The Bank of England has been quite publicly troubled by the lack of wage inflation. And across the market, folks are looking hard at dismal charts that look a bit like this:
UK Average Weekly Earnings, 3mth YoY
Here we see a familiar picture of annual average wage growth in the UK: a labour market in the doldrums. This sits in contrast to a lot of the survey data regarding how easy or hard it is to recruit staff without paying up, Bank Agent reports on the same topic, and proprietary data from recruitment firms that some of my super-smart colleagues analyse when evaluating the worth of said firms. The Bank has started to drop references to low labour market churn perhaps suppressing wage inflation numbers into the last couple of MPC minutes, echoing some work that @nevillehill has been conducting at Credit Suisse.
What would help me a lot in thinking about this is some better data visualisation. As a human being I instinctively think of stagnant wages being associated with wages for people individually stagnating. But my brain tells me that stagnant wages at an aggregate level does not at all mean that individual households will experience stagnant wages. With zero aggregate wage inflation, the average Brit will experience rapid salary increases through their twenties and thirties (rising at around 7% per annum in their 20s, and 4% per annum in their 30s if pre-tax income is a guide to wages), experiencing an income peak in their mid-forties, and then through a mixture of changing working hours, working practices and plain redundancies, see their incomes trail off from there and into retirement.
So how would I like to see wage data displayed? As someone who grew up professionally in the bond market, I like these visualised using a wage-age curve (like a yield curve, it shows a snapshot, which needs refreshing over time; instead of curve roll-down there is age-roll-up in early professional years etc). I’m showing pre-tax income by age cohort because I couldn’t find the wage data by cohort easily on the ONS website. The first chart shows the basic pre-tax income of taxpayers by age cohort in 2010-11 (blue) and then again in 2011-12 (red), with the changes between years shown on the green dots at the bottom referencing the left-hand axis. The second chart shows the same data, but sizes the cohorts as a proportion of the taxpayers, and this corresponds to the size of bubbles (so showing the relative importance of these cohorts for aggregate wage data).
Does data visualisation matter? To me it absolutely does. If monetary policy is contingent upon changes in wages, I should absolutely be focused on the degree to which wage inflation is changing due to demographic changes that can be anticipated (eg, everyone gets the same lifecycle in wages, but there are more older folks/ younger folks/ middle-aged folks etc), changing sectoral or skill-based labour market footprint, or due to changing compensation practices among firms. Changing the way that we look at data helps achieve that goal.
But unfortunately this brings me to the ONS website. Upon which it is probably best to dwell no further.
With the unemployment rate collapsing, some folks (understandably) raise the question as to whether we risk soon breaching the Non-Accelerating Inflationary Rate of Unemployment (NAIRU), and worry that at some point soon wage inflation will explode to the upside. But conversations with @Goodrichwatts have led me to the view that it may be more complicated than that: NAIRU is going to be contingent on the type of job added. If all new jobs are for burger-flippers NAIRU is probably going to be lower than anything we have historically seen; if new jobs from here all require PhDs NAIRU is going to be somewhat higher. It becomes a question of McNAIRU vs DrNAIRU if you like. I have my view as to where the balance lies between McNAIRU and DrNAIRU, but it is forward-looking and qualitative.