfair to other parts of the public sector who don’t get it and to the private sector who have to pay for it. So we will end automatic progression pay in the civil service by 2015-16. And we are working to remove automatic pay rises simply for time served in our schools, NHS, prisons and police. The armed forces will be excluded from [this]. Keeping pay awards down and ending automatic progression means that, for every pound we have to save in central administration, we can better limit job losses.’ More

So-called ‘merit’ or performance-related pay systems are coming under scrutiny, as line managers complain about shrinking budgets and ever-stricter guidelines for the distribution of pay rises. Line managers are also unhappy with the propensity for merit reviews to hijack discussions with staff about work objectives and how they might develop in their roles. Meanwhile employees point to the lack of transparency associated with merit pay, with outcomes that are often inequitable. More

Performance or merit-related pay has been a tool much loved by senior management at many companies since the late 1980s, but just as the recession has tested a whole number of cherished assumptions, so too has performance-related pay come under scrutiny. Tighter budgets have led to smaller pay pots, undermining the prospect of staff motivation that merit pay promises. And the principles involved have increasingly begun to be questioned by staff. In some instances, the lack of transparency surrounding the distribution of performance-related pay has resulted in arguments between employers and employees. More

The Office for National Statistics is to publish a new RPI-based measure of inflation, ‘RPIJ’, from this March. It will be published alongside the existing Retail Prices Index, the main measure of inflation used in pay-setting and uprating private pensions, Government bonds and gilts. This move follows a consultation over potential changes to RPI, regarded as necessary because of differences between the RPI and the Government’s preferred measure of inflation for macroeconomic purposes, the Consumer Prices Index (CPI). More

Recent coverage of the costs of public sector pay progression presents a partial picture. Official figures from the Office for National Statistics show that average earnings growth in the public sector is currently below that in the private sector. The latest figures, for the three months to June 2012, show that average earnings in the public sector (excluding financial services) rose by 1.5 per cent compared with the same period a year ago. The corresponding figure for the private sector is 1.8 per cent. This is the closest the two have been all year, with previous figures for 2012 showing an average gap of 0.5 per cent in favour of the private sector. More

TV reviews don’t often figure in our coverage, but Channel 4’s recent reality programme Show Me Your Money’ raised too many interesting issues for us to let it pass without comment. The show told the story of how Charlie Mullins, the owner of a successful London plumbing business, invited his 200 staff to disclose their salaries to each other. This is probably not that ground-breaking for many IDS Pay Report subscribers. But Charlie came up with the novel idea that any discrepancies could only be ironed out by better-off workers taking pay cuts in order to finance pay rises for those earning less. More

The Office for National Statistics has set out how it intends to meet concerns about the Government’s preferred measure of inflation, the Consumer Prices Index (CPI). Stephen Penneck, the Director General of the ONS, has said opens PDF]  that the body intends to be in a position to include owner-occupier housing costs in the CPI by early 2013. He also said that the ONS is working to understand and communicate the reasons for the difference between the CPI and the RPI, especially those caused by the formula effect of using different averages for calculating price changes. The ONS will report on this work throughout 2012. More

The latest sharp rise in the RPI, combined with a slight drop in the IDS median pay award, has once more cast a spotlight on the relationship between the cost of living and wages. The current high levels of inflation, coupled with comparatively lower average pay increases, mean that, in what economists and journalists like to call ‘real terms’, earnings continue to fall. More

A clear gap between the level of pay settlements in the public and private sectors is continuing, according to the latest data from The median settlement level for private sector deals in the three months to the end of September is 2.6 per cent, up from 2.5 per cent in the three months to August. The median in the public sector remains at zero. More

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