Wage growth in Scotland: what does the latest data say and why does it matter?


David Eiser and Anna Murray


The dramatic fall in wages following the recession of 2008-9 has been well documented. The median weekly real wages of full-time workers in Scotland fell by 5% between 2008 and 2012, and have been increasing at only a sluggish rate since 2013.

Wages are clearly an important measure of living standards, accounting for three quarters of the total income of Scottish working age households[1].

Wage growth is also a key driver of income tax revenues, and with income tax revenues being almost wholly devolved to the Scottish Parliament in April 2017, Scottish wage growth will become a key indicator of the Scottish Government’s fiscal position.

The ONS yesterday published the latest results from its Annual Survey of Hours and Earnings (ASHE). ASHE is the most comprehensive survey of employee pay, based on a one per cent sample of all employees in the UK. It is based on earnings measured in April of each year, with the latest data now including 2016.

What does yesterday’s release tell us?

Median Scottish earnings are still below the pre-recession peak

The latest ASHE data shows that Scottish real median weekly wages for full time workers are still trailing pre-recession levels, around 3% below the pre-recession peak. A similar picture is seen when looking at real median hourly wages in Scotland, albeit with a slightly softer fall and recovery.

The gender pay gap is narrowing

The earnings of females in full-time work have held up more robustly than the wages of full-time males over the same period. While the median weekly wage for full-time male workers remains 5% below the pre-recession level, median weekly wages are almost back to the pre-recession level for full-time female workers.

This implies some narrowing of the gender pay gap – the median weekly earnings of full time female employees in Scotland was 79% of the male median in 2008 but is now at 85%, the smallest gap seen in the last two decades.

mf-earnings-graph

The ‘National Living Wage’ has been good for low earners

As was the case in the UK as a whole, 2016 was a good year for low earners in Scotland. Hourly pay at the 10th percentile grew 5% in real terms between 2015-16, compared to 1% at the median. Weekly pay also grew strongly at the 10th percentile, up 4% on 2015. The main driver of this increase was the introduction of the new ‘national living wage’, which came into effect on 1 April (with the ASHE data based on a snapshot of earnings in mid-April).

Whilst pay growth in the lower part of the income distribution is of course welcome, the ASHE data do not allow a full assessment of the impact of the national living wage on employment, hours worked, prices, or household income inequality (employees who earn the ‘living wage’ are not exclusively those who live in low income households). Nor does it provide much insight into the incomes of low income households, for whom positive news on earnings may be offset by changes to low-income benefits.

Wage growth was slower in Scotland than the UK in 2016

Wage growth is a key determinant of income tax revenue growth.Under Scotland’s new fiscal framework, what determines the resources available to the Scottish Government is the growth in Scottish tax revenues per capita relative to those of rUK.

How does Scottish wage growth compare to wage growth in the UK as a whole? In the aftermath of the recession itself, wages in Scotland appeared to hold up slightly better than UK wages, particularly among males. For the most recent year however, this trend appears to have somewhat reversed. Scottish median weekly wages tend to have grown slightly slower than those of the UK between 2015 and 2016, regardless of whether we consider males, females, full-time or part-time workers.

But what is much more important than median wages in determining income tax revenues is the wage growth of higher income earners, as high earners contribute a disproportionate amount of income tax.

Between 2015 and 2016, wages at the 75th and 90th percentile grew more quickly in the UK than they did in Scotland. For example, wage growth at the 90th percentile was 1.3% in Scotland, half the growth rate of 2.7% seen in the UK.

One possible explanation for slower wage growth in Scotland between 2015 and 2016 is the downturn in the offshore economy and correspondingly the economy of the north east. Indeed, according to the latest ASHE data, the median wage declined by 5% in Aberdeen and 4% in Aberdeenshire between 2015 and 2016, despite increasing across Scotland as a whole. Regardless of the precise explanation, whether Scotland’s recent slower wage growth is a temporary phenomenon or the beginning of a longer-term trend will have important implications for the future revenues of the Scottish Government.

 90p-earnings-graph

 

 

[1] According to the Households Below Average Income dataset 2014/15