Real wages fall sharply, but not by a “record” amount when using the best measure
Many media outlets, including the Daily Mirror, BBC, Bloomberg, Financial Times, Telegraph, Sky News, New Statesman and Sun, have reported a ‘record’ fall in real wages in the latest figures from the ‘Office for National. Statistics (ONS).
The latest drop in real wages (ie inflation-adjusted wages) is certainly very significant. And that could be called a record, at least in official data going back to 2001, if you only talk about wages excluding bonus (also known as “regular pay”).
However, this is not a record when looking at total wages including bonuses, as ONS figures show a bigger drop following the spring 2009 financial crisis.
It may not be the biggest drop ever, either, with historical data showing very deep falls in real wages in the 1970s, although this cannot be directly compared to wage figures. regular now.
We last wrote about this issue in June, when profits including bonuses increased but profits without bonuses decreased.
What are real wages?
If someone’s income increases, they may bring more money home, but that doesn’t necessarily mean they are better off. This is because the price of the things they need to buy may rise even faster. This rise in prices is called inflation.
So, if a person’s salary increases by 5% in a year, they have made more money in “cash” or “nominal” terms – but if prices have also increased by 10% at the same time, they actually got poorer in practice, which means that their “real wages”, when adjusted for inflation, went down.
That’s what’s happening to a lot of people right now.
What do the latest numbers show?
In its latest data, released on August 16, the ONS said average total earnings (including bonuses) rose – in cash terms – by 5.1% in the year from April to June 2022.
However, due to the very high level of inflation, as measured by the consumer price index including owner-occupied housing costs (CPIH), the average total real wages fell by 2.5%.
This is a very significant drop – the largest since 2009 – which means that the value of people’s incomes has fallen rapidly. But this is not the biggest drop ever recorded by the ONS, as its data shows a 5.7% drop in total earnings in March 2009. This data on annual changes does not go back beyond 2001 .
The ONS also reported a 3% drop in the average real price usual earnings, i.e. earnings excluding bonuses. This is a record drop – as reported by most media – but it doesn’t quite show us the whole thing, as it misses out on some of what people have gained.
Xiaowei Xu, senior economist at the Institute for Fiscal Studies, said on Twitter: “Excluding bonuses exaggerates the drop in wages we see.”
The ONS says: “Bonus payouts continue at the high levels seen over the past six months, following a slightly lower level in May 2022. Since August 2021 we have seen higher bonus payouts, particularly in March 2022 when the unseasonally adjusted premium payment was extremely high. The largest bonus payments are in the finance and business services sector.
Is this the worst fall of all time?
We cannot say for sure whether real regular wages have ever fallen more sharply in the past, as the data we have is based on a measure called Average Weekly Earnings, which was only introduced by the ONS in beginning of this century. As a result, we cannot easily compare the numbers we see now with what happened in the 20th century.
In 2014 the ONS published a paper (download file) looking at the evolution of real total wages since the 1960s. This does not show us regular wages (without bonuses), and it was calculated using a measure different from inflation called RPI, so is not perfectly comparable with the average weekly earnings data we have now.
However, it shows an extremely large fall in real total wages, of about 8% at one point in the late 1970s. This may suggest that then real regular wages were also falling more than today today.
Image reproduced with the kind permission of Towfiqu barbhuiya