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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Has Arlene Foster saved power-sharing in Northern Ireland?

The DUP leader's decision to attend Martin McGuinness' funeral was much more than symbolic. But is Gerry Adams willing to make a deal?

After some prevarication, DUP leader Arlene Foster chose to attend the funeral of Martin McGuinness in Derry today. Her decision to do so cannot have been an easy one.

A substantial part of her loyalist base has noisily resisted attempts to memorialise the late deputy first minister as anything other than an inveterate killer. Foster herself notes in today’s Belfast Telegraph that the former IRA commander was responsible for the deaths of “many neighbours and friends”. And in 1979 – aged just eight – she bore witness to the bloody aftermath of an IRA attack in her own home: her father, a reservist police officer, was shot in the head by a gunman later eulogised by McGuinness.

Her attendance at today’s funeral is thus noteworthy and has been the subject of due praise. She was twice applauded by the congregation: as she took her seat, and after Bill Clinton singled her out in his eulogy. It is, however, much more than the symbolic gesture it might appear.

Last month’s election, which saw the DUP lose 10 seats and unionist parties lose their Stormont majority for the first time in nearly a century, proved Foster to be damaged goods. She was – and remains – tarnished by the RHI scandal but also by her crass behaviour towards the nationalist community, particularly on Irish language issues.

Her carelessly won reputation as a truculent bigot will therefore not be easily lost. Her departure remains a red line for Sinn Fein. But with just four days until the deadline for a new devolution settlement, Foster’s presence at McGuinness’ funeral is the clearest indication yet of the DUP’s carefully calculated strategy. It isn’t quite a resignation, but is nonetheless indicative of the new manner in which Foster has carried herself since her party’s chastening collapse.

She has demonstrated some contrition and offered tacit acknowledgement that her election shtick was misjudged and incendiary. Her statement on McGuinness’ death was delicately pitched and made only oblique reference to his IRA past. In the absence of a willingness to allow Foster to step down, the decision instead has been taken to detoxify her brand.

The conciliatory Foster the DUP will nominate for First Minister on Monday will as such at least appear to be apart from the dogwhistling Foster who fought the election – and her attendance today is the superlative indication of that careful transition. There has been talk that this increases the chance of a deal on a new executive. This is premature – not least because the onus is now almost entirely on Sinn Fein.

Theirs is just as much a mandate to reject Stormont as we know it as it is to return and right the DUP’s wrongs. Gerry Adams, the last member of the Armalite generation standing, has made this abundantly clear – and has hardened his line just as Foster has made sure to be seen magnanimously softening hers. He said last night that he would not tolerate any extension of power-sharing talks beyond Monday’s deadline, and called on Dublin to prevent the UK government from re-instating direct rule.

Though Adams also maintained a deal was still possible in the coming days, his statement augurs badly. As the former UUP leader Lord Empey told me on the day McGuinness died, the Sinn Fein president – the ideologue to McGuinness’ Stormont pragmatist – is now entirely without equal within his party. Though he has set the transition to a new generation of female leaders in train, he remains in total control.

The demand for Dublin’s involvement is also telling: as the leader of the third-biggest party in the Dail, his is an all-Ireland long game. Enda Kenny will soon depart, offering Fianna Fail – riding high in the polls – a useful pretext to renegotiate or scrap their confidence and supply arrangement with his minority government. Sinn Fein are on course to make gains, but implementing Brexit and austerity as partners in a Stormont executive would undermine their populist anti-austerity platform.

As such, Empey predicted McGuinness’ death would allow Adams to exert a disruptive influence on the talks to come. “I don’t think it’ll be positive because for all his faults, Martin was actually committed to making the institutions work,” he said. “I don’t think Gerry Adams is as committed – and it was obvious from the latter part of last year that Gerry was reinstating his significant influence in the party. For that reason I think it will make matters more difficult.  I hope I’m wrong, but that’s my sense.”

He is not alone. There was, earlier this week, growing confidence in Westminster that some fudge could be reached on the most contentious issues. It isn't impossible - but Adams’ renewed dominance and rejection of the extended timeframe such negotiations would undoubtedly require suggests a new executive is as unlikely a prospect as it has ever been. With Foster quietly reinventing herself, the DUP could be the big winners come the next election (which could come this year and reinstate a unionist majority) – and the resurgent republicans might well rue the day they squandered their big chance.

Patrick Maguire writes about politics and is the 2016 winner of the Anthony Howard Award.