The Government’s prime policy objective is to maintain the annual rate of consumer price inflation within one percentage point either side of 2%.

To achieve this target requires some restraint on earnings growth, but does not imply no pay increases at all.

The conventional view is that, after allowing for growth of productivity, average earnings growth of 4.5% implies higher pay will be self-financing and the increases will be compatible with the inflation target.

It is assumed, therefore, that if average earnings are increasing by more than 4.5% a year, firms will be forced to raise the prices of their goods and services. This target has not seriously been threatened for several years and the mid-2009 growth rate (excluding bonuses) in the private sector dipped below 3%, good news for inflation but bad for spending.

As the economy slowed, so the rate of earnings growth in the private sector slowed and public sector rose. The rates crossed in the spring of 2008 and widened thereafter.

Source: ONS

If, as now seems to be the case, the UK remains a low-inflation economy, then earnings growth will also be modest. If, for instance, consumer price inflation averages 2% (i.e. the Government’s inflation target is consistently achieved), and if we assume annual productivity growth of 2%, this would be consistent with earnings rising at around 4% a year.

Earnings, in cash terms, are recorded by the Annual Survey of Hours and Earnings, which is also published by National Statistics.

According to the latest (2008) survey, average (mean) gross annual earnings for full-time workers were £31,323 in 2008.

It should be noted, however, that this mean average tends to be disproportionately influenced by a relatively small number of very high earners.

In analysing average earnings, therefore, it is often appropriate to look at the median value, which in 2008 was £25,123.

Measures of average earnings, moreover, mask huge variations across the entire distribution of earnings.

Table 11.3: Distribution of earnings shows how the distribution of weekly earnings has changed over time.

A median value of weekly earnings of £479 in 2008 indicates that half of full-time employees earned more this figure, while half earned less; and a quarter of people earned more than £676 a week, while the lowest-paid quarter earned less than £338 a week.

An area of particular interest for some commentators is the difference in pay for men and women, which shows that, on average, men have consistently earned more than women.

This statistical phenomenon, often referred to as the gender pay gap, has prompted stringent legislation aimed at achieving a more equal distribution of earnings.

Despite this, the earnings differential between women and men has not yet disappeared.

Indeed, that would be surprising, since the median values for weekly pay do not necessarily indicate different rates of pay for comparable jobs.

They do, however, reflect the significant differences between the working patterns of men and women, such as the length of time in jobs, and the proportions of men and women in different occupations.

Although the gender gap has not disappeared, it has narrowed appreciably in recent years.

Table 11.4: Gross hourly earnings (median values) by gender

Table 11.4: Gross hourly earnings (median values) by gender shows that women’s hourly earnings, expressed as a ratio of men’s average earnings, had risen to 87.4% in April 2006, the narrowest gap since records began.

Not surprisingly, wages vary considerably between different industries, with earnings tending to be highest within financial services, property and business services, and the energy sectors.

In contrast, pay is relatively low in agriculture, health and social work, distribution and hotels and catering. See Table 11.5: Average gross annual earnings for all employees, by industry

Wages also very considerably between regions, as seen in Table 11.6: Average gross annual earnings for all employees, by region.

Since earnings in each region reflect the industrial composition, earnings in Greater London (the national home of financial services) are around two thirds higher than the northern regions, which are still disproportionately dependent on manufacturing.

Areas with high concentrations of agriculture or reliance on government spending are also amongst the lowest paid. See Section 13 - Regional Perspective.

Another factor that is thought to have made an enormous difference to the UK labour market is the recent influx of migrant labour.

In 2004, ten new member countries joined the EU, eight of which were from eastern Europe. Since then, two more former Warsaw Pact countries (Bulgaria and Romania) have also joined.

Higher than predicted immigration

In 2004, the UK was one of only three of the EU15 which did not suspend the free movement of labour clauses of the Treaty of Rome, and the resulting influx of workers into the UK far exceeded the official forecasts.

Rather than the 5,000-13,000 predicted by the government, 427,000 workers were on the Workers Registration Scheme in the first two years.

This has prompted a vigorous political debate, which has been much more about the uncertain social implications (housing, education, health, etc.) than the generally positive economic consequences.

Economic benefits

The economic pluses include filling skill gaps that might otherwise have led to inflationary wage rises and higher interest rates.

The UK has been able to sustain above trend growth for longer than in the past whilst containing inflation at historically low levels.

Labour supply is the usual constraint, and faster earnings growth arising from skill shortages the early warning of nascent inflation.

The additional labour from eastern Europe (a high proportion of which anecdotal reports claim is highly skilled, disciplined and motivated) is likely to have contributed to the absence of the traditional pressures after 15 years of unbroken growth.