Compositional Effects Push Up Average Weekly Earnings at End of 2020

Compositional effects push up average weekly earnings at the end of 2020

Main points

• Pay growth ended 2020 better than it had started. Average weekly earnings including bonuses (AWE) among employees increased from 2.8% in October to 3.6% in November 2020.
• The increase was driven by the compositional effects from a fall in the number and proportion of lower-paid jobs.
• Excluding composition effects, underlying pay growth was probably much lower as evidenced by surveys indicating a decline in starting pay and a large fraction of pay freeze during pay settlements.
• We forecast AWE to moderate from 3.6% in the fourth quarter of 2020 to 2.7% in the first quarter of 2021. This forecast is highly uncertain because of the composition effects resulting from an expected rise in the number of furloughed employees during the current lockdown that may extend longer than expected.

“Despite a late surge in average pay driven by composition effects, 2020 will probably end up being the worst year for total pay growth since 2014, with AWE growing at 1½ per cent on average. Pay freeze for a large part of the labour force, in addition to lost income during the time spent in furlough have put more strain on the labour market than the latest pay numbers suggest. Given the current course of the pandemic and the pace of the recovery, unemployment could rise to more than 7 per cent even with a successful vaccination campaign”.

Cyrille Lenoël
Senior Economist, NIESR

Please find the full commentary in attachment