Five things we learned from today’s earnings figures

Today’s publication of the Annual Survey of Hours and Earnings (ASHE)  – our least timely but most comprehensive source on employee pay – allows us to assess what was happening to pay across the workforce shortly before the EU referendum, and provides an opportunity for speculation as to what the future holds. Here – in five key charts – is what we’ve learned.

1. Real pay growth was the strongest for over five years, but is set to be the strongest for at least the next five years too

The ASHE data allows us to measure median pay (a better reflection of the experience of typical workers than the average) and to look at hourly as well as weekly earnings (thereby removing the effects of changes in hours worked). On this preferred measure, we have confirmation that real pay was growing in April 2016 at a healthy 2.6 per cent – stronger than the more timely Average Weekly Earnings data had indicated (it was around 1.5 per cent at the time).

This makes 2016 the strongest year in the past eight (or, indeed, the past 15 if we ignore 2009, when the inflation measure briefly turned negative due to falling mortgage costs). However, the weak outlook for nominal pay and expectations for faster inflation following the decision to leave the EU mean that this performance looks unlikely to be repeated in years to come.

2. Meaning it may be over a decade before the pre-downturn earnings peak is recovered

Despite this strong second year of recovery, typical earnings are still 88p (6.8 per cent) below peak. If the pace of growth we’ve had during these first two recovery years were to continue, we’d get back to this peak in four years’ time. However the latest forecasts for pay and inflation mentioned above suggest a much longer time horizon – another 11 years until real pay returns to its highest levels. That would mean nearly two decades of lost pay growth.

3. The introduction of the National Living Wage meant pay for low earners grew fastest in 2016

While the future looks less than encouraging, there’s plenty more to be positive about in 2016’s pay performance. Most prominently, it was a good year for low earners, with pay at the 10^th percentile growing more than twice as fast as at the median. This was largely due to the introduction of the National Living Wage (NLW) – a higher minimum wage for those aged 25 and over and a 50p increase on the previous rate – on 1 April 2016.

4. In fact, growth for the lowest paid was its fastest in nearly 20 years, beating the introduction of the National Minimum Wage in 1999

Looking back over time, 2016 wasn’t just a good year for the lowest paid, it was the best we have on record. This period includes the introduction of the National Minimum Wage in 1999 (and the finding holds even if you look further down the distribution, as the ONS do).

Among other things, this will reflect the growing proportion of the workforce earning the wage floor since its initial introduction: the share of employees earning the legal minimum has increased from 3 per cent in 1999 to 11 per cent in 2016. What happens to minimum wages is clearly now a high stakes game for the pay trajectory of low earners.

5. 2016 was a good year to be young, female, working part time, in a sales job and in Wales

Earnings in 2016 grew fastest for those in their 20s, women, part-time employees, and those in occupations including sales, customer services and cleaning. Given low earners tend to be concentrated in these groups, this is largely a reflection of the positive distributional story connected to the NLW’s introduction, discussed above.

Pay growth was fastest in Wales, and continued slow growth in London means pay in the capital remains furthest from its pre-downturn peak.

And one thing we didn’t learn…

As we’ve previously highlighted, while ASHE is our most comprehensive source on pay, it still leaves us with a significant blind spot because it only covers employees. We’ve little clue on what’s happened to the earnings of the one-in-seven workers who are self-employed in the past year, but less timely data suggests they were lower in 2014-15 than they were 20 years before.

As well as where employee pay goes next, how the earnings of the self-employed fare in the post-referendum, post-NLW introduction, ‘gig economy’-era is a crucial question for years to come.