Search Class

What to make of the latest claims on living standards?

What to make of the latest claims on living standards?

The Government are today claiming that ‘take home pay’ has risen for 90% of workers. If true this would be excellent news but I’m afraid there a quite a few reasons to take these figures with more than pinch of salt.

To start with it is important to be clear exactly what the government the arguing. As far as I can tell they have taken the earnings figures from ASHE (the Annual Survey of Hours and Earnings, which came out in December but is collected in April) for each decile of the working population, compared that to CPI inflation and then added back in the effects of a higher personal allowance.

This is, to say the least, an unusual approach. Usually when discussing living standards economists would use one of two approaches. The first would be to look at real wages (i.e. wages rises compared to price rises)  - as wages are by far the largest component of household income and we have regular data (an ONS monthly series – average weekly earnings) this is by far the most common type of analysis. But it does have limitations – it takes no account of changes in tax, tax credits, benefits or interest income. 

So the second approach is to measure household income. This measure starts with what is happening to wages and then adds back in changes in taxes/benefits and other sources of income. There is a good discussion on this in the December edition of the ONS Economic Review.

What the Government have chosen to highlight today is an unusual hybrid measure. They started with wages and then added in on the impact of one positive (the higher personal allowance) whilst ignoring the negatives (changes to benefits and tax credits which will have an especially large impact on people with children).

There are of course other issues here – the data the government is pushing relates to April whilst the latest average weekly earnings data (November) points to further weakness in wages.

They have used the CPI measure of inflation – others still prefer RPI or the new fangled RPIJ.

The figures today take no account of the self employed – 15% of those in work and rising.

Whilst government have focused on the impact of a rising personal allowance – many low earners do not benefit from this as they already pay no income tax (as the Government’s own evidence to the LPC acknowledged last week!).

The government’s new stats take no account of household composition- and a family with two children (depending on what they earn) may well be losing more in tax credit than they are gaining from a higher allowance.

The latest data on real disposable income per head (per compared below to GDP per capita) isn’t showing much signs of improvement.

Furthermore this a mean measure and could be distorted by pay rises as the top, recent ONS work suggests that median household income (i.e. those in the middle of the distribution) has fared worse in recent years.

In other words the chart above may overstate how the ‘typical’ household is doing.

All in all it is hard to see today’s figures has much more than political spin. The Prime Minister claimed in PMQs on Wednesday that real pay was rising and day and bit later some figures have been cobbled together to ‘prove’ this.

There are indications that the long squeeze is easing – the gap between pay and prices is finally starting to narrow and many forecasters now expect real wages to begin rising in the second half of this year.

This will be good news (when it happens) but there is still an awful long way to go to make back the lost ground of the past five years.

This post originally appeared on Touchstone, and is cross posted here with permission.