With their unemployment-based guidance strategy in tatters, MPC members are shifting focus to weak average earnings growth, as well as recent sterling strength, to defend their refusal to raise Bank rate. Official earnings numbers, however, may understate current pay expansion.

The chart below shows annual growth in three average income measures:

1.    The official average weekly earnings series;
2.    An alternative average pay measure derived by dividing aggregate wages and salaries in the national accounts by the number of employees in employment;
3.    A broader measure of average income from economic activities including self-employment earnings and small business profits*.

The national accounts based average wage measure rose by an annual 1.9% in the third quarter of 2013, significantly faster than official average earnings growth of 0.8%. The broader measure including non-wage income expanded by 3.1%.

Annual growth of all three measures was depressed in the first quarter of 2013 and boosted in the second quarter by late payment of bonuses to take advantage of the cut in the top rate of income tax last April. The third quarter numbers, however, should be undistorted.

The difference between the two average wage measures partly reflects recent stronger growth in jobs than employee numbers. The official earnings series is measured on a per job basis but more people now have several positions – the total number of workers with a second job rose by 4.3% in the year to the third quarter and reached a 12-year high in the latest three months**.

The recent stronger growth of the alternative average wage and total income measures aligns with survey evidence of improving household finances, as well as solid consumer spending expansion.

The chart shows that divergences between the series can be significant but are temporary – their long-term growth rates are almost equal. The expectation here is that the current gap will be closed by a pick-up in the official average earnings measure during 2014.

*Wages and salaries plus the household sector’s gross operating surplus and gross mixed income divided by total employment.
**Includes self-employed. 1,176,000 or 3.9% of workers reported having a second job in the three months to November.