Catch My Drift on Pay

The difference between average pay settlements and average earnings is known as 'pay drift'. It was identified as a major economic problem in the early 1970s, when the gap between the two indicators was seen as a sign that wages were drifting out of control.

The gap itself is referred to as being 'positive' when average earnings outstrip pay settlements, and 'negative' when the opposite is the case. Since the two indicators have been compared, pay drift has only rarely been negative. Even then the more usual positive pay drift has been quick to reassert itself.

Examination of the data for the period 1997 to 2000 reveals a similar positive drift.

Get the pay drift data [Excel sheet 15K].

The implications of uncontrolled positive pay drift for employers'and government decision-making, can be summarised as follows:

Trends in pay can influence the level of interest rates, as evidenced by the following quote from the Monetary Policy Committee of the Bank of England:

"Despite a continuing fall in unemployment and reports of growing labour shortages there was as yet little sign of an acceleration in nominal earnings, although unit labour cost estimates were increasing quite rapidly."
MPC Oct 1999 Meeting minutes

Out of control positive pay drift can also jeopardise planning by affecting the cost of capital to business, and influencing aspects of government monetary policy, like the exchange rate. But does pay drift actually reflect what is happening to workers' pay? If data on pay settlements or average earnings is unreliable then measuring pay drift may be futile. Changes in labour force structure such as increasing numbers of part-time employees will affect average earnings separately from what happens to the pay of individual workers, and settlement levels often exclude aspects of pay like bonuses.

CBI research into the factors responsible for causing pay drift suggests that labour market pressure on starting salaries and the workings of pay systems in organisations are the chief culprits.

Follow-up studies by Incomes Data Services found that adjustments to pay levels happen outside the annual pay award (settlement). The reasons for having to make adjustments seem to be associated with being able to attract and retain staff when labour market conditions are tight.

Some of the organisations in the IDS research were carrying out ad hoc pay reviews at six monthly intervals; others were adjusting pay more frequently. Annual pay awards appear to be only a part of firms' overall pay strategies. It is also much more common to see pay being varied according to performance. Other reasons for pay drift were revealed to be larger job size and location-related allowances.

Pay drift can be expected to persist because the variables concerned, pay settlements and average earnings, measure two different things: settlements reflect cost of living rises; but an individual's pay level is affected by performance, location and sector of industry, among other determinants.

It is continuing to affect the UK economy some thirty years after its effects were first studied, because of employers in all sectors reacting to labour and skills shortages and labour factor immobility.

Questions

Back to worksheets