Alastair Hatchett | 24 Mar 2021

Private sector earnings growth continues to strengthen

The overall whole economy rate of growth was 4.8% in the year to January on the total pay measure, up from 4.7% in December, and 4.2% in January on the regular pay measure (which excludes bonuses), also up, from 4.1% in December. Last year many companies cancelled or postponed bonuses in the first few months of the pandemic but this year bonuses have returned, and this is one factor behind the stronger earnings data, especially that for total pay.

However, regular earnings growth is showing strongly across most sectors as well. Here, the ONS makes the point that average earnings growth at the moment is being nudged upwards by the workforce composition effect of fewer low-paid workers in the figures and a smaller proportion of low-paid jobs in the economy. It estimates that this could be adding 1.6% to the overall figures and suggests an ‘underlying’ rate of growth of 3% on total pay and 2.5% on regular pay.

Workforce composition effects are a perennial influence on the AWE figures. Since the pandemic began, however, they have had a slightly greater effect than previously. Some of the important impacts in the latest release include a decrease in the number of part-time jobs, a fall in the number of elementary occupations, and a decline in the number of new labour market entrants, who tend to be lower-paid than the average. The ONS also points to a drop in the number of employees on payrolls in lower-paying areas of the economy. All of these effects have tended to raise the average, thereby contributing in a small but significant way to the picture of increasing earnings growth.

But the ONS also notes offsetting compositional effects from a fall in the number of employees in higher-paying professional, scientific and technical activities on the one hand, while the numbers of employees in lower-paying health and social care activities has risen. Together, these two developments would tend to reduce the average, partially offsetting the effect from the drop in the number of lower-paid employees.

At the same time, factors other than workforce composition changes are also relevant to the latest earnings data. Separate ONS figures on hours worked show that these have recovered significantly since falling to a record low in April to June last year.  This could be a feature of stronger earnings growth in construction and manufacturing, both areas where earnings growth went negative last summer. In construction, the rate of growth in average earnings was 2.5% in the year to January, up from 1.9% in the year to December. In manufacturing, the rate of growth in the year to January was 2.0%, up from 1.5% in the year to December.

Meanwhile in wholesaling, retailing, hotels and restaurants, the annual rate of growth in average earnings was down from 4.2% in the year to December to 3.2% in the year to January. This sector is the largest in the economy and contains the largest proportion of lower-paid workers. Therefore we might expect any impact on average earnings from fewer low-paid employees to be greatest in this sector, but that does not appear to be the case, at least not for the sector as a whole. An element in the current situation that might be acting to mute earnings growth here could be the recent rise in the numbers of staff on furlough – in many cases on 80% of earnings. This went from 16.9% to 18.3% in the final fortnight of January, and although this is still some way below the peak last summer, it had been on a gently rising trend since the end of last year.