5. Wage growth, working pattern and contract type

While the UK economy expands, real wages continue to fall and continue to perform poorly compared with our European counterparts. The headline measure of unemployment, historically, has been used to interpret labour supply and is therefore heavily relied upon in explaining wage growth.

Simplistically, you could expect nominal wage growth to be relatively high, following the recent UK record low unemployment since 1975. The real wage growth may be harder to predict because inflation can be induced by various external pressures, such as the sterling depreciation, however, in the medium term, you could expect it to be positive in the existing economic climate. This has not been the case, with real wage growth staying between negative 0.6% and positive 0.6% excluding bonuses (or negative 0.6% percent and positive 0.5% including bonuses) during 2017, with little sign of acceleration towards the end of the year.

The puzzling coexistence of low unemployment and low wage growth is not a unique feature of the UK economy. To take one example, Australia also witnessed the tightening of its labour market in 2017. As in the UK, the wage growth remained very moderate. Evidently, the labour market is not responding to employment pressure in the same way as it had done before.

One obvious feature of the headline measure of unemployment is its failure to capture the full extent of underutilisation of labour. As we discussed in the October 2017 Economic Review, gradual changes in the labour force composition or labour contracts (among other factors) may have led to a shift towards more implicit forms of underutilisation of labour such as underemployment.

The data discussed in the September 2017 labour market economic commentary suggested a broadly downward trend in underemployment. The data published in February 2018 suggest a far more modest fall in the second half of 2017, compared with the same period in years between 2013 and 2016.

Perhaps more importantly, it remains the case that for any 100 people who work full time, the number of people who want to work more hours is higher now than it was prior to the economic downturn (11.9% in November to January 2018 and 9.1% on average in the decade between November to January 1998 and November to January 2008). What this suggests is that the underutilisation of labour may be to a lesser extent captured by unemployment, with a higher degree of underutilisation among people in employment.

Figure 4: Share of workers unable to find a full-time or permanent job among those working part-time or on a temporary contract UK, seasonally adjusted, January to March 2006 to November to January 2018 Source: Office for National Statistics, Labour Force Survey Download this chart Figure 4: Share of workers unable to find a full-time or permanent job among those working part-time or on a temporary contract Image .csv .xls

Temporary workers represent another category that is worth considering in the context of wage growth. Using data from the Annual Survey of Hours and Earnings, we previously found that workers on fixed-term contracts were earning less than their counterparts on permanent contracts, taking into account their characteristics (such as age, tenure, industry they were employed in and so on). The research conducted by the European Commission also suggested a noticeable negative wage premium associated with being on a fixed-term contract (PDF, 564.4KB), a conclusion that held not only for the UK but also for most other European nations1.

Since the size of the workforce grew over time, Figure 4 looks at the number of workers on temporary contracts in relation to those on permanent contracts. Furthermore, we focus on one specific sub-group; those who could not find a permanent job. As you would expect, the period between March to May 2008 and June to August 2013 was characterised by an increase in the number of workers falling under this category.

Similar to the case of part-time workers who could not find a full-time job, the number of temporary workers who could not find a permanent job started decreasing thereafter but remained relatively high and is growing again – perhaps a sign of economic uncertainty. As indicated previously, on average, such workers would be earning less than their permanent counterparts, adjusted for job and personal characteristics.

Notes: Wage growth, working pattern and contract type