Are British workers really missing out? The Treasury thinks not

Of all the economic phenomena of the past few years, one of the most perplexing (and worrying) is the breakdown in the relationship between economic growth and the earnings of actual workers. As the Resolution Foundation has pointed out, back in the late 20^th century, every pound of GDP growth in Britain was accompanied by around 90p of median wage growth, but between 2000 and 2007 this fell to just 43p.

While we spend a lot of time focusing on the squeeze in real earnings, as wages fail to keep pace with inflation, these statistics suggest that this may only be the latest manifestation of an issue which has been affecting the country for some time (but which was obscured in the boom years immediately before the crisis).

Quite what’s driven this has never been particularly clear – but, in an era when the middle class have found themselves more squeezed than ever it has seemed to be yet more evidence that the wealthy, privileged few in society were benefiting at the expense of everybody else.

However, now the Treasury has provided a possible explanation. In research its economists have put together it suggests that the main reason households have seen their wages drop back in comparison with the country’s overall growth is not that they are missing out at the expense of their employers: it’s that they are being paid in other, rather less obvious forms. It’s right, they say, that wages have not risen as fast as overall productivity since 2000: but if you look at overall real compensation per employee, it has pretty much kept pace.

The difference between the two measures is that overall compensation includes not just wages but also the social contributions made by employers, including pension contributions and National Insurance Contributions. Technically-speaking, these are forms of payment, except that because they don’t go straight into your pocket they don’t feel particularly obvious.

And it turns out that the reason wages have disappointed in recent years while overall compensation has kept pace with broader economic growth is that employers are paying their workers in ever-greater amounts of social contributions. Partly because of the pensions crisis, which has seen companies shut their defined benefit schemes and put more into their pensions schemes, and partly because of an increase in National Insurance Contributions, these elements of compensation have risen from 13% of total compensation in 2000 to 17.2% in 2012.

Now, on the one hand this analysis provides a more sanguine view of the real earnings crisis discussion (as one would probably expect from the Treasury). It indicates that people aren’t necessarily getting proportionately poorer – it’s just that they’re being paid in different forms. Though I would say it’s questionable to suggest that these are analogous to actual remuneration.

On the other hand, this also underlines the almost indiscernible effects wrought by pension reforms and fiscal drag (which has pushed up NICs contributions for employers): over the course of a decade and a half, they have essentially meant that a larger and larger proportion of money which would otherwise be going to employees is going into the taxation system (through NICs) or into pension schemes.

There’s plenty more to be found online about this debate. Also check out this paper from John van Reenen and  Joao Paulo Pessoa.