1. Pay growth: latest figures and forecasts
Paul Sellers

2. What will this presentation cover?
What is pay growth?
Why we generally use the ONS Average Weekly Earnings series (AWE)?
When do we use ONS ASHE or LFS instead? Where can we find pay data?
What do the current pay growth figures tell us?
Results broken down by industry and public and private sector
What are the predictions for 2018 and beyond?
How likely are the predictions to be true?
Pay isn’t keeping pace with prices - what will happen to inflation?
The labour market is tightening – the vacancy to unemployment ratio
The trade union wage premium – your better off in a trade union

3. What is pay growth?
Pay growth is a measure of how much average earnings have changed.
This is not the same as pay settlements or awards.
Pay surveys measure average earnings. Different surveys are conducted annually, quarterly and monthly.
The surveys that we use deal only with employees. There is also a series for self- employed earnings, but it is not very reliable.
Changes in average earnings include those who have been promoted, received increments, changed job or changed hours of work, all of which affect the result.
Changes in composition can also affect average earnings. For example, if experienced employees at the top of the pay scale retire and are replaced by new staff at the bottom, this will lower the average.

4. Why do we use ONS Average Weekly Earnings?
AWE is also the preferred measure of both ONS and government. It is very up-to- date, as the AWE is conducted monthly. It surveys 8,000 employers.
The ONS Annual Survey of Hours and Earnings (ASHE) has the best data. Sample is 1% of employees on PAYE –about a quarter of a million employees. But is taken in April and published in the autumn, so it can be up to 17 months out of date.
We have to use ONS ASHE for pay data related to regional variations, age, gender, and full-time/part-time earnings.
We use the ONS Labour Force Survey for pay data related to disability or BME backgrounds, as this is not available anywhere else.
LFS is a quarterly sample survey of 92,000 people, but 1/3 of the interviews are proxies. As a result, it systematically under-reports pay levels.

5. Pay growth – calculated for year to September to November (excludes bonuses)
2015
2016
2017
All employees
2.0%
2.7%
2.4%
Private sector
2.2%
3.0%
2.5%
Public sector (excluding banks)
1.6%
1.4%
1.9%

6. Pay growth by sectors 2015 2016 2017 Manufacturing 2.2% 2.0% 2.4%
Construction
2.6%
4.2%
2.3%
Finance and business services
1.8%
Wholesale, retail, hotels and restaurants
3.3%
All service sector
2.7%

7. Where can we find pay growth forecasts?
There are two main sources
The Office of Budget Responsibility (OBR) produces forecasts twice a year. These are published in the OBR’s “Economic and Fiscal Outlook”. They have the most credibility for government and employers, but they may get out of date if the economy changes quickly.
The Treasury produces a monthly round-up of forecasts made by finance sector and academic economists. These can vary quite widely, so most analysts look at the median average of forecast made within the past 3 months. The latest round up shows pay forecasts rising because of higher than expected inflation. The central forecast for pay growth in 2018 is now 2.6%. The range of forecasts varies between 2.0% and 3.5%.

8. Forecasts for 2018 and beyond
OBR – Nov 2017
HMT round-up Jan 2018
2018
2.3%
2.6%
2019
3.0%
2020
3.2%
2021
3.3%
2022
3.1% -

9. Pay has not reached forecasts in recent years
Pay growth and other economic forecasts are far from infallible. They are the best map that we have, but they have to be read with care.
Forecasters have been much less accurate on pay than on some other measures.
Pay growth has fallen short of predicted levels for 3 years running.
Forecasts have been continually downgraded as pay growth has failed to take off as predicted.
In November 2017, the OBR downgraded its March forecast for 2018 pay growth from 2.6% to 2.3%
This follows a steady series of down-grades as 2018 approached. Older predictions for this year were more optimistic: 2.8% (2016), 3.6% (2015), 3.9% (2014).
The closer to the actual the year in question, the more accurate the prediction.

10. Why has pay growth fallen short of predictions?
The strong employer narrative has been that pay should grow by about 2%, the Bank of England's inflation target, unless there is a reason to do otherwise – like 3% CPI!
Conventional advice is that real pay growth (taking account of inflation) should reflect labour productivity growth, which has been weak for a long time.
The public sector pay cap is probably one factor, reducing competition for labour and holding down the spending power of part of the economy. If public sector wages had grown at the same rate as private sector last year, total public sector pay would have been just over £1 billion higher during 2017.
Collective bargaining is extremely patchy in the private sector (14.9%). Unions have used intelligent strategies to try to push up real pay, but have been hampered by slow GDP growth, economic uncertainty and very competitive trading conditions.
But we should also be aware that average corporate profit is at near record levels- largely as a result of corporation tax cuts.

11. What is likely to happen to the National Minimum Wage and the voluntary living wage
In 2015 the government announced a target of 60% of median earnings by 2020, named the “national living wage”. This applies to those aged 25 and above.
Initially the target was announced as being worth around £9 per hour. However, pay growth has been much slower than predicted.
The current rate is £7.50 an hour. This will increase to £7.83 from April (+4.4%). The target is now forecast to deliver a rate of £8.61 by 2020.
Even so, with average earnings growing by 2.4%, Trade union bargainers will have to take some account of the more rapidly rising minimum wage rate.
The real living wage is a voluntary standard – currently £10.20 in London and £ The formula should generally maintain the gap between the real living wage and the statutory minimum wage. However, higher than expected inflation meant that the London rate grew faster last year. This was largely due to the phase out of the old London formula, which capped inflation. This is not expected to happen again.

12. Pay has not kept pace with prices
Inflation is outstripping the current 2.4% AWE pay growth, so real pay is falling.
The real value of pay has never recovered to pre-recession levels. 10 years on, the average employee still earns around £2,000 PA less in real terms – a £38 weekly loss.
Government has now made CPIH its preferred measure of inflation. This includes housing costs. House price rises have slowed and average rents fell slightly last year.
Consumer Price Index (CPI) is still the recognised international measure of inflation
Retail Price Index is still widely used as a measure in collective bargaining.
Long term inflation forecasts are always less accurate, as forecasters assume the Bank of England will take action to enforce the 2% CPI target.
The BoE is bound to do so, but after a time- lag, The bank raised the base rate last autumn and the governor says that he expects 2 more increases in the next 3 years.

13. Inflation figures (Dec )
CPIH
CPI
RPI
2016
1.9%
1.8%
2.8%
2017
2.7%
3.0%
4.1%

14. Inflation - forecasts for 2018 whole year
CPI
RPI
OBR November 2017
2.4%
2.9%
HMT round up Jan 2018
2.3%
3.1%

15. Inflation forecast for 2018 quarters – by Trading Economics Jan 2018
CPI inflation forecast
Q1 Jan-March
2.8%
Q2 April-June
2.7%
Q3 July-Sept
2.5%
Q4 Oct-Dec
2.4%

16. The labour market is steadily tightening – and the vacancy to unemployment ratio narrows
Sept-Nov figs
All vacancies (thousands)
Unemployment (thousands)
Number of unemployed people per vacancy
2014
703
1,922
2.7
2015
741
1,684
2.3
2016
753
1,600
2.1
2017
804
1,439
1.8

17. The trade union pay premium 2016 – you are still better off in a union.
All employees
13.7%
Public sector
14.5%
Private sector
7.6%
Manufacturing
7.4%
Professional, scientific, technical
8.5%
Public admin, defence, social security
3.3%
Health and social work
32.9%
Education
28.7%