Economic Background for Pay Claims

ECONOMIC BACKGROUND FOR PAY CLAIMS

Introduction

This document seeks to provide an outline of the latest developments in the economy which are most directly linked to pay claims. A model pay claim, available here, offers a stripped down version of this information, which may be of most value to branches representing staff working in private companies and community / voluntary organisations, who are not covered by the major national bargaining bodies in local government, the NHS and education. However, this document offers greater detail that can be utilised selectively in constructing all types of local and national pay claims.

The document outlines:

Latest headline figures relevant to pay claims;

Changes in the cost of living facing workers, which pay claims need to keep pace with if the buying power of wages are not to fall;

Pay settlement and average earnings growth figures, whichcan act as a benchmark for pay claims;

The context for pay claims in terms of the labour market, welfare cuts affecting workers, the National Minimum Wage, the Living Wageand comparisons with the earnings of high income groups

Contents

Latest headline figures

Inflation as benchmark for pay claims

Historical inflation rates

Impact on real wages

Main factors affecting inflation

Forecast inflation rates

Reason for comparing wages to RPI

Pay settlements and average earnings as benchmark for pay claims

Pay settlements

Average earnings

Wider context for pay claims

Labour market

National Minimum Wage

Living Wage

Impact of tax and benefit changes

Comparisons of pay cap against wider economy

Appendix 1 - Most recent pay rises among some of UNISON’s largest bargaining groups

Economic background for pay claims Last updated: May 2018 Contact: 1

Latest headline figures

Economic background for pay claims Last updated: May 2018 Contact: 1

Inflation as benchmark for pay claims

Historical inflation rates

The most widely reported measure of inflation in the UK is the Consumer Prices Index (CPI). However, the most accurate indicator of changes in the cost of living facing workers is the Retail Prices Index (RPI) [for the reasons why RPI is most relevant, see note below].

Over 2010 and 2011, RPI inflation centred on the 5% mark, before a decline saw the rate cluster around 3% during most of the three years between 2012 and 2014. Inflation then went into a further slide, with RPI around 1% over most of 2015. However, inflation began to riseagain over 2016 and escalated sharply throughout 2017.The February 2018figures stood at3.4% for RPI and 2.4% for CPI.

Source: Office for National Statistics, UK Consumer Price Inflation: April2018, publishedMay2018

Between the start of 2010 and the end of 2017, the cost of living, as measured by the Retail Prices Index, rose by a total of 27.6%.

Impact on real wages

The annual changes for full years since 2010 have been as below. The annual pay rises at an organisation can be set against these annual inflation rates to show the impact on the value of wages and examples of actual salaries can be used to show the impact in cash terms (if you need assistance in carrying out these calculations, contact Bargaining Support on ).

Across the economy, the most recent data from the Annual Survey of Hours and Earnings suggests that the real value of average UK pay packets has fallen by 13% since 2010, with employees losing over £3,000 a year from the value of their pay packet. The average worker would have accumulated over £24,434 more had their wage kept pace with inflation.

For the public sector worker who has not benefited from any incremental progression in their pay, the decline has been even sharper. Between 2010 and 2017, the public sector worker on the median wage saw a 17% cut in the real value of their earnings, leaving their 2017 wage £6,109 down on the value of their earnings at the start of 2010 and the accumulated loss from their wage failing to keep pace with inflation each year stood at over £32,000.

Main factors affecting inflation

The changes in the price of components of the Retail Prices Index over the year to April 2018 are shown in the table below.

Source: Office for National Statistics, Consumer Price Inflation Reference Tables, April 2018

Within these figures, some costs are rising significantly faster, such as electricity bills at 8.6% and busfares at 4.6%. Regulated rail fares were also allowed to rise by 3.6% from January 2018.

The price of housing also remains one of the biggest issues facing employees and their families. Across the UK, house prices rose by 4.2% in the year to March 2018, taking the average house price to £224,000[1]. However, the picture varied across the nations of the UK, with Scotland experiencing the biggest increase at 6.7%, followed by England at 4%, Wales at 3.5% and Northern Ireland at 4.2% (to see price changes in English regions, click here, or for a borough / county breakdown click herefor England / Wales and here for Scotland). Latest estimates of the ratio between average house prices and average earnings stands at 7.7 in England (12.9 in London), 5.7 in Wales[2], 5.2 in Scotland[3] and 5.0 in Northern Ireland[4].

Private rental prices grew less rapidly, but nonetheless rose 1% in the year to March 2018 across Great Britain (1% in England 1.3% in Wales and 0.6% in Scotland).[5]The latest data for Northern Ireland is less up-to-date, but the last study in 2017 showed sharply higher increases of 5.3%[6]. The average monthly rent for new tenancies in the UK now stands at£918[7](for a regional breakdown of rents click here ).

Though not specifically assessed by CPI or RPI figures, childcare costs represent a key area of expenditure for many staff (UNISON surveys have consistently found that around a third of staff have child caring responsibilities).Therefore, it is also worth noting that the annual Family & Childcare Trust survey[8] for 2018 found that the cost of a part-time nursery place for a child under two has grown by 7% over the last yearand the annual cost now stands at £5,075 for 25 hours care a week.

Current inflation rates can mask longer term changes in the cost of living that have taken place since 2010. The examples below show major increases in core costs that have surpassed average prices increases over the period.

Forecast inflation rates

The Treasury average of independent forecasts states that RPI inflation will average 3.4% over2018. It will then remain at3% or above every year until 2022, following the pattern shown in the graph below. These annual rates show the rate at which pay rises would be needed for wages just to maintain their current value.

Source: HM Treasury Forecasts for the UK Economy, May 2018

If these rates turn out to be correct, the cost of living employees face will have grown by 16.8% between 2018 and 2022, following the pattern set out in the graph below.

Reason for comparing wages to RPI

UNISON believes that the Retail Prices Index (RPI) remains the most accurate measure of inflation faced by employees.

The most widely quoted figure for inflation in the media is the Consumer Prices Index, However, UNISON believes that CPI consistently understates the real level of inflation for the following reasons:

• CPI fails to adequately measure one of the main costs facing most households in the UK – housing. Almost two-thirds of housing in the UK is owner occupied, yet CPI almost entirely excludes the housing costs of people with a mortgage;
• CPI is less targeted on the experiences of the working population than RPI, since CPI covers non working groups excluded by RPI – most notably pensioner households where 75% of income is derived from state pensions and benefits, the top 4% of households by income and tourists;
• CPI is calculated using a flawed statistical technique that consistently under-estimates the actual cost of living rises faced by employees. The statistical arguments are set out exhaustively in the report “Consumer Prices in the UK” by former Treasury economic adviser Dr Mark Courtney, which is summarised hereand covered in full here

The Royal Statistical Society has consistently stated that CPI was never intended as a measure of changes in costs facing households. Rather, it was “designed in the 1990s for macroeconomic purposes” and its purpose is to act “as the principal inflation indicator for the Bank of England in its interest-setting rate role.”

The society sums up its position as follows:

“Why should the typical household accept an inflation index that: -

• fails to take account of, or does not track directly, one of their main expenditureitems: mortgage payments and other costs of house purchase and renovation;
• gives more weight to the expenditure patterns of wealthier households than ofother households;
• fails to take account of interest on loans for a wide variety of purposes, rangingfrom student loans to loans for car purchase;
• includes the expenditure of foreign tourists in the UK but not their ownexpenditure outside the UK;
• fails to include council tax.”

Following recommendations made by the National Statistician in November last year, the Office for National Statistics (ONS) has now adopted the inflation measure CPIH as its “most comprehensive measure of inflation.” However, the National Statistician also seemed to acknowledge thatboth CPI and CPIH fail to measure the real costs facing workers as the ONS was also instructed to develop a measure that addressed the Royal Statistical Society’s concerns outlined above (this measure is not expected to be ready until later this year).

Though CPIH represents an improvement on CPI in attempting to incorporate housing costs, its measure of housing costs is based on treating all households as if they rented their accommodation. However, rents can follow sharply different trends to house prices, making this a dubious assumption. Furthermore, the other more significant flaws in CPI outlined above remain a feature of CPIH.

CPI is the figure quoted almost uniformly across the media, but RPI remains by far the most common reference point for pay negotiations. Incomes Data Research found in its 2016 Reward Intentions Survey that 75% of employers regard RPI as the “most relevant to making decisions on the level of pay award,” compared to 53% for CPI, 5% for RPIJ and 3% for CPIH.

Pay settlements and average earnings as benchmark for pay claims

Pay settlements

Pay settlements across the economy stand at 2.6%, which is well below the long-run median of between 3% and 3.5% that prevailed for over two decades until the 2008 economic crisis, but nonetheless represents a significant increase in recent years and the highest level in more than four years.

Pay settlements in the private sector stand at 2.7%, which is more than 1% higher than the rate in the public sector. Private sector settlements have been running far in advance of the public sector since 2010.

The table to the right shows average settlements for further sectors where UNISON represents members or sectors that compete for similar types of worker as public services. Therefore, employers falling below relevant rates can expect damage to their ability to recruit and retain high quality staff.

[To reference the latest pay settlements for UNISON’s largest bargaining groups, see appendix one at the end of this document, or to seek more detailed figures on pay settlements within a particular sector, contact Bargaining Support on

Average pay settlements across the economy since 2010 are shown by the table below. The dangers of falling behind market rates can be demonstrated to employers as part of pay claims by contrasting the pay awards in an organisation against this economy average (for more detailed averages by sector, contact Bargaining Support on ).

The Bank of England forecasts that pay settlements will average 3.1% over 2018[9], with the ability to recruit and retain staff seen as the biggest factor behind this increase.

In Scotland, the draft 2018-19 budget has set expenditure at a level to allow 3% pay rises for all earning less than £30,000 and 2% for those earning more (subject to a cap of £1,600 for anyone on over £80,000)

Average earnings

The graph below shows trends in average earnings growth over the last two years, which mirror pay settlements in showing the competitiveness of public sector wages in decline. Since April 2013, private sector earnings growth has been running ahead of the public sector every month except two. Latest figures put the across the economy average at 2.6%,private sector growth at 2.6% and public sector growth at 2.3% in March 2018.

Source: Office for National Statistics, Labour Market Statistics, May 2018

Forecasts of average earnings predict that growth will average 2.7% in 2018, followed by a dip to 2.4% in 2019 and then a steady escalationevery year that takes the rate to 3% by 2022, following the pattern shown below[10].

These predicted rates can again be used to show the pay increases needed for an employer to avoid slipping behind the going rate and suffering damage to recruitment and retention.

The Annual Survey of Hours and Earnings (ASHE) providesdetailed data that can form useful comparators for changes in average earnings experienced by UNISON members. The table below shows the change in median gross annual pay for full-time staff within the main job categories listed.

A listing of earnings growth for more specific jobs within these categories can be found on the Office for National Statistics website by clicking here