Take-home pay beats wage settlements

ECONOMICS - THE WEEK IN VIEW

Several earnings reports this week are expected to show that while wage settlements remain steady in the UK, take-home pay is surging, boosted by overtime and bonuses, raising pressure for an interest-rate increase to curb growth soon after the election.

A combination of rising productivity, tax concessions on profit-related pay as well as performance bonuses is leading to a gap between earnings and pay settlements in the UK, according to Income Data Services which monitors salaries and will produce its next report tomorrow.

"Most people monitoring pay deals would say they're rising at around 3 per cent a year, but that simply isn't the case. We have a picture of subdued earnings but lively take-home pay. So there's a whole bunch of employees with increased spending power," said Alistair Hatchett at IDS.

The Office for National Statistics will produce its own report on average earnings for February on Wednesday. Economists expect underlying average earnings to have risen 5 per cent from a year earlier, unchanged from January but up from 3.5 per cent in January 1996.

Unemployment figures for March will be released at the same time. These are expected to show a decline of 50,000, a little below February's fall of 68,000. While the recent drop has been exaggerated by the introduction of changes to the benefit system, official figures show that the tighter labour market is beginning to push average earnings higher.

Average earnings reports are increasingly given greater credence by markets in judging whether an economy is nearing capacity constraints than the more traditional measures of the inflation rate and unemployment totals.

As unemployment drops a growing number of businesses are beginning to report skill shortages and higher staff turnover.

"When these levels of unemployment were last seen, there were extraordinary problems for some organisations with skill shortages, poaching of staff and increasing staff turnover," said Mr Hatchett.

"If unemployment continues to fall, recruitment and retention problems will increase and will exert an upward pressure on pay by the second half of this year."

The pressure is particularly evident in financial services. While NatWest, for instance, has increased the amount of money designated to salary increases by 3 per cent in this financial year beginning in April, it has raised the amount available for bonuses by 10 per cent.

Pressure to raise take-home pay is largest in areas where there are skill shortages. British Telecommunications recently agreed to higher salary rises for its information technology workers.

Similarly, competition for suitable university graduates persuaded British Aerospace to offer higher salaries for its engineering trainee programmes.

The Bank of England "agents" who provide information to the bank on business conditions around the country recently said skill shortages were "severe in specialised areas of engineering, information technology, accountancy, law and marketing and significant in electronics and chemicals."

For the time being, the drive to increase productivity means employers are not paying for higher earnings by raising the prices they charge for their goods and services.

"Profits are so high there is a lot of scope to squeeze them and any pressures for higher wages is likely to be met by squeezing margins," said Martin Weale, director of the National Institute for Economic and Social Research.

So while employees at travel and financial services company Thomas Cook received a 1 per cent wage increase above their individual wage settlements this financial year, they also agreed to a one-and-a-half-hour increase in the working week.

Salary increases vary between industries and regional areas. Retailers are still reluctant to grant pay increases, and engineering wages are at their lowest level for two years.

"Wages have been rising between 3 and 4 per cent for some time now and there is no pressure to raise that. Flexible labour laws mean, apart from a few localised incidents, retailers face no problems in filling vacancies," said Andrew Sentence, chief economic advisor to the British Retail Consortium.

Retailing employs around 10 per cent of the workforce. Copyright: IOS & Bloomberg