Comment: How do the figures on pay add up for Scots?

GOOD news in economics rarely comes unalloyed. Thus it proved last week with further remarkable rises in employment and economic growth in Scotland outpacing that for the UK – all this overshadowed by weak average earnings growth. But are the figures on pay really as dismal as they look?

Bill Jamieson. Picture: TSPL

A robust recovery is certainly under way. And the growth in numbers in work continues to confound expert projections. The number of Scots in employment has hit a record 2.59 million, with a further quarter-on-quarter rise of 76,000 in the March-May period making it the longest ever unbroken run of quarterly gains.

Yet the consensus view is that no-one is feeling this recovery. There has been little uplift in household finances and confidence because average earnings, as measured by regular pay, rose by just 0.7 per cent in the March-May quarter compared with a year ago.

And as the rate of inflation moved up to 1.9 per cent in the year to June (from 1.5 per cent the previous month) real earnings are actually shrinking – just when it looked as if pay was overtaking inflation for the first time in four years. How can there be a return of the “feelgood factor” until pay starts to move up much more sharply – and certainly above the rate of inflation?

The figures have provided another opportunity for the poverty lobbies to present the state of the nation, not as one enjoying a robust recovery but one characterised by resort to food banks and payday lenders. Yet the bigger picture is more varied and complex than those average earnings figures might suggest and they need to be treated with caution.

“Average weekly earnings” is a statistical measure subject to the same objections and limitations as “average house prices”. It obscures wide variance in activity. We know from the controversy over house prices that the “average” number conceals a huge gap between price performance in many regions of the UK and central London. According to ONS data, property prices in London have shot up 20.1 per cent in the 12 months to May compared with a rise of 7.3 per cent across the rest of Britain. Indeed, the average price of a house in London is now 2.2 times that of a regional home for the first time.

Similar disparity appears to be at work beneath the “average” figure for earnings. A report last month from Markit Economic Research found that surging demand for staff and near-record skill shortages were pushing up pay rates offered by companies to attract suitable workers “at a rapid pace”, adding to signs that the UK’s economic recovery “is increasingly filtering through to improved pay growth”.

The Markit survey data, collected on behalf of the Recruitment and Employment Confederation (REC) and KPMG, found that jobs firms, ranging from some of the largest agencies to small headhunting firms, reported that the availability of candidates to fill permanent vacancies deteriorated to the greatest extent since late 1997. The availability of temporary and contract staff, meanwhile, has continued to fall at a rate similar to April, which saw staff shortages rising at the fastest rate since 2000.

Says the Markit report: “The deterioration of candidate availability follows a sustained period of surging employment amid rising demand for staff from employers. The number of people placed in permanent positions by recruitment firms has so far this year shown the strongest spell of growth in the survey’s near 17-year history.”

The result is that the recruitment industry’s permanent staff pay rates index rose at an annual rate of almost 5 per cent in June, while private sector employee pay growth has been rising by less than 2 per cent. And it is not just the recruitment survey that is suggesting that official pay data may soon start to show an upturn.

Companies responding to the services PMI survey reported a marked increased incidence of rising pay rates in May, which contributed to an overall upturn in cost pressures in this sector. And Markit says pay is already creeping up, with private sector pay rising by 1.8 per cent on a year ago in the three months to March, rising to 2.9 per cent in manufacturing and construction, and 3.2 per cent in retail, hotels and restaurants – all well above inflation.

A similar picture is emerging in Scotland. Last month’s Business Trends research from accountants and business advisers BDO LLP suggested that firms plan to continue growing their workforces at a higher-than-average rate over the next three months.

And the Bank of Scotland’s Report On Jobs For May also showed a rising number of job vacancies and increases in appointments. It warned that the rate of decline in the supply of candidates for permanent posts was “one of the fastest in the history of the survey” and that this “lack of available candidates” for jobs was leading to rising salaries.

Donald MacRae, chief economist at Bank of Scotland, noted that the number of candidates was “resulting in a noticeable increase in permanent salaries”.

There is no sign that would lead observers to expect any break in this remarkable labour market uptrend when the latest update for June, due to be unveiled tomorrow, will show any change either in pace or direction.

There is one further statistic pointing to upward pressure on wages in the period ahead: the number of unfilled vacancies. There were 648,000 job vacancies in April to June 2014, up 30,000 on the previous quarter and by 117,000 from a year earlier. This strengthening demand for labour augurs well for further employment growth – and, in time, growth in pay. «