Simon Caunt, David England and Imogen Shepherd.
AWE growth has picked up over the past year but stalled in recent months, remaining some way below pre-recession levels. Should we expect that weakness to continue? One way to gauge wage pressures is through the company visit scores (CVS) the Bank’s Agents assign for businesses they meet. Agents score a range of variables, including turnover, employment and costs, -5 to +5, generally according to growth. An anonymised CVS dataset is published on the Bank’s website. Here we look at what CVS say about prospects for pay, considering factors such as recruitment difficulties, low inflation, public sector pay and the National Living Wage. Overall, we think this evidence points to continued modest rates of wage growth over the coming year.
Introduction
The economic intelligence gathered by the Bank’s Agents is largely qualitative and often aimed at understanding the drivers of business behaviour, such as their investment or pricing decisions. To aid this, Agents score a range of economic variables for the companies they visit. Aggregated up, these company visit scores (CVS) provide a timely source of information on business conditions and can provide insights into differences between sectors and companies. While we wouldn’t expect them to match official data perfectly, average scores have been found to be broadly consistent with trends in the economy. A 2013 Q1 Quarterly Bulletin article provides more background on these scores which, for the purposes of economic research, have been made available in an anonymised dataset (up to 2012), to be updated annually. But here, we examine what these scores can say about current wage pressures in the economy, and the influence of a range of factors.
What do average CVS say about wage pressures?
In our view it is striking how stable the scores for pay growth have been over recent years at modest levels, consistent with private sector settlements reported to the Agents of around 2%–3%. CVS for a broader measure of growth of total labour costs, which includes bonuses, commissions and pension costs, are somewhat higher, but also point to pretty modest growth, at rates below those that prevailed before the financial crisis.
CVS also allow us to examine what contacts expect for pay growth at their companies over the coming year (Chart 1). And these scores indicate pay growth only marginally above the current level. That said, CVS have not always accurately predicted actual changes in AWE previously.
Chart 1: Agents CVS for pay growth and AWE private sector pay growth(a)
(a) Three months on a year earlier. CVS for expected wage growth are pushed back 12 months (ie the score for expected pay growth at end-2016 is that made at the end of 2015).
Are recruitment difficulties feeding through to pay?
One sign of a tightening labour market driving up wage inflation would be if companies with recruitment difficulties needed increasingly to pay up to fill vacancies and/or to retain staff. Looking across company visit scores, companies with greater recruitment difficulties tend to have greater pay growth as we might expect (see Chart 3 in an earlier Bank Underground post). But, across companies, on the basis of data to the end of 2015, the relationship between those two variables has been little changed over recent years: companies with more intense recruitment difficulties have not been reporting stronger increases in their pay growth over the past couple of years than has previously been the case. In our view, that is consistent with Agency intelligence and wider evidence such as a recent report from the CIPD that, so far, companies whose hiring difficulties have intensified have tended to address that problem by targeted pay increases for new hires and/or to retain key individuals, rather than by making more general increases in wage growth for their staff.
Indeed, as Chart 2 shows, average pay growth scores are lower currently than might be expected given the extent of recruitment difficulties. That could put upward pressure on pay growth over the coming year, especially if the labour market tightens further and staff turnover increases.
Chart 2: CVS for labour cost growth and recruitment difficulties
Is there evidence that low inflation has been holding back pay growth?
Of course, the subdued response of pay growth scores to increased recruitment difficulties could also indicate that some other factor is suppressing labour cost growth. The most obvious candidate is low inflation, which our contacts have increasingly mentioned as a factor holding down pay awards in recent months. And the Agents’ pay survey at the start of 2015 showed that, at that time, inflation expectations were the single biggest factor expected to put downward pressure on labour cost growth during 2015. The Agents’ latest pay survey indicated continued expectations of a drag from inflation on labour cost growth in 2016.
It is difficult to tell from CVS alone whether low inflation has been depressing wage growth. That said, CVS show that during the recent period of low inflation, average labour costs growth scores in manufacturing have been a bit softer than for services (Chart 3). The Engineering Employers’ Federation has also noted a slowing in the pace of pay growth in manufacturing. In contrast, between 2011 and 2013, when inflation was higher, the difference across sectors was reversed. One possible explanation for this pattern may be that a higher proportion of awards in manufacturing are more formally linked to measures of inflation such as RPI, CPI or AWE. But the negative effect of weaker manufacturing output growth on overtime payments recently, linked to weak world demand growth, the strength of sterling, and in some cases the weakness of the oil and gas industry, may also have slowed pay growth for some manufacturers.
Chart 3: Agents CVS for growth in labour costs per head
Has weak public sector pay growth held back private sector pay?
Another factor that could have held back private sector wage inflation is weak pay growth seen in the public sector. It is not a perfect test, but we can look for evidence of such an effect in the CVS of companies located in different regions: if weak public sector pay growth had affected private pay growth significantly, we might expect companies’ pay scores to have been weakest where the regional share of public sector employment was large. Chart 4 shows the average labour costs scores for 2015 reported by each Agency, ordered by regional public sector employment share (in descending order). In our view, there is little evidence here that weak public sector pay growth has had a major effect on private sector wage inflation.
Chart 4: CVS for growth in per-head labour costs by agency and public sector share of total regional employment
Do CVS indicate an effect from the National Living Wage (NLW)?
The NLW might have an impact on pay growth when it is introduced in April. Although uncertain, the aggregate effect of the NLW is estimated by the Bank to be small – less than 0.5 percentage points over the next 5 years, as explained in a box on page 24 of the August 2015 Inflation Report. But the Agents’ discussions suggest that in some parts of the economy, the effect may be significantly greater. Chart 5 indicates that, while average year-ahead CVS expectations for pay growth overall have risen only slightly during the past six months, expectations in accommodation and food services activities have picked up markedly – broadly consistent with findings from a recent report by the Resolution Foundation.
Chart 5: Agents CVS for expected growth in labour costs per head(a)
Summary
So, on the basis of evidence from the CVS at least, growth in pay seems likely to continue at modest rates of growth, albeit with some upside risks from increasing recruitment difficulties and, for some sectors, the National Living Wage. We think low inflation has dulled the response of pay to increased recruitment difficulties and could have depressed pay awards in sectors where there is a more formal link to measures of inflation such as RPI, CPI and AWE. But we think that weak public sector wage inflation appears to have had little impact on pay growth in the private sector.
Update 17/02/2016: Data for the charts in this post are available here.
Simon Caunt, David England and Imogen Shepherd work in the Bank’s Inflation Report and Agency Intelligence Division.
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Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.
