Why 2014 wasn’t the year of the pay-rise

Despite upbeat predictions from employers, 2014 didn’t turn out to be the year of the pay rise after all. Research from the Resolution Foundation published today shows that surveys of employers tended to overstate the level of pay increases in the economy as a whole.

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The reason for this:

All of these measures are partial and take no account of compositional changes.

Or, to put it more crudely, they have surveyed the posher end of the job market, which isn’t where most of the job growth has been.

Although there has been an increase in the number of full-time employed jobs over the last year, many of these have been in low-paying sectors and occupations, while the number of jobs in some of the higher paying sectors has fallen.

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This is consistent with what we’ve seen in the news recently. Banks and the public sector are laying off staff and automation is creeping into the retail sector. The big employment increase has come in the hotels and restaurants which are among some of the lowest paid.

Another interesting finding is a sharp drop in the number of employees in management roles, reversing the trend of recent years. (See previous post.)

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Overall employment in management occupations looks high because many of those classed as managers in ONS surveys are self-employed. Strip those out and the number falls. At the same time, there has been an increase at the other end of the hourglass, again, mostly in the lower-paid occupations. It’s too early to say whether this fall in managerial jobs is a blip or a symptom of automation working its way up the skill ladder but it’s certainly one to watch.

Even though 2014 saw the return of the full-time employee job, almost, but not quite, to pre-recession levels, a number of other factors combined to keep pay levels down.

Matthew Whittaker, the Resolution Foundation’s chief economist, is cautiously optimistic for next year:

Many people predicted that 2014 would be the year of the pay rise. In fact, earnings growth reached a record low earlier this year and is not set to overtake inflation until 2015. This stubbornness of pay falls is a worry to all of us.

We are beginning to get a clearer picture of what underpins these terrible wage figures. Some factors are more benign, while others are a cause for concern. The speed up in the entry of younger and less experienced employees into the workforce, who are invariably lower paid than average, has been an important drag on wages. This downward pressure on wage growth should dissipate next year and hopefully open the way for a long overdue return to positive wage growth.

What’s more worrying however is how the mix of occupations – particularly the decline in managerial roles and the rise of low-skilled occupations – is dragging down wage growth. It’s not yet clear whether this is a temporary blip or the start of a new shift in patterns of UK employment.

We shouldn’t forget that underlying pay growth within different sectors and groups of workers remains very subdued, despite the reports of strong growth in some firms. Ultimately the prospects for pay rest on employers’ willingness and ability to reintroduce above-inflation pay increases. If the recent minimum wage rise of three per cent can set a benchmark, then there are reasons to be optimistic that 2015 could finally be the year of the pay rise.

That’s good news but, as Matthew said earlier this year, even if pay starts to rise next year, we are unlikely to see the real mean wage get back to pre-recession levels much before 2018 and by the time you allow for rising housing costs, not even then. Six years after the collapse of Lehman Brothers, most of the country is still waiting to feel the recovery. Lets’ hope next years is finally the year of the pay rise but it’s been a hell of a long time coming.

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8 Responses to Why 2014 wasn’t the year of the pay-rise

  1. Jeffery Davies says:

    Ask the mps they sem to get one when they want one

  2. SK says:

    instead of rising housing costs, i would use ‘rising rents’.
    This is where most of the damage of stagnant wages has taken place.

  3. David says:

    It wasn’t a pay rise because we didn’t earn one

  4. Dave Timoney says:

    Re “It’s too early to say whether this fall in managerial jobs is a blip or a symptom of automation working its way up the skill ladder but it’s certainly one to watch”. It is unquestionably a sympotm of automation, and not just from the bottom up, though to what degree is difficult to tell yet.

    When the composition of work changes from people to machines, we see an absolute decline in the management of one but also a relative increase in the management of the other. However, roles that entail machine management tend to be categorised as professional rather than managerial. For example, a database administrator (DBA) is functionally a management role: organising resource availability, allocating priorities, monitoring performance etc.

    This tendency also happens at the margin, where people are still employed, e.g. a software development team leader is more likely to be classed as a professional than a manager. The decline of managers and the (smaller) increase in professionals are therefore linked.

  5. The fall in the number of managers may be a result of swingeing public sector cuts. For many years the more rudimentary occupations (bin men, caterers, park keepers etc) have been outsourced to the private sector, and the people left behind tend to be those procuring and managing these contracts, dealing with legal aspects etc.
    This also explains why the average pay rate in the public sector has recently been higher than the private sector (average educational levels are also higher), and why the coalition should be ignored when using this fact to call 1% public sector pay rises ‘fair’.

  6. David says:

    I agree the 1% pay rise is very unfair compared to the private sectors 0% or less . They have to live in the real world of earning before spending and produce the wealth the public sector spends . The PS has enjoyed too many years of this kind of ‘unfair’ remuneration increase .
    And if you think the reductions in staff have so far been “swingeing” , then I believe you ain’t seen nothing yet !

    • George says:

      It is not true to say that the private sector creates wealth and the public sector spends it, although it is depressingly common how often you see this argued…just because the state chooses to spend some of my income on my behalf through the mechanism of taxation, does not for example mean that an NHS doctor creates any less “wealth” than a privately funded one I chose to spend some of my salary on would do….I have no problem if you are making a philosophical argument about taxation but I don’t think that is what you are doing…

  7. David says:

    Rather a fine point and politely made George but it’s a little disingenuous to compare a public or private Doctor practising domestically with , say , manufacturing industry or financial services earning hard currency from overseas trading . The public sector does little or none of this , I should say .However it IS a fact that broadly the private sector ‘earns’ (for want of a better description) the wealth of the UK and broadly the public sector spends it , and only some of it on our behalf , so please don’t be depressed ! It’s not unreasonable (or political) to demand that this is kept to the barest minimum whether that’s on the easily observable Doctors and Dustmen or the more obscure Mandarins and Minions of Whitehall (say) .
    You are correct , it’s certainly not a philosophical point to resent any money taken from me in the name of taxation or anything else . We all have our own wish list of what the state should or should not be providing , some would say interfering , in our lives and mine may be more or less than yours .

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