Cost of living crisis? What cost of living crisis?

I’ve been in long conversations with a few readers and a couple of MPs about the real level of household income in the UK for ages. I – and they – keep pointing out that the PAYE or simple wage statistics don’t tell the whole story about how much money we are all making and getting. Why? Because modern workers so often have more than one source of income.

You might have a day job and a freelance job done in the evening or a spare day. You might have a non-executive position at another company. You might have a buy-to-let or two. And then there is of course general investment income. Or perhaps you buy and sell bitcoins.

Ask around the middle classes and you will find that multiple streams of income are par for the course. The same is clearly true for the working and non-working poor – benefits in the form of cash or tax credits are clearly streams of income.

Look at it like this and you will see how I have – with some trepidation – even wondered if the numbers we use to look at house prices (simple average earnings versus prices) make any sense in the modern world of work. Perhaps we should be looking at total household earning versus prices. It’s complicated.

It’s good news that the living wage/cost of living crisis debate has now brought to everyone’s attention the fact that things might not be as bad as everyone thinks – and the stats that explain it.

Yes, average employee earnings have only risen 2% a year since 2009 (versus inflation of 3.1% a year). But it turns out that household incomes have risen some 4% a year. How? As Peter Warburton of Halkin Services points out, entrepreneurial income is up 6.8% a year, property income is up 3.5% a year and welfare payments are up 3.7%.

The key point is this: actual employee wages only count for 45% of total household income. However, on the income front, it is also worth looking more closely at what the Office of National Statistics’ 2013 Annual Survey of Hours and Earnings (ASHE) has to say.

It puts growth in median gross weekly earnings for all employee jobs at 2.2% from the spring of 2012 to that of 2013 (that’s £417 a week) – that’s rather more than previously thought, so suggests less of a wage squeeze than previously thought.

What does it mean? We’ll think on that one for a bit.

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29 Responses

  1. 12/12/2013, mr clyde wrote

    Another major factor is trickle down income. I suspect the IHT take substantially under represents the amount of money finding its way from one generation to the next. There are an awful lot of WOOPIES out here with functional families who are quite happy to pass it on early.

  2. 12/12/2013, Boris MacDonut wrote

    Well done Merryn.You do listen. Imagine who chuffed I am that the penny has finally dropped for you. I have been saying for three or more years that it is Income and Wealth that buys houses not pay/salary or wages alone. There is no prescriptive rule that says only wages can buy houses.
    Just one source of buying power gives a hint at this. The typical inheritance in the UK is now at £70,000 and 500,000 people die every year. That means total windfalls of £35 billion to folk who are usually working and mortgaged.
    As you know I swear by looking at average Income to House Price.
    The best way to measure this is GDP,currently about £1,620 billion pa, divided by number of adults not still at University(that is those looking to buy a house) ,currently 475 million….i.e £35,000pa .As most houses are bought by two adults not at University they strat with £70,000. If you leave out the poorest 25% of folk, who never can afford to buy, the typical two buyers have an income of near £85,000pa. They can borrow up to £300,000 form most high street banks.So where is the problem?

    • 12/12/2013, Boris MacDonut wrote

      That should say 47.5 million not 475 million .Not even UKIP’s worst scenario has UK pop hitting 475 million!

  3. 12/12/2013, GFL wrote

    Merryn, what you write is true. The middle class have supplemented their salaries through multiple income streams, which is all good and healthy.
    But there is a big twist to the tale, which I’ve mentioned before:- A lot of the money made in order to buy these cash producing assets have relied on:

    •Huge expansion in the money/credit supply
    •Easy borrowing
    •Pretty much every asset going up many times
    •A time when avoiding tax was a lot easier
    •Debt free education
    •Business was not as centralized

    Now as we deleverage (or slow the rate of the above) – the money is stuck with those that got in early.

    Apart from the odd ebay business, I wonder how many under 37s (without parental support) have cash following assets. I know many people that are considered to have good salaries, although they have savings there is no way they will be able to accumulate the assets previous generation did!

  4. 12/12/2013, Tyler Durden wrote

    Oh dear Merryn, you’re not buying into this load of ridiculous propaganda, are you? That there is some looking glass that money appears out of? I’m afraid some moronic posters around here, and those in government, believe that there is some magical pink, pixie parallel universe that incomes appear from, debt and inflation free, and it appears you’ve been drinking some of the same anti-freeze. Even more hilarious, they’re still quoting silly little GDP figures that keep getting inflated by further debt and government spending. Did some one mention deleveraging?

    Money, or currency at any rate, represents peoples’ time and wealth – productivity in other words. By any measure that anyone cares to look at productivity is decreasing markedly, regardless of the government’s little refrain of the number of people in work.

    So, whatever little universe this ‘income’ is appearing from is not through any increase in productivity. Far from it. It can only be coming from savings, which is currently boosting consumer spending, and various pensions ‘investments’ that aren’t anything of the kind and are based on nothing more than debt obligations.

    On the contrary, we should be incredibly worried that the ONS is saying that nearly half of all of a household’s income is based on completely non-productive activity because that represents an obligation someone will have to pay for. You’ve got a shrinking, productive economy that is having to support those ‘incomes’.

    Whatever British Gas pay Save the children or the figures the ONS cooks up, it won’t make fuel poverty go away and it won’t make the massive uptick in those using foodbanks, especially in the last couple of years, magically disappear.

    Our economy is contracting and the only way there will be any recovery and any improvement in the cost of living is if productivity goes up. The reverse is happening because it’s the only way we can keep our top-heavy, unproductive economy going.

  5. 13/12/2013, Ellen12 wrote

    Where did you find the figures to back up the assertion that wages only account for 45% of household income? Maybe if pensions among the retired are included it may come close but I struggle to think of anyone I know that is below retirement age who regards their wages and less than half their income. Most of them regard it as virtually their entire income, with the exception of maybe a bit of interest and a few dividends. And average pay increases may well be 2% but this includes the public sector. Many people in the private sector have not had a pay rise in years. I do not know the exact basket used by the chancellor to measure inflation but it isn’t the same basket I buy week in and week out. Inflation is considerably more than the recorded 2% or 3% for basic needs. The railways and the utilities certainly do not expect to be entertained with mere 4% increases. To suggest financial repression is not happening is denial and the proof of that is how inundated charities like the CAB and foodbanks are.

    • 15/12/2013, Boris MacDonut wrote

      Ellen. Merryn is close to correct. Of the 30 million workers in the UK only 23 million are on PAYE and thus employees.The others are self employed etc… As the share of total income that is wages and salaries is about 65% of all income the employee bit is about 75% of 65%…which is 48% of total income.

  6. 13/12/2013, robin wrote

    The PAYE stats are a complete fabrication. Just about all my colleagues work as contractors and take their income through dividends. This pollutes the stats as they declare an actual salary of 11k while their income is actually nearer to 100k. Its gotten to the stage that the PAYE stats serve one purpose only and that is to make those who earn less think that they get more than the average.

    Its lies, all damned dirty lies.

    • 13/12/2013, GFL wrote

      Yep this is true – I bet some of MW’s journalists are taking their salaries through companies too. I touched on this in a previous post. MW never seem to cover the biggest and most common tax loophole of them all.

  7. 13/12/2013, Merryn wrote

    @GFL It is true we haven’t looked at it much – I suppose we assume that everyone who can work as a contractor/freelancer already is and for the rest PAYE is the only choice. Don’t forget that you have to pay corp tax and dividend tax if you get paid via a personal services company. It doesn’t always make much of a difference to your end income – particularly if you need that income on a regular basis.

    • 13/12/2013, Boris MacDonut wrote

      Merryn. The reason for service companies is to avoid both employee and employers Nics, not tax.
      The saving is huge, especially for the employer. I am flabbergasted at the level of dishonesty shown by so many. Even then for a 45% taxpayer the tax saving alone is massive. But of course the toffs are happy to let this carry on. 43 months in to their Governemt and 2 million taxpayers still get away with it.

      • 17/12/2013, Tyler Durden wrote

        “The saving is huge, especially for the employer.”

        But if their employees are ‘self-employed’ then they are not an employer, are they? ;-)

        Of course, that’s why it’s done. It’s not for the benefit of the ‘employee’. But their employees are still employees and wages and salaries are still wages and salaries – they’re just not called that.

        It’s nonsense, in other words. It’s like arguing that a chair isn’t a chair therefore it isn’t possible for anyone to sit down. Usual statistical nonsense.

    • 13/12/2013, Tyler Durden wrote

      Come on Merryn. There’s no way anyone in this country has income that miraculously appears out of a black hole, apart from the top one percent, nor are most fiddling the PAYE system – apart from those at the top. It’s pure, total and utter nonsense. Peekaboo accounting.

      As Michael Burry (the guy who predicted the sub-prime crash we all know couldn’t be predicted) pondered when he was looking into how house prices were rising well beyond wages and salaries, if it’s not pay out of productivity it’s leverage.

      I know some morons around here want desperately desperately to believe that the whole ponzi scheme will keep going no matter how many times they get punched in the face, but I didn’t think you would drink the anti-freeze to that extent.

  8. 14/12/2013, Sevo wrote

    “The key point is this: actual employee wages only count for 45% of total household income”

    Completely agree with Ellen’s point. From what alternative universe were these numbers plucked? I’m a mid level public sector worker. PAYE is the norm and it will be for the rest of my career. Even as my career continues and (hopefully) I move into more senior positions, only in my wildest dreams could I generate much more than 10% income from investments. I could take on additional hours via private agencies ect but I will not approach 45%.

    Ellen; regarding your point about pay increases; in the last four years I have had a 1% increase, with assaults on pension and child benefits. We are all out of pocket. The beeb have an interesting infalation calculator on their website at the moment. Its worth a look. With our household’s current high motoring costs and a young family, my personal inflation rate was estimated at over 6%!! This is my sad face reserved for times of economic hardship… :(

    • 15/12/2013, Tyler Durden wrote

      ‘Your’ inflation rate is 6%, various food items have risen by 10%, 20% or even 30% and yet the official inflation rate hovers around 2% or 3%.

      Just think about that for a second…….

  9. 16/12/2013, GFL wrote

    @Merryn, your response to this tax loophole is it’s not a big issue because those people that can take advantage of it are, screw the others? How can you bang on about tax fairness when, I assume, you are taking advantage of this?

    The difference is pretty big, for example if someone is on 34k under PAYE they take home 68% of their salary, while in a company it’s more like more like 84%. For someone on 60k, PAYE they take home 62% under a company it’s more like 78%. Not to mention the added advantage of being able to do backdoor tricks like letting family members have a stake in the business.

    If you compound this over 20 years, the difference is huge. I wonder how you are paid when you write columns for the FT or feature on TV programmes!?!

  10. 16/12/2013, mr clyde wrote

    Money does come out of ‘black holes’ and one entirely legal one is tax free capital gains made from flipping BTLs. If this money is fed back into SIPPs and VCTs it is simple for a tax payer to have their PAYE rebated every year. This is one of the reasons why I keep banging on like some bag person about why CGT reform is imperative. Osborne has started but needs to do more, more quickly.

  11. 16/12/2013, dave21kj wrote

    Less of a wage squeeze than previously thought.
    I must come from another planet where-
    - pound shops and pawn shops prevail
    - house purchases are slow at 0.5% interest rates
    -UK plc is broke
    - the tax man mugs us of income, steals our pensions
    All is well it seems from some of the comments, no problem everyone has cash..

    • 16/12/2013, GFL wrote

      I’m assuming this article refers to the top 15-20% or so – i.e. those that have enough money left at the end of the month to actually make some investments. It’s a fairly reasonable assumption to make, that most people interested in investing have something to invest.

      Anyone that has any cash flowing assets is probably pretty happy. Stocks are up, house prices are up, interest payments are down, money is pretty loose, etc. What is not to like? If your investments are bringing in an extra X pounds a month, who cares if food and travel has gone up by Y when Y is a fairly small part of your income anyway.

      • 16/12/2013, Boris MacDonut wrote

        GFL. This is an investment magazine. It is aimed at those with spare money to invest so it is reasonable to assume they are by and large the richest 20%. Just like football fanzines are aimed at a certain demographic.
        MW should not be criticised for touting investment opportunities, only taken to task when they are wrong.

  12. 17/12/2013, Merryn wrote

    Interesting on how much inheritance matters.

    • 17/12/2013, Boris MacDonut wrote

      Merryn. Even more interesting that folk are now saying those born 1960 to 1980 will be worse off than those born 1940 to 1960. MW has regularly mentioned the good fortune of the babyboomers, but in the UK the baby boom was 1957 to 1973 ,largely within this cohort of the hard done by.
      The proviso unless getting an inheritance is laughable as almost 70% will do just that and the average legacy is now at £74,000.
      Someone born in 1948 who bought a house in 1974 would have had most of their debt inflated away. Some one born 1968 who bought in 1988 would still carry a significant debt by comparison. But the earlier person was much less likely to inherit much at all, the latter stands to reap some largesse by comparison.

  13. 17/12/2013, Boris MacDonut wrote

    Merryn. HSBC crunched some numbers to find the amount inherited by UK citizens in 2011 was £200 billion. This is rising rapidly to a peak of £1,100 billion by 2047 then falling back to £600 billion by 2065.
    This is the dawning of the age of inheritors. With as much as 8% of total UK wealth falling into the hands of spenders every year for the next 4 decades.

  14. 18/12/2013, mr clyde wrote

    Another plum for the picking methinks. Does anyone else remember the infamous Capital Transfer Tax of yesteryear?

  15. 24/12/2013, Boris MacDonut wrote

    Another useful bit of info’ today. Especially for all those who tell us average wages are £26,000 or less. The avaerage advertised salay across 760,000 vacancies (any of which will be starting salaries) is …..£32,700.

  16. 27/12/2013, gamesinvestor wrote

    This seems like clear illustration of the lack of understanding of the quality of income and the validity of asset prices in the western world. The assumption that 45% of income is from salary is incredible and is, well, wrong!!

    The vast majority of families in this country are largely reliant on wages for their existence and it is getting harder as asset prices continuously inflate, mortgage commitments become ever more associated with fantasy land, taxes continue to rise, transport costs consistently outstrip inflation, fuel costs are prohibitive and causing poverty, and the quality of real jobs earning high salaries are replaced with weak, low paid and low skilled jobs.

    The views here are seemingly one of someone living in a parallel universe and perhaps a little dangerous when applied to investment recommendations.

  17. 28/12/2013, Boris MacDonut wrote

    gameinvestor. Merryn is talking about household income. You are talking about families. You seem to think families make up a big majority, they do not.
    It is all money in an economy that drives it along, not just family spending ,but all households. The richest 10% have most of the money and pay a huge share of taxes too. The rich lady who buys ten houses is as important (more important) than many families who cannot afford to buy one between them.Sad but a fact.
    There are 26 million households in the UK, of which 8 million are single persons and 9 million are couples with no kids. That leaves only 9 million “families” as such.
    Of those, only about two thirds will earn wages, being the ones not retired ,unemployed, self-employed, studying or otherwise not in the PAYE market… about 23% of all households are the sort of families you refer to, but even many of these will be wealthy due to windfals, inheritance even lottery wins and not reliant on wages, that is Merryn’s point.

  18. 09/01/2014, Boris MacDonut wrote

    Of course in 1998 the Tories opposed the minimum wage. It will cost 2 million jobs they said. But no. we still needed 800,000 Europeans to come and work here and now they tell us ( Merryn included) that we need a living wage instead, an even higher minimum.
    Proof if proof be need be that the Tories have not a clue.

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