It's productivity that matters for future living standards

Ian Brinkley, a chief economist at the Work Foundation, discusses the link between productivity, wages and living standards in the UK

The impressive job figures released on in January 2014 had some of their gloss taken off by the measure favoured by the ONS, average weekly earnings. They revealed that regular pay only increased by 0.9%, when comparing the three months running up to November 2013 with the same three months a year ago. With inflation - measured by the Consumer Price Index - increasing by 2% on an annual basis, it was clear that many people in work were experiencing real wage declines.

This morning, Downing St released an estimate that showed for most people the increase to take home pay – after taking account for changes in tax and national insurance – was higher than inflation over the period April 2012 and 2013.

This is of course not an official statistic, and that alone should make us cautious about taking it at face value. Some have questioned why the estimate excludes changes in social benefits. It also uses a different measure of earnings – derived from the Annual Survey of Hours and Earning (ASHE) rather than average weekly earnings published by the ONS each month.

However, it is based on an analysis of official statistics and there is no reason to think that the calculation is wrong. Whether the methodology is sound, and the conclusions derived from it are technically justified, is best left to the Institute for Fiscal Studies to evaluate. The ONS do produce a statistic for real household disposable income per head, but unfortunately it is not very timely.

This is not the first time that governments have introduced new measures of take-home pay to make policies appear in a more favourable light. People may remember the Tax and Price Index (TPI) introduced in 1979. The government of the day argued that just looking at inflation – which was very high at the time - to judge whether people were better off or not was misleading because this failed to take account of cuts in direct tax. There was also some hope that over time the TPI would persuade wage bargainers to exercise more moderation in wage settlements. However, the TPI had little credibility in its day, faded into obscurity, and has recently been abandoned by the ONS as an official statistic.

We can expect the statistical battle to continue as all the indications are “living standards” will continue to be a hot topic for debate in the run up to the next Election. Past experience suggests it will generate more heat than light. The ONS will continue to vainly point out that the Consumer Price Index (CPI) is not a measure of the cost of living even though many people assume it is.

What is clear however is that productivity and wages are rising at exceptionally low rates. However measured, sustainable increases in living standards are ultimately dependent on productivity growth. It would be more helpful for politicians and others to focus on why productivity has been falling, what the prospects are for the future, and what can be done to improve performance.

With stronger economic growth expected in 2014, we may at last see significant improvements in both wages and productivity. But a note of a caution is always in order – the forecasts for 2013 were also suggesting a recovery in wages and productivity and it did not happen. We still cannot be confident that we are close to returning to a more “business as usual” economy