The background
Earlier this week we looked at Labour’s claim that wages have fallen by £1,600 a year under David Cameron.
Now the government has hit back on living standards, producing figures that show wages actually rose faster than inflation last year.
With Labour seeking to put the cost of living at the heart of the political debate, this is potentially explosive stuff.
But a number of heavyweight analysts have cast doubt on the robustness of the government’s calculations.
The analysis
These are the numbers the government relies on. They come from the Annual Survey of Hours and Earnings and no one disputes them:
“Gross weekly pay” becomes “take home pay” when you take out income tax and National Insurance. Take home pay has been rising more quickly because the government increased the personal tax allowance, meaning most people get to keep more of their wages.
Once you factor in tax cuts, pay was above CPI inflation (running at 2.4 per cent) for the first nine out of ten income deciles – so everyone except the top earners – in this period.
There are a number of problems with this that economists raised immediately.
The calculation only works if you use CPI as the measure of inflation. CPI is almost always lower than other rates like RPI.
That’s not a huge problem for the government because the Office for National Statistics no longer considers RPI an official measure, but economists will still debate which is the better gauge of the real cost of living.
These figures are not the latest available. They date from April 2012 to April 2013. More recent figures show lower wage growth.
And the numbers don’t include the self-employed – who now number more than 4 million people.
Other methodological objections include the use of weekly rather than hourly wages and individual rather than household earnings.
Most damning of all is the fact that this measure is one-sided. It includes the positive effects on income of some tax policies, but ignores benefit cuts that have reduced household income.
As the Institute of Fiscal Studies (IFS) has shown repeatedly, the total effect of government policies from 2010 to 2015 taken together has been to cut income for most people.
And taking the long view – going back to 2010, or 2008, when real wages began to experience negative growth – puts things in perspective.
Most measures show that average real earnings are lower now than they were before the financial crisis. What the government is offering here is questionable evidence of minimal wage growth, whereas we will need sustained high growth to get earnings back up to pre-crash levels.
The verdict
This piece of research is unlikely to win a Nobel Prize for economics, although there has been a mixture of reaction from the big-hitting commentators.
Jonathan Portes of the National Institute of Economic and Social Research states simply that we “cannot conclude anything about household incomes/living standards from this analysis”.
The IFS and the Resolution Foundation gave more nuanced reactions. IFS director Paul Johnson said the figures for take home pay were “a perfectly sensible set of numbers” and said other evidence suggested that most working people’s incomes have stopped falling.
There was cautious optimism from other quarters today, with TUC general secretary Frances O’Grady expressing the hope that “the longest real wage squeeze in over a century could finally end this year” after a study found that the average pay award has increased to 2.5 per cent.
So while many commentators accuse the government of using selective figures, there is a real debate about whether wages could finally be on the rise.
Everyone agrees that after nearly six years of falling real wages, we have a mountain to climb.
