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24 January 2014

The coalition’s wage stats don’t tell us much about living standards

The government's new stats ignore all benefit cuts and exclude the 4.4m self-employed workers.

By James Plunkett

This morning the government released some interesting new stats on wages. It claims that 90 per cent of people saw their earnings rise in the year to April 2013. As I tweeted earlier this week, the data source that the government are using tells a more positive story about wages than the more regular earnings data that drives most public debate. Here are some quick thoughts on the more technical upsides and downsides of the new numbers. It’s important to take these in the round (journalists can read that as a naive plea for no selective quoting!) – but it’s fair to say that whatever these stats tell us, they don’t tell us much about living standards.

Upside 1: the government’s source — the Annual Survey of Hours and Earnings (ASHE) — is a good one. In fact, it’s the most accurate measure we have of earnings and is probably better than the more regular measure of Average Weekly Earnings. ASHE is a direct sample of around 160,000 employees. (It includes everyone whose National Insurance number ends in a particular pair of digits.) By contrast, Average Weekly Earnings is a survey of employers that academics have long had their doubts about (wonks can see the original methodology here). The simple summary is that ASHE is probably a more accurate, if less timely, measure of what is happening to pay.

Upside 2: because the ASHE data relates to April 2013, before the wider economy turned the corner, it MAY be that wages have improved in the interim. In fact, this is not what we see in the more regular Average Weekly Earnings measure. But again, there may be reasons to believe that AWE is not telling the full story. At the very least, it is unlikely that wage growth has become worse than it was when the ASHE data measured it back in April.

Downside 1 (and this is a big one): “take home pay” is an unusual measure, and is not widely used by experts. It is not “pay” as such, because it is after taxes, and so it tells us little about the labour market. And it is not “taken home”, because it ignores all benefits and tax credits, and so won’t pick up true changes in people’s incomes— in particular from cuts to welfare for working people. If we want to understand living standards, disposable income per household is a much better measure. And if we want to understand the labour market, gross pay (before tax) is a better measure. Either way, it’s important to remember that today’s release tells us about just one year in a much longer downturn.

Downside 2: the government’s source (ASHE) excludes some important groups. In particular, it excludes the self-employed. This is now 4.4 million people, a number that has grown sharply in recent years. Again, this is a really big deal, not just because of the number of people, but because we also know that the income of self-employed people has been falling quickly, so this would almost certainly drag down the true figures. Nor does ASHE include people who earn too little to pay National Insurance. Again, this is a group that could plausibly be seeing some weak wage growth—particularly because the minimum wage fell in real terms for the fifth year running in 2013.

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So overall, there are upsides and downsides to this new analysis. In general I think it’s helpful to have more data, rather than less. But the only way to get a full account of living standards is to then look at that data in the round.

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