2018 risks being a standstill year on pay

2018 looks set to be a standstill year. On the biggest political issue of our time we will spend all 365 days of it leaving, but not out, of the EU. It also looks set to be a standstill year for our economy as most people experience it – on pay and employment we may well end it pretty much where we began.

That flat pay may be seen as good news shows quite how far we’ve come as a country. The recent catastrophe of wages in Britain has well and truly managed our expectations. The living standards story of 2017 was the return of shrinking pay packets – still £15 a week below their pre-crisis peak and not forecast to fully recover until 2025. Far from catching back up, we’ve started digging again.

So zero pay growth is better, but hardly great. It would make 2018 worse than every single year in the three decades running up to the crisis, but a better than average year for post-crisis Britain. Indeed our own projection is that the pay squeeze may well get deeper before it eases during 2018 as inflation recedes.  A noticeable year on year rise in real pay isn’t forecast to take place until December 2018. Happy Christmas for next year.

Figure 1: Earnings growth and inflation 2013-18

Source: Resolution Foundation analysis, ONS and OBR

The reason pay growth not returning in 2018 matters is that without it, it’s very hard to see how incomes can make much progress. While wage led income growth was the norm pre-crisis, occurring in 9 of the 10 years running up to 2008, we’ve only experienced 2 years of wage-led growth since then.

Continuing this post-crisis pattern is unlikely to work in 2018 for two reasons. First, our post-2012 jobs boom that has been the major driver of income growth may have finally come to a close in recent months. Second, the scale of social security cuts biting in 2018 are very significant, especially the benefits freeze set for April 2018.

That’s what the experts think – but as we know Britain’s had quite enough of them. So what about the punters? Very unfashionably they largely agree with the experts, according to recently released Bank of England data.

Over half expect their pay to stay the same or fall if they remain in the same job. Only one in seven expect an increase. More broadly an almost identical proportion (just over a quarter) of families expect their financial situation to get worse next year as expect it to get better.

Figure 2: Expected change in working-age household financial situation in coming 12 months, by equivalised household income quintile: GB, 2017

We can also get an insight into why workers may not be feeling particularly pushy on pay. Nearly 40 per cent think the chances of the economy suffering a “severe” downturn in the next 12 months is higher than normal (only 12 per cent say it’s less likely). That pessimism is shared right across the income spectrum. More worryingly, while most people don’t expect to lose their job (unsurprisingly with unemployment at a 40 year low), one in five think they will ‘almost definitely’ or ‘quite likely’ lose their job. Business isn’t much perkier. Pessimistic workers and anxious businesses aren’t a good recipe for strong wage growth.

Figure 3: Perceived likelihood of the economy suffering a “severe” downturn in the next 12 months, by equivalised working-age household income quintile: GB, 2017

But it’s good to end the year on some optimism – after all Philip Hammond told us it was our job to ensure forecasts are  ‘proved wrong’, and there is a decent chance they will be.  Here’s three reasons for some post-Christmas cheer.

First a good chunk of people will get a pay rise next year – the lowest paid. The National Living Wage will increase to £7.83 in April 2018 – a 4.4 per cent rise that will almost certainly reduce earnings inequality in 2018.

Second, there is a glimmer of hope on productivity. We estimate that a surprisingly large fall in hours worked this Autumn might imply growth in productivity of 1.2% in the three months to October – stronger growth than seen in any quarter since the end of 2005.

Third, the Bank of England is noticeably more optimistic on pay rises next year than the OBR. A tight labour market could deliver the increase in nominal pay growth that economic theory has promised. There is plenty of evidence of firms facing increased difficulties recruiting and workers being able to bargain for more secure jobs.

So there’s some grounds for optimism amongst the gloom from the forecasts and the public. The case for pessimism? The experts have been consistently wrong on pay and productivity over the past decade – consistently too optimistic that is…