Are we earning more now? Measuring real wage growth during the pandemic
Many of the UK’s key indicators have seen dramatic movements as a result of the pandemic, making it hard to see underlying trends. Earnings statistics have been under particular scrutiny, as we’ve blogged about recently. Here, Darren Morgan looks at our main data sources on pay and what they are telling us.
When the pandemic struck early last year, it had major impacts on the labour market, with many business sectors forced to close for a while, employers paying less in bonuses, furloughed workers potentially losing earnings if their employers did not top up their pay packets and many people losing their jobs altogether.
Since then we’ve seen the economy reopening, a huge rise in job vacancies and press reports of employers offering pay rises and signing-on bonuses to attract new workers.
So it’s not surprising that ONS earnings statistics, as with so many of our other indicators, have seen some highly unusual movements of late. Economic commentators have naturally focused on whether or not people are better off after taking rising prices into account. But before looking at these movements in more detail, it’s helpful first to look at how we actually put together our most high-profile earnings statistics.
We have several key sources, which all help us to paint a full picture of earnings. Two of the most widely reported are the Annual Survey of Hours and Earnings (ASHE) and the Average Weekly Earnings (AWE). ASHE is, as the name suggests, a large yearly survey in which the earnings of a random sample of employees are reported by their employers. Although infrequent, because it collects data on individual employees, we are able to publish a great amount of detail, including average pay down to local authority levels and very detailed types of job. It’s also the source for the once-a-year gender pay gap statistics. The AWE, by contrast, is derived from a sample of businesses’ total wage bills rather than what they pay individual employees, so does not allow for the more detailed breakdowns we get in ASHE, but does give us more timely information about headline pay and bonuses.
Recent trends in earnings
Recent AWE results suggest continued strong growth, after the initial shock of the onset of the pandemic in early 2020. In early summer 2021 our headline measure of total annual pay growth – including bonuses – peaked at nearly 9%, around three times the rate we saw just before the onset of COVID-19.
However, sometimes things are more complex than they seem, and this is a case in point. As we pointed out previously, there are a couple of special factors affecting earnings right now, the so-called ‘base effect’ arising from comparing current earnings levels with an exceptionally low point 12 months earlier, and the ‘compositional effect’ arising from more lower-paid workers losing their jobs or having their earnings reduce by more than higher-paid people.
We calculate that taken together these impacts would knock the rate of annual pay growth down to something between 4.1% and 5.6% – almost a third less than the headline rate if one takes the lower bound of our estimate.
Of course, these headline figures ignore the effects of inflation. Once inflation is taken into account, real pay growth is substantially lower, though with the exception of a brief dip right at the onset of the pandemic, has still been growing more quickly than inflation since the beginning of 2018. Its current underlying trend is clearly positive even after adjusting in the same way for base and compositional effects.
Tomorrow, we will release our annual ASHE data. As I mentioned earlier, it allows much more detailed breakdowns than AWE. However, it will still be affected by the compositional and base effects seen in AWE. In addition, it sampled wages in April 2021 and so won’t be able to give us information about the latest changes in earnings as the economy reopened in the early summer.
Of course, as our earlier blog pointed out, there are considerable difficulties interpreting all these figures, because of the special factors in the data brought about by the pandemic, so one should not be too categoric in pointing to, and drawing conclusions from, small differences in the data.
One thing, however, you can be sure of: we at the ONS will continue to monitor the evolving situation with pay, just as we are with so many other facets of the huge upheaval that this country, and the world, has gone through in the last 18 months.
Darren Morgan is ONS Director of Economic Statistics.