Is pay going up or down? Both, or neither, depending on the measure you use. Photo: Getty
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Pay set is to go up, or down, or stay the same – it all depends on how you measure it

We are heading into a so-called “living standards election” – without accurate data on living standards. Different sides will be able to tell whatever story they want.

We can expect to hear an awful lot about the closing gap between pay and inflation over the next few months as, inevitably and thankfully, on some measure we close in on a “cross-over point” where wages overtake price rises.  

But this poses the question: which measure of inflation and, indeed, which measure of pay?

Confusion abounds on this – and this provides the space for different political parties to choose numbers which stand up the story they want to tell about the recovery and living standards. Get ready for a war of competing statistics.

When it comes to pay, average wages (that is, mean pay across the economy or, more accurately, across employees) regularly get reported as if they relate to the experience of a typical worker in the economy. They don’t – they are skewed by whatever is going on at the top of the distribution. For this reason we need to look at median pay – that of the typical worker. While the period since the financial crisis have been marked by relatively even movements in pay across the earnings distribution, the typical experience in recent decades has been for the mean to significantly outpace the median, reflecting growing wage inequality. No one knows for sure how this will pan out during economic recovery, but few would be surprised if the historic relationship resumes.

The trickier issue is the measure of inflation that should be used to deflate trends in wages. And here there is a bit of disarray. This debate may sound nerdy – indeed, it is quite nerdy – but it matters and we are going to hear a lot about all this, so it’s worth reflecting on.

The Retail Price Index (RPI), introduced after WWII,  was traditionally considered the best measure for gauging what was happening to living standards, covering a wider suite of prices (and generally being higher) than the CPI which was introduced in the 1990s to meet the need for international harmonisation. Recently RPI has fallen out of favour. The formula it uses for aggregating prices (the Carli index, if you are into this sort of thing) has been fairly widely criticised and is thought to overstate inflation, leading the ONS to deem that it no longer qualifies as a National Statistic (though that hasn’t stopped the government from continuing to use it in relation to index-linked gilts and bonds).

This has left CPI as the main reported measure for inflation and it is used for uprating benefits, tax credits, pensions and tax thresholds (the government switched from RPI to CPI for uprating benefits from April 2011 and in doing so made a massive saving). But unlike RPI, CPI takes no account of a range of housing costs, such as mortgage interest payments. Arguably, it tells us quite a lot less about living standards.

The controversy about how to measure inflation is such that the UK Statistics Authority has established two reviews including one by the IFS’s Paul Johnson looking specifically at the arguments for using ‘cost of living’ or ‘cost of goods’ concepts in defining inflation. The former concept is likely to have more relevance for households and for the purposes of deflating pay and incomes; the latter is likely to be more useful from a macroeconomic perspective. As things stand, the various measures used in the UK tend to fall somewhere between these two camps.

Just to complicate matters further, two new measures have been already introduced: CPI-H (which adds an owner occupied housing element to CPI) and RPI-J (which maintains the RPI coverage but uses a more reliable formula similar to CPI). But neither of these measures is used by the government in policy formulation so when it comes to official wage projections we are left with the traditional choice between CPI and RPI.

To see how important – and politically relevant – these different measures can be consider this chart.

Source: OBR, Economic and Fiscal Outllook; and Resolution Foundation modelling

The CPI-deflated mean (average) wage projection is taken directly from the OBR’s latest Economic and Fiscal Outlook. It looks pretty rosy in the years ahead – at least compared to the recent past – and has caught the eye of many economic commentators. But it only tells part of the story.

If we want to get a sense of what this might mean for median pay we can adjust the average (assuming, as discussed above, that the relationship between the mean and median over the next few years is the same as that in the decade prior to the financial crisis).

What the chart shows is that if we then adjust this median wage figure for RPI inflation then pay looks set to fall in the years ahead. But if we use CPI it’s set to rise. And if we try and find some middle ground that avoids the narrowness of CPI or the unreliability of RPI, then we could use an imputed projection for RPI-J. (This assumes – imperfectly, but defensibly – that past relationships hold: holding constant the ratio between annual growth in the RPI and RPI-J in the years ahead, reflecting the relative stability of this ratio over the course of the history of the RPI-J). And under this RPI-J measure, pay is set to flat-line. So according to which measure of inflation you use wages are set to rise. Or flat-line. Or fall. Take your pick.

For now, at least, this leaves us in no man’s land. We are heading into a so-called ‘living standards election’ in which different sides will be able to tell whatever story they want about the prospects for wages depending on the measures used (with no official ‘best measure’). Add to this the fact that when it comes to what is happening to household incomes – a far superior measure of living standards – the only accurate data will be more than two years out of date by polling day. Given that some of our key economic measures are misleading and others are out of date, the electorate should stand ready to be bamboozled. Is this really the best we can do?

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Who will win in Copeland? The Labour heartland hangs in the balance

The knife-edge by-election could end 82 years of Labour rule on the West Cumbrian coast.

Fine, relentless drizzle shrouds Whitehaven, a harbour town exposed on the outer edge of Copeland, West Cumbria. It is the most populous part of the coastal north-western constituency, which takes in everything from this old fishing port to Sellafield nuclear power station to England’s tallest mountain Scafell Pike. Sprawling and remote, it protrudes from the heart of the Lake District out into the Irish Sea.

Billy, a 72-year-old Whitehaven resident, is out for a morning walk along the marina with two friends, his woolly-hatted head held high against the whipping rain. He worked down the pit at the Haig Colliery for 27 years until it closed, and now works at Sellafield on contract, where he’s been since the age of 42.

“Whatever happens, a change has got to happen,” he says, hands stuffed into the pockets of his thick fleece. “If I do vote, the Bootle lass talks well for the Tories. They’re the favourites. If me mam heard me saying this now, she’d have battered us!” he laughs. “We were a big Labour family. But their vote has gone. Jeremy Corbyn – what is he?”

The Conservatives have their sights on traditional Labour voters like Billy, who have been returning Labour MPs for 82 years, to make the first government gain in a by-election since 1982.

Copeland has become increasingly marginal, held with just 2,564 votes by former frontbencher Jamie Reed, who resigned from Parliament last December to take a job at the nuclear plant. He triggered a by-election now regarded by all sides as too close to call. “I wouldn’t put a penny on it,” is how one local activist sums up the mood.

There are 10,000 people employed at the Sellafield site, and 21,000 jobs are promised for nearby Moorside – a project to build Europe’s largest nuclear power station now thrown into doubt, with Japanese company Toshiba likely to pull out.

Tories believe Jeremy Corbyn’s stance on nuclear power (he limply conceded it could be part of the “energy mix” recently, but his long prevarication betrayed his scepticism) and opposition to Trident, which is hosted in the neighbouring constituency of Barrow-in-Furness, could put off local employees who usually stick to Labour.

But it’s not that simple. The constituency may rely on nuclear for jobs, but I found a notable lack of affection for the industry. While most see the employment benefits, there is less enthusiasm for Sellafield being part of their home’s identity – particularly in Whitehaven, which houses the majority of employees in the constituency. Also, unions representing Sellafield workers have been in a dispute for months with ministers over pension cut plans.

“I worked at Sellafield for 30 years, and I’m against it,” growls Fred, Billy’s friend, a retiree of the same age who also used to work at the colliery. “Can you see nuclear power as safer than coal?” he asks, wild wiry eyebrows raised. “I’m a pit man; there was just nowhere else to work [when the colliery closed]. The pension scheme used to be second-to-none, now they’re trying to cut it, changing the terms.”

Derek Bone, a 51-year-old who has been a storeman at the plant for 15 years, is equally unconvinced. I meet him walking his dog along the seafront. “This county, Cumbria, Copeland, has always been a nuclear area – whether we like it or don’t,” he says, over the impatient barks of his Yorkshire terrier Milo. “But people say it’s only to do with Copeland. It ain’t. It employs a lot of people in the UK, outside the county – then they’re spending the money back where they’re from, not here.”

Such views might be just enough of a buffer against the damage caused by Corbyn’s nuclear reluctance. But the problem for Labour is that neither Fred nor Derek are particularly bothered about the result. While awareness of the by-election is high, many tell me that they won’t be voting this time. “Jeremy Corbyn says he’s against it [nuclear], now he’s not, and he could change his mind – I don’t believe any of them,” says Malcolm Campbell, a 55-year-old lorry driver who is part of the nuclear supply chain.

Also worrying for Labour is the deprivation in Copeland. Everyone I speak to complains about poor infrastructure, shoddy roads, derelict buildings, and lack of investment. This could punish the party that has been in power locally for so long.

The Tory candidate Trudy Harrison, who grew up in the coastal village of Seascale and now lives in Bootle, at the southern end of the constituency, claims local Labour rule has been ineffective. “We’re isolated, we’re remote, we’ve been forgotten and ignored by Labour for far too long,” she says.

I meet her in the town of Millom, at the southern tip of the constituency – the opposite end to Whitehaven. It centres on a small market square dominated by a smart 19th-century town hall with a mint-green domed clock tower. This is good Tory door-knocking territory; Millom has a Conservative-led town council.

While Harrison’s Labour opponents are relying on their legacy vote to turn out, Harrison is hoping that the same people think it’s time for a change, and can be combined with the existing Tory vote in places like Millom. “After 82 years of Labour rule, this is a huge ask,” she admits.

Another challenge for Harrison is the threat to services at Whitehaven’s West Cumberland Hospital. It has been proposed for a downgrade, which would mean those seeking urgent care – including children, stroke sufferers, and those in need of major trauma treatment and maternity care beyond midwifery – would have to travel the 40-mile journey to Carlisle on the notoriously bad A595 road.

Labour is blaming this on Conservative cuts to health spending, and indeed, Theresa May dodged calls to rescue the hospital in her campaign visit last week. “The Lady’s Not For Talking,” was one local paper front page. It also helps that Labour’s candidate, Gillian Troughton, is a St John Ambulance driver, who has driven the dangerous journey on a blue light.

“Seeing the health service having services taken away in the name of centralisation and saving money is just heart-breaking,” she tells me. “People are genuinely frightened . . . If we have a Tory MP, that essentially gives them the green light to say ‘this is OK’.”

But Harrison believes she would be best-placed to reverse the hospital downgrade. “[I] will have the ear of government,” she insists. “I stand the very best chance of making sure we save those essential services.”

Voters are concerned about the hospital, but divided on the idea that a Tory MP would have more power to save it.

“What the Conservatives are doing with the hospitals is disgusting,” a 44-year-old carer from Copeland’s second most-populated town of Egremont tells me. Her partner, Shaun Grant, who works as a labourer, agrees. “You have to travel to Carlisle – it could take one hour 40 minutes; the road is unpredictable.” They will both vote Labour.

Ken, a Conservative voter, counters: “People will lose their lives over it – we need someone in the circle, who can influence the government, to change it. I think the government would reward us for voting Tory.”

Fog engulfs the jagged coastline and rolling hills of Copeland as the sun begins to set on Sunday evening. But for most voters and campaigners here, the dense grey horizon is far clearer than what the result will be after going to the polls on Thursday.

Anoosh Chakelian is senior writer at the New Statesman.