Visualising Wage Changes II

In the last blog I bemoaned my lack of understanding of available data on the UK labour market, and also on the way in which this data is traditionally visualised (which can impede its discussion). It seems that the ONS has some really interesting data but hides it well.

I appreciated very much the crowd-sourced pointers on the data front that the blog generated. And also am indebted to @Nevillehill who downloaded and sent me enough ONS data to freeze my bewildered Mac.

As is often the case when looking at data, I am left with new questions. And as is often the case with me, some of these questions sound pretty stupid. The stupidest question that I am left with is this: how do you – as an individual – know whether your earnings are growing quickly or slowly? But I think it is an interesting question.

What do I mean? Well, let’s look at the data.

The first chart below shows the pace of wage growth on a per annum basis split by age.* This shows that the earnings of a brand new 25 year old rose in 2007 were 3.0% than the earnings of a brand new 25 year old in 2006, while the earnings of a brand new 25 year old in 2011 were 1.7% below the earnings of a brand new 25 year old in 2010.

Increase in median earnings for a brand new person of a given age (age cohorts 18-55)

median earnings brand new person

But we are only a brand new 25 year old once. After that we are a brand new 26 year old. Then a brand new 27 year old. We get to be one of these things one time only and so while knowing how much more the people a year younger than you will get paid for the role you used to do might be interesting, it doesn’t relate much to you and cannot be observed in your paycheque. What about the change in earnings that we as individuals can observe in our paycheques? What has happened to them?

The second chart below shows the median step up in earnings experienced by people as they have become older over recent years. In this chart we are 18 years old once, then 19 years old once, then twenty years old once. And the change in earnings experienced between ages is plotted.

Median increase in earnings experienced in given year, given starting age in that year (age cohorts 18-55)

median earnings in a given year

This shows that a median 25 year old personally increased their earnings by 6.2% in 2007 as they moved from being 25 years old to 26 years old (compared to the 3% bump up in earnings that the next batch of 25 year olds would have had over you when you were 25), and in 2011 a median 25 year old personally increased their earnings by 1.9% as they similarly aged (compared to the 1.7% reduction in earnings that the next batch of 25 year olds would have had compared to you when you were 25).

Of course, from a traditional macroeconomic perspective, what individuals experience over time as individuals has never really mattered: it is what the workforce collectively experience that counts.

But to this I would say two things.

Firstly, as per the previous blog, some nod towards the demography of the workforce might be worthwhile in considering the impact on aggregate wage changes if institutions frame their consideration of employment and compensation practices with reference to either age (which would be illegal) or experience (which would not be). As people age so their earnings growth has traditionally flattened out, and having a bunch of older people whose earnings are not growing fast just because they are young could in aggregate make a difference to wage growth numbers (depressing them). I am not a labour market economist and am sure that the smart folk who are had this all in hand decades ago, but none of this sort of good stuff comes through to market-types like me on a day-to-day basis and any pointers would be well-received. (Apologies if I haven’t been paying attention.)

Secondly, I have sympathies with classical economists who believe that the tug of war between capital and labour is one of the most important things going on in a political economy. From this perspective employers have a high level of information about wage developments across age and skill cohorts for their given industry (or at least company), but each employee has information only about wage developments as they apply to their own age and skill cohort. And given that you are only the same age once, labour cannot tell whether they are getting a good or a bad deal by observing their own personal experience. In the second chart above, the median 25 year old turning into a median 26 year old in 2011 had a wage increase of 1.9% rather than a wage cut of 1.7%. The median experience of earnings growth for young (less well-compensated) workers is hardly ever as bad as economy-wide average earnings growth, while median older (better compensated) workers will experience consistently lower levels of earnings growth than the economy-wide average. Absent unions, younger workers have no first-hand data as to whether their above-average earnings growth represents an historically good deal or bad deal: wage growth in the early years of their employment is not only entirely consistent with aggregate wage deflation, but taking smaller positive wage gains than has traditionally been associated with early-stage career development could be the main driver of wage deflation. This is by no means a new thing. But it casts a different light (for me) upon the public conversation on income and wealth inequality that appears to inform ever-more of the political debate in the UK.




* I split the age cohorts for which the ONS provides data smaller cohorts sized containing only people of a given age (eg 24 yrs old, 25yrs old etc), using the (wrong) assumptions that: (1) there are the same number of individuals of every age across the population; (2) that the cohort average wage was the wage received by the smaller (made up) cohort in the middle of the larger (actual) cohort; (3) that wages rose or fell to in linear increments by age between the actual data points from the ONS. I’m gambling that these wrong assumptions are insufficiently wrong to meaningfully change either chart or any substantive point made in the blog (but will bow to anyone with better data that contradicts this assertion).


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