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?

Photo: Getty
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Unite stewards urge members to back Owen Smith

In a letter to Unite members, the officials have called for a vote for the longshot candidate.

29 Unite officials have broken ranks and thrown their weight behind Owen Smith’s longshot bid for the Labour leadership in an open letter to their members.

The officials serve as stewards, conveners and negotiators in Britain’s aerospace and shipbuilding industries, and are believed in part to be driven by Jeremy Corbyn’s longstanding opposition to the nuclear deterrent and defence spending more generally.

In the letter to Unite members, who are believed to have been signed up in large numbers to vote in the Labour leadership race, the stewards highlight Smith’s support for extra funding in the NHS and his vision for an industrial strategy.

Corbyn was endorsed by Unite, Labour's largest affliated union and the largest trades union in the country, following votes by Unite's ruling executive committee and policy conference. 

Although few expect the intervention to have a decisive role in the Labour leadership, regarded as a formality for Corbyn, the opposition of Unite workers in these industries may prove significant in Len McCluskey’s bid to be re-elected as general secretary of Unite.

 

The full letter is below:

Britain needs a Labour Government to defend jobs, industry and skills and to promote strong trade unions. As convenors and shop stewards in the manufacturing, defence, aerospace and energy sectors we believe that Owen Smith is the best candidate to lead the Labour Party in opposition and in government.

Owen has made clear his support for the industries we work in. He has spelt out his vision for an industrial strategy which supports great British businesses: investing in infrastructure, research and development, skills and training. He has set out ways to back British industry with new procurement rules to protect jobs and contracts from being outsourced to the lowest bidder. He has demanded a seat at the table during the Brexit negotiations to defend trade union and workers’ rights. Defending manufacturing jobs threatened by Brexit must be at the forefront of the negotiations. He has called for the final deal to be put to the British people via a second referendum or at a general election.

But Owen has also talked about the issues which affect our families and our communities. Investing £60 billion extra over 5 years in the NHS funded through new taxes on the wealthiest. Building 300,000 new homes a year over 5 years, half of which should be social housing. Investing in Sure Start schemes by scrapping the charitable status of private schools. That’s why we are backing Owen.

The Labour Party is at a crossroads. We cannot ignore reality – we need to be radical but we also need to be credible – capable of winning the support of the British people. We need an effective Opposition and we need a Labour Government to put policies into practice that will defend our members’ and their families’ interests. That’s why we are backing Owen.

Steve Hibbert, Convenor Rolls Royce, Derby
Howard Turner, Senior Steward, Walter Frank & Sons Limited
Danny Coleman, Branch Secretary, GE Aviation, Wales
Karl Daly, Deputy Convenor, Rolls Royce, Derby
Nigel Stott, Convenor, BASSA, British Airways
John Brough, Works Convenor, Rolls Royce, Barnoldswick
John Bennett, Site Convenor, Babcock Marine, Devonport, Plymouth
Kevin Langford, Mechanical Convenor, Babcock, Devonport, Plymouth
John McAllister, Convenor, Vector Aerospace Helicopter Services
Garry Andrews, Works Convenor, Rolls Royce, Sunderland
Steve Froggatt, Deputy Convenor, Rolls Royce, Derby
Jim McGivern, Convenor, Rolls Royce, Derby
Alan Bird, Chairman & Senior Rep, Rolls Royce, Derby
Raymond Duguid, Convenor, Babcock, Rosyth
Steve Duke, Senior Staff Rep, Rolls Royce, Barnoldswick
Paul Welsh, Works Convenor, Brush Electrical Machines, Loughborough
Bob Holmes, Manual Convenor, BAE Systems, Warton, Lancs
Simon Hemmings, Staff Convenor, Rolls Royce, Derby
Mick Forbes, Works Convenor, GKN, Birmingham
Ian Bestwick, Chief Negotiator, Rolls Royce Submarines, Derby
Mark Barron, Senior Staff Rep, Pallion, Sunderland
Ian Hodgkison, Chief Negotiator, PCO, Rolls Royce
Joe O’Gorman, Convenor, BAE Systems, Maritime Services, Portsmouth
Azza Samms, Manual Workers Convenor, BAE Systems Submarines, Barrow
Dave Thompson, Staff Convenor, BAE Systems Submarines, Barrow
Tim Griffiths, Convenor, BAE Systems Submarines, Barrow
Paul Blake, Convenor, Princess Yachts, Plymouth
Steve Jones, Convenor, Rolls Royce, Bristol
Colin Gosling, Senior Rep, Siemens Traffic Solutions, Poole

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.