A bottom-up wage recovery

According to the latest Annual Survey of Hours and Earnings (ASHE) for April 2016, Northern Ireland workers notched up their second successive year of real earnings growth – i.e. wage growth exceeding the rate of consumer price inflation. This followed a five-year period (2009-2014) of falling real-earnings.

Northern Ireland’s median gross weekly earnings for full-time employees increased by 2.2% in the year to April 2016.  This matched the growth rate for the UK. Given that CPI inflation over the year to April 2016 was just 0.3% this represented a real terms increase of 1.9%. The median annual full-time wage in Northern Ireland now stands at £26,069 (public sector = £31,673 versus private sector £23,000).

The recent introduction of the National Living Wage has significantly boosted the pay packets of those on low wages and contributed to what could be described as a bottom-up wage recovery. Those individuals (full-time employees) in the lowest 10% of the earnings distribution, earning less than £14,485 per annum, reported a 4.4% real terms increase.  This compared with 2.6% rise for the top 10% of earners, which are those earning over £48,688 p.a.

Within Northern Ireland’s labour market, the wage recovery has been much weaker than the jobs recovery. As of Q2 2016, Northern Ireland employee jobs have returned to pre-downturn levels.  However, the same cannot be said for inflation-adjusted earnings. Northern Ireland full-time gross weekly wages fell for five consecutive years from 2009-2014.

Over this period the cumulative decline was almost 10% (9.6%) and gave rise to what became known as the “cost of living crisis”. During the last two years, however, over 70% of the real terms decline in earnings that occurred between 2009-2014 has been recouped. This represents a real-terms increase of 7.5% in just two years and has helped to fuel a consumer feel-good factor. Despite this rise, however, median full-time earnings, in real terms, are almost 3% below where they were in 2009 and are broadly in line with 2005 levels.

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Interestingly, those earners on lower wages have experienced a stronger earnings recovery than their higher wage counterparts. When adjusted for inflation, the earnings of the bottom 25% of all wage earners are some 1% higher than they were in 2009.  The bottom 10% of earners have almost recovered all of their lost earning power with inflation adjusted earnings in 2016 just 1% below 2009 levels.  Conversely, the higher wage earners have experienced a more modest earnings recovery. The top 10% of earners have recovered less than half (44%) of the decline in their inflation adjusted earnings that occurred between 2009-2013. The inflation adjusted earnings of those in the top 10% (i.e. >£48.7k p.a.) in 2016 was still over 6% below 2009 levels. For the top 25% of earners (i.e. > £37.3k p.a.), the inflation adjusted earnings were still almost 4% below 2009 levels.

Both Northern Ireland and the UK have witnessed a significant real-terms earnings recovery over the last two years.  However, with inflation now taking hold, combined with economic uncertainty, we may not see a third year of real-terms earnings growth. Indeed, it is those on lower incomes who will feel the squeeze the most from consumer goods (e.g food & fuel) inflation in the next year. Already this year we have seen the price of petrol and diesel rise by 16-17%.  This is before the full impact of sterling’s recent depreciation has filtered through to consumer prices. There is also the freeze in child benefit and tax credits to 2020 to take into account, which will mean real-terms falls in these benefits, as a result of inflation, impacting on household incomes.

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