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What’s in a number?

May 9, 2014

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Type: Advice for Businesses, Corporate Finance, Latest Blogs, Trending

 

Mid April saw data released from the ONS regarding employee pay.  It showed average annualised pay growth for Dec – Feb 2014 was some 1.7% –  which matches the consumer price inflation in February 2014.  So, does this mean that at long last the gap between wage rises and inflation has been closed and the former has caught up with the latter?  Well pay growth has been rising and inflation falling for the last 12m or so, so that must be good news; but there is a problem hidden in these numbers about increases in pay. And it is this, the ONS considers movements in mean average pay –  ie total pay divided by the total number of workers.

 

 

What’s wrong with that you may ask?  Well as Ben Chu, (economic editor of The Independent) points out in his article of 17 April the clearest example of why mean average pay is a flawed measure is given by the old ‘joke’: four men are drinking in an empty bar bewailing their lot in life when Bill Gates walks in. “Cheer up” says one of the men, a statistician, “The mean average wealth of the five of us has just gone through the roof!”.

 

 

Mean average measures of pay, or anything else for that matter, can be very crude and arguably very misleading as they take no account of the shape of the distribution curve; they simply smooth out inequalities.

 

 

A more relevant measure is how the pay of a worker in the middle of the range ie all employees are lined up from the lowest remuneration to the highest and the person who is in the middle of the line is the median average.  The ONS only measures this annually releasing figures in December which relate to the previous April.  So the most recent information we currently have for median average pay relates to April 2013 –  so some care needs to be exercised when using this information. That said the data here is less rosey. It shows that median pay increaes have frequently been lower than mean average pay increases over the past decade –  although the gap has reduced somewhat since 2011 to 2013 there is still a gap.

 

 

Why does this matter? Because it implies growing wage inequality.  Many commentators have argued that, ignoring the ethical questions raised by a skewed distribution of wealth,  balancing out the distribution of the benefits of economic recovery is important if we want a broader based and more resilient economiy. Thus far it has been fuelled largely by consumer spending.   This will, of course,  continue to be an important component of ongoing recovery, but as Katja Hall of the CBI recently pointed out, it is important that consumer spending is augmented by, amongst other things, continued increased business investment.

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