Overview
Wednesday saw the provisional release of the 2016 ONS Annual Survey of Hours and Earnings (ASHE). This time series, which has been running since 1997, is an important economic indicator. In 2004, it replaced the New Earnings Survey as the principal statistical release reporting the levels and distribution of earnings in the UK. The survey’s headline measure is full-time employees’ median weekly earnings; it looks at earnings by occupation, location, age, and tenure, and is the principal data source of the gender pay gap. Although ASHE’s results only go as far as April, which was, of course, before the EU referendum, they have been much awaited by those keen to assess the resilience of the British economy before the vote’s effects — and Brexit’s opportunities and challenges — become clearer.
At first glance, the survey’s news is highly positive. Median gross weekly earnings for full-time employees are up 2.2 per cent on 2015, which is the joint highest rate of growth since the Great Recession in 2008; in real terms, earnings increased 1.9 per cent. This compounds last year’s progress, when, ‘adjusted for inflation, weekly earnings increased by 1.9 per cent compared to 2014’ — the first increase since 2008. And the government’s short-term earnings indicator, Average Weekly Earnings, has disclosed similar findings: the latest UK Labour Market bulletin (June – August) showed that nominal earnings rose by 2.3 per cent — or 1.8 per cent in real terms — on a year ago. ASHE also shows that the gender pay gap has reached a historic low; that earnings for part-time workers rose by 6.6 per cent; and that earnings from employment at the ‘bottom of the distribution’ have ‘grown fastest this year, with the fifth percentile growing by 6.2 per cent, and the 95th percentile growing by 2.5 per cent’.
However, much of the response to the ASHE earnings data has focused on the fact that earnings have not yet reached pre-downturn heights: The Sun led with the line that ‘Brits are being paid less than they were 12 years ago even after taking into account inflation shocking new research has revealed’. And the survey’s findings have also been criticised for not including information on the self-employed — an increasingly significant group, which contains disproportionate clusters both at the top and the bottom of the pay scale (the Social Market Foundation has recently estimated that 45 per cent earn less than the National Living Wage).
It is important to consider this debate about the ASHE data in its wider labour market context. Firstly, ASHE’s results are a counterpart to a successful employment story. The aforementioned bulletin points out that employment has ‘never’ been higher (since 1971, when comparable records began), and that is owing, not least, to a realistic adjustment of real pay following the devastating effects of the Great Recession, when output fell 6.3 per cent.
Secondly, ASHE data is only part of the labour market story. Its results simply tell us what individuals can get, regarding employment, from the labour market. Bigger-picture assessments are usually considered on more comprehensive measures, such as household disposable income, which can fully take into account other forms of incomings, living costs, tax, and social security transfer payments. The ASHE data does not cover the self-employed, and people involved in the ‘gig economy’, but around 85 per cent of the workforce is employed, and their earnings are covered. It therefore provides the bench mark that people use to evaluate their earnings; the average wages of those in full-time employment is a basic comparator for us all.
1) The Living Wage
The novel feature in this year’s ASHE data is the first information about the National Living Wage. Its introduction in April (the survey covers the tax year, and an employee’s pay period within it including a date in April), helped to increase earnings at the bottom of the distribution. This builds on increases to the National Minimum Wage over the past few years, and, specifically, the changes initiated last October.
The National Living Wage offers a fascinating labour market experiment. It raises wages for the lowest paid, which is a process that may present difficulties for smaller businesses, and will also compress pay differentials in a way that potentially has implications for the efficiency of the labour market. We should recognise, too, that, in the years following the Great Recession, it was social security transfer payments targeted on household income that ensured that the dispersion in household income diminished, while earnings from employment grew slowly. The slow growth in earnings allowed the labour market to adjust, and explains the strong employment performance.
2) The gender pay gap
Having decreased by 0.2 per cent this year, the gender pay gap is now the lowest since ASHE began. But it is widely understood that the survey’s findings have displayed relatively little change in this area over the past decade. 2016’s figures show a bigger growth in pay for women than men, but a similar gap between the genders remains.
It is important to bear in mind that ASHE does not show differences in pay for comparable jobs; the compositions and behaviours of the overall male and female workforces are not the same. That women, on average, experience more career interruption than men, for instance, is particularly relevant because ASHE’s figures show that longer tenure is associated with higher pay increases. The Living Wage is also significant, here. As the Resolution Foundation has pointed out, ‘earnings in 2016 grew fastest for those in their 20s, women, part-time employees, and those in occupations including sales, customer services and cleaning. Given low earners tend to be concentrated in these groups, this is largely a reflection of the positive distributional story connected to the NLW’s introduction.’
3) Regional disparity
ASHE earnings data is particularly useful for comparing regional pay. It reports the average pay of jobs in a given location, however, rather than that of the people who live there. The relevance of this is seen in areas of clear disadvantage where there are, nonetheless, a good number of highly-paid jobs — jobs that are held by those who live elsewhere.
Moreover, when considering regional differences today, it is important to note that the data takes no account of different regional prices indices, or, for example, differences in housing costs. In April 2016, London had the highest median earnings for full-time employees by place of work — £671 per week. Employees in London earned £105 more per week than the next highest — the South East (£566) — and £132 more than the median for the whole of the UK (£539). Pay in London reflects the high proportion of its labour force employed in high-paying industries and occupations, and that many employees receive allowances for working in the capital.
4) Public- and private-sector pay
The survey also shows 2016 to be the ‘first year in the series that the differential is in favour of the private sector since 2003’. The mean pay of those in the public sector (up by 0.7 per cent) is now estimated to be 1 per cent lower than those of their private-sector counterparts (up by 3.4 per cent), though, again, ASHE does not take other forms of remuneration into account. Once more, the Minimum/Living Wage issue is of consequence, here. More private-sector workers have been directly affected by the recent adjustments, and although fewer in the public sector are at the very top of the wage distribution, many more of them are in the ‘professional and middle-skilled group’ (75 per cent, as opposed to 48 per cent of the private sector).