A rising tide that lowers the boats? On wage growth and labour market performance since the crash
On Sunday, this counsel of despair was echoed by the ever-despairing shadow chancellor John McDonnell, who said on the Andrew Marr Show: ‘We’re the only economy in Europe that’s growing while wages are falling.’ But are we?
The graphic in question comes from an article in the Financial Times. Upon closer inspection, it does not show that workers are getting poorer, nor does it show that wages are falling. Office for National Statistics data show that median wages rose above the rate of inflation in 2015 and 2016, and incomes have increased for all but the richest fifth since 2008. Last year, average weekly earnings grew by 1.9 per cent in real terms. Moreover, income growth was fastest among those on low incomes, ‘with the fifth percentile growing by 6.2% and the 95th percentile growing by 2.5%’ (in nominal terms, against an inflation rate of 0.7 per cent).
But whilst there is no evidence that wages are falling, it is true that they have fallen and that whilst median earnings are rising they have still not returned to the levels seen in 2007. That is what the Financial Times chart actually shows and the FT offers several reasons for this, including the relatively high inflation rate between 2008 and 2011, but averages can be misleading and there is one statistical explanation that is so important that the ONS dedicated a whole webpage to it in 2015.
Unlike many European countries, Britain’s post-crash era has seen surprisingly little unemployment. The employment rate amongst working age people is currently 74.6 per cent, the highest it has been since ONS records began in 1971. Very large numbers of people have entered the labour market in recent years. Some of them have come off benefits and into work. Others have come from abroad. Being new to the workforce, they tend to start on relatively low salaries.
The person who is on the median average salary – let’s call him Jeremy – earns more money than half of the workforce but less money than the other half. If a million jobs are created which pay less than average, the median drops. Jeremy moves into the upper half and is no longer the median worker.
Jeremy does not become any poorer as a result of the median falling, nor does he become any richer by moving into the upper half of the distribution. He is a flesh and blood human being, not a statistical category. If we want to know whether people like Jeremy have seen their wages fall since 2007 we need to look at the ONS’s data on continuous employment.
You are termed ‘continuously employed’ if you have been employed for more than a year. Eighty per cent of full-time workers in Britain fall into this category and ONS data show significant above-inflation wage increases going back years. In fact, since the crash, the only year when wages of the continuously employed fell below the rate of inflation was 2011 when the Consumer Price Index was 4.5 per cent. Last year, wage growth was 4.6 per cent, far above the 0.7 per cent inflation rate.
What about the people who have just joined the workforce? The question of whether they are better off than they were in 2007 depends on what they were doing ten years ago, but if they are economic migrants it is safe to assume that they are earning more than did before, otherwise they would not have emigrated, and we know that people earn more money in full-time work than they do living on benefits (as even Danny Dorling has grudgingly admitted.) The fact that the incomes of the poorest fifth have risen by 13 per cent in real terms since 2007 strongly suggests that they are better off as a result of these jobs being created.
A one per cent drop in median earnings, as shown in the FT graphic, does not mean that people have been slogging away in the same old job on lower wages than they received before the recession. Nor should it be inferred that life is rosier in France and Spain where median earnings are slightly higher than they were in 2007. When it comes to wage data, you only count if you have a job. The unemployment rate in France is twice as high as it is in Britain. In Spain, it is four times higher.
Understanding changes in the labour market helps us to explain the counter-intuitive finding that median incomes have risen since 2007 while median wages have fallen. Part of the reason is that people who were previously on benefits have found work, thereby raising their own incomes, but have disproportionately taken jobs that pay less than average, thereby lowering the median. In general, this has made people better off. If, on the other hand, the economy had shed large numbers of low-skilled jobs, the median income would have risen mathematically without benefiting anyone.