Saturday, 4 October 2014

The Tories are wrong to compare benefit increases with average earnings

*This article originally appeared on Left Foot Forward
It is not necessary to be an expert statistician to know that a few choice facts taken out of context can give a distorted and misleading view of the world. David Cameron’s recent justification of a two year freeze in benefits on top of previously announced cuts are a case in point.
The prime minister’s argument is that between 2007 and 2013 the value of benefits has increased by 22 per cent while average earnings have only increased by 14 per cent, and that this is simply not fair on hard working people.
Cameron is not actually wrong to claim that benefits have increased (slightly) faster than average earnings. (To put this into context: if the value of Jobseekers Allowance (JSA) in 2007 would have risen by 14 per cent rather than 22 per cent, it would now be at £67.40 per week rather than £72.40).
Rather, he ignores his own government’s culpability for poor earnings growth and the value that benefits have lost in the decades preceding the Financial Crisis. He also relies on a very particular measure of ‘earnings’ and fails to take into account the impact of other cuts to social security and the fact that average earnings and benefit increases are not directly comparable.
Firstly, lets take a look at how increases in benefits and average earnings have played out since 2007. The graph below compares cumulative increases to Jobseekers’ Allowance (JSA), total pay (including bonuses) and regular pay (excluding bonuses) since April 2007 (click to zoom):
It seems clear from the graph at least, that average earnings kept up with JSA till about April 2012 (albeit with JSA running slightly ahead of average earnings). A combination of high inflation in 2011/12, which led to a relatively large cost of living increase in JSA, coupled with stagnant wage increases, meant that after April 2012, JSA and average earnings started to diverge. (If you want an idea of how earnings trends should look like in a normal economy, go to April 2007, trace the average earnings line to April 2008 and keep on going at the point when earnings start to tail off).
It is informative to note that there was no obvious divergence before the Tories came to power and also the speed with which this divergence occurred after 2012. Essentially, Cameron is blaming those on benefits for his government’s failure to grow the economy and control inflation.
But there is also a longer-term story at play here. Going back to 1987, Jobseekers allowance has lost around a quarter of its value in comparison to average earnings. Go back even further and the trend is even starker. Whereas average earnings were just over six times higher than unemployment benefit in 1987, today, average earnings are almost 9 times higher than JSA. The two graphs below show this trend in more detail. One looks at absolute amounts of JSA and average earnings. The other is indexed:
Graph earningsj
Graph earnings 2j
Given the five years’ of freezes now implemented or announced, it is unlikely that this very temporary period where benefits outstrip earnings will last for long. Moreover it provides a mirror to Mr Cameron’s argument that it is not fair for earnings of people on ‘benefits’ to go up faster than average earnings. What he is implicitly suggesting is that the value of benefits may very well drop over a protracted period of time, but that it is simply not ‘fair’ to redress this at any point.
But what of the claim that earnings have only increased by 14 per cent?
This is based on one measure of earnings produced by the Average Weekly Earnings Index (AWE), which is itself only one source of data that we have on earnings. An important drawback of the AWE is that it is strongly affected by the composition of the labour market. This means that it does not just measure the increases that people in jobs are receiving, but it is also affected by changes to the structure of employment.
If the economy creates large numbers of low paid jobs, as it has done since the financial crisis, this will paradoxically reduce average earnings below where they would have been if the jobs had never been created in the first place.
It is difficult to calculate how much this effect has impacted on average earnings and the AWE isn’t really clear, but we know that it is a widespread trend across the economy. As the Pay Researchers IDS point out in a recent report, Average Weekly Earnings were traditionally, for much of the period since 1945, above pay settlements. Since 2010, average earnings have dropped below pay settlements. IDS conclude that among the principal drivers of low earnings growth is the growth of employment in low pay sectors of the economy and growth of part time roles, often in these lower paying industries and notably for men.
These effects have caused compositional changes to the AWE which are part of the reason why average earnings growth has been low in recent years. Not only has it kept earnings growth low, but the large numbers of people transitioning into employment from periods of unemployment or economic inactivity will have experienced sharp increases in income as they move from benefits to employment, further complicating the picture on average earnings and not captured by the AWE.
Another perspective on average earnings is given by the Annual Survey of Hours and Earnings (ASHE). Although its headline figure is also susceptible to compositional effects, it is possible to exclude the impact of those entering the labour market from its findings.
This is because the Office for National Statistics publishes differences in average earnings increases for all employees against increases for employees who have remained in their job continuously for at least one year. These figures for continuous employment therefore exclude compositional changes from calculations of average earnings. The figures are in the box below.
What they show is that for all employees, between 2007 and 2013, average earnings increased by 13.6 per cent – almost the same as the AWE before the figures are rounded. In contrast, the increase for those in continuous employment over the whole period is 28.2 per cent, far exceeding increases in benefits.
Annual change in median full-time gross weekly earnings for all employees and those in continuous employment, UK, (Source: ONS)
Year (April)All employeesContinuous employment

On a side note, and returning back to the AWE Index, although average weekly earnings including bonuses increased 14.4 per cent between January 2007 and December 2013, regular pay, excluding bonuses increased by 15.7 per cent. Part of the explanation for this is the large reduction in bonuses in financial services in in the aftermath of the Financial Crisis. According to the ONS, bonus payments dropped by £7 billion pounds in just one year (2008/09).
In effect, poor people on welfare are being penalised because benefit increases have been compared with falling bonuses for rich bankers in the aftermath of the financial crisis.
Finally, however, comparing average earnings and social security increases is itself inherently problematic. Wage earners are typically people who do not spend all of their wages on essential goods. Instead if they suffer from falling real wages they tend to be able to cut back on expenditure without compromising their ability to afford the absolute essentials.
In contrast, benefits are intended to form a social safety net for those who would otherwise be unable to cover their basic living costs, including affording shelter, utilities, food, and other essentials.
That is why benefits were originally (and for many years) up-rated based on cost of living increases related to inflation. There is not meant to be wriggle room for those on benefits, while there is for the vast majority of wage earners. Linking benefit increases to average earnings in the way this government is doing penalises those in receipt of social security for government failures to on the one hand control inflation and on the other grow the economy.
Also, it should be remembered that many of the poorest members of society have also been affected by a number of cuts to social security. For instance the Bedroom Tax, Benefit Cap, housing benefit changes, a tighter sanctions policy and abolition of council tax support among others have meant that for a great many people the cumulative impact of these cuts and caps have outweighed any of the increases.
The truth is that far from benefiting from unfair rises to social security payments, many people have had to make the limited Social Security money that they receive go further and further. It is this simple fact that explains why many people increasingly need to rely on food banks and why the IFS predict that both relative and absolute child poverty is set to jump in the next few years.
So that is the wider story behind the prime minister’s claim that benefit increases have outstripped average earnings. For much of semi-recent history, the reverse has been the case, and it is only actually true for a narrow measure of earnings which lump in compositional changes to the economy. And strictly speaking it is not valid to compare average earnings and benefits increases anyway. Hence why benefits are up-rated based on inflation rather than any other measure.
Moreover it is not the responsibility of the poorest members of society to ensure that inflation remains low and average earnings grow. That is the responsibility of the government. But don’t tell all this to the prime minister. He is just a simple guy, so he probably wouldn’t get it anyway.

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