It is not true we are getting poorer or that our incomes are falling

Given the economics profession’s delight in gloom, sifting out the good news from that which is actually bad requires constant vigilance.

This week is a classic example, over the average earnings data. The Office for National Statistics said that average earnings grew at an annual rate of 2.2% in August, below inflation. In other words, in real terms, average wages are declining. This overshadowed the more positive news that unemployment was at a 42-year low.

Frances O’Grady, the ever-cheerful secretary general of the TUC, proclaimed that “Pay packets are taking a hammering. This is the sixth month in a row that prices have risen faster than wages.”

But is this really true? Er, not quite. It omits the rise in self-employment. Add that back in and incomes are on average, rising, as is personal wealth.

The ONS average earnings number is based on a survey of around 9000 employers who employ 20 people or more on their payroll, not freelancers or consultants. It doesn’t capture, and nor is it intended to, the growth in self-employment, especially those who set up a new company. Many of these are actually in lower paid trades, such as construction. Such people now amount to 4.8m. or 15% of the workforce and they typically receive dividends, not just salaries.

Last month, the ONS revised up substantially the level of household incomes in the latest National Accounts. Due to the growth in self-employment and small companies, it said, households actually received £61.7bn of dividends last year, not £12.2bn as previously thought.

Not all of these dividends were spent, instead many were saved. With the result the savings ratio (the proportion of incomes being saved) was revised up to 5.4% from 3.8%. This was good news.
Some people, of course, are both employed and have companies or professions from which they earn income on the side. The growth in mini-corporate buy-to-lets is explosive, for instance, but the statisticians are only just adapting to this phenomenon.

There is a second problem with the average weekly earnings data as a proxy for our prosperity: it is before tax. So, it does not reflect the rising personal tax threshold, which has reduced income tax for millions of people, or the impact of tax credits.

A better number than average weekly earnings which picks up all the income of households, including wages, self-employed income, investment income and pensions, and which also takes account of tax change, benefits and inflation, is the so-called “real disposable household income per head” number in the revised National Accounts. This shows that actual money in people’s pockets has risen steadily in the last few years, ahead of inflation.

Real disposable income surged by 4.8% in 2015, as company owners paid themselves bumper dividends in advance of a tax change. Last year, real household disposable income per head shrank by 0.7%, mostly because dividends dropped after those bumper payouts in 2015.

This year, from what we know so far, it shrank by 1.2% in the first quarter, but then accelerated to plus 1.5% in the second quarter. So, it is not true, that on average, our incomes are falling.

Incidentally, mean real household wealth per head also rose by 3.3% last year, driven by the rising stock market and house prices. Though clearly those with the most assets benefited the most.

Even the real disposable income number has its limitations. In particular, it is difficult for the ONS to break out the impact of the rising minimum wage and the National Living Wage. We do know that, at the lower end, this has benefited some 1.3m people. As a matter of logic, for the average to be growing slowly when the lower half is rising, it must be those further up the wage scale who have been held back.

If those on lower incomes have had rising wage packets and company owners are doing okay too, it means that it is predominantly the middle classes in paid employment but without self-employed earnings who have seen their incomes fall in real terms.

Many of these work in the public sector, where we know there is a soon-to-be-dropped 1% pay cap. (That in turn does not reflect the generous future pension contributions to which the public sector is entitled). Alternatively, those who work in the private sector are exposed to both technological disruption and Brexit-related uncertainty (undoubtedly a factor in, say, universities or parts of the City).

However, the situation could be about to flip round. The Government is theoretically planning some big cuts to benefits and tax credits, which would obviously hit those on lower incomes, and the outlook for middle class salaries is improving.

The labour market is incredibly tight. According to the survey data published in the Bank of England’s August Inflation Report, companies are reporting greater difficulties in recruitment and filling vacancies. Unfilled vacancies, as a percentage of the entire labour force, are 2.31%. That is the highest ratio for about 20 years. If you ask employers, they will tell you finding the right people is their number one difficulty. In order to do so, they now have to offer new recruits substantial pay rises.

In other words, the recent lull in middle class wages is likely to be offset by rising earnings for new recruits spreading across the labour force. Unless, of course, either the Conservatives or an incoming Labour Government tip the economy into recession with their bad policies (always possible), or inflation goes through the roof, or our jobs are suddenly replaced by robots.

Next time somebody says to you “it is a disaster, we are all getting poorer.” You can say “No, that it is not true, it is middle class employees who have been temporarily squeezed, and their wealth has anyway risen strongly due to the rising value of their savings, pensions and houses”.

The squeezing of middle class wages helps explain noisy bourgeois political phenomena, such as the rise of Jeremy Corbyn or Remainers agitating about Brexit. One reason they are so cross is that many of them have indeed seen their wages stall. Hopefully it is already passing.

A bigger problem is the barriers to wealth accumulation for young people caused by the dysfunctional housing market and the student loan system.

Life in Britain is not perfect – and I am glad I am not myself wrestling with universal credit or a student loan – but we are definitely not all getting poorer. Not yet, anyway.