Our forecast uses an implied measure of average earnings constructed by dividing the National Accounts measure of wages and salaries by the number of employees (rather than the official ONS measure of average weekly earnings, although the two measures are conceptually similar). This allows us to fit the earnings forecast directly into the National Accounts framework on which our economy forecast is based – and, in particular, the National Accounts measure of wages and salaries, which is an important determinant of tax receipts.
Our short-term forecast for whole economy average earnings growth is informed by available indicators of labour market slack and pay pressure, including relevant indicators from business surveys. Over the medium term, the outlook for productivity (on an output-per-worker basis) and whole economy inflation are the main determinants of our forecast for earnings growth. We also make adjustments for policies that we expect to have material effects on earnings, including those that imply a cost for employers that we would expect to be passed on to employees via wages (for example, the apprenticeship levy and auto-enrolment).
Our main focus is whole economy average earnings growth, but when producing that forecast we ensure that it is consistent with the weighted combination of separate forecasts for market sector and general government average earnings (since the government sector may be affected by centrally imposed pay policies).
Our forecast for government sector wage growth takes into account recent data, relevant Government policies (such as overall departmental spending plans and any limits on pay growth, such as those that applied in recent years), historical rates of pay drift and whole economy earnings growth. In the absence of public sector pay policy, we would expect market and government sector earnings growth to converge, given both sets of employers are competing for employees in the same labour market.
Having produced forecasts for whole economy and general government average earnings, we can derive an implied market sector earnings forecast. We can use this to sense check whether the whole economy forecast is reasonable given public sector pay policy – and will adjust our forecast further until it looks reasonable.