After almost a year and a half from the start of COVID-19, it’s time to take stock. We all know the pandemic has affected people’s mental health, created new habits, and put a strain on our wellbeing. But what about businesses in the UK and as a result, what about people’s earnings?
The impact of covid-19 on businesses in the UK
It’s been estimated that the cost of the pandemic for small businesses and the self-employed is around £126.6 billion.
In the UK, 81% of small businesses said they hadn’t had enough support from the government, with 24% saying there should have been better communication and transparency about the impact on small businesses – but even so, new companies have emerged. In fact, 2020 was named the ‘Year of the start-up’, seeing a record 770,000 businesses started, making it the biggest ever UK increase year on year.
Looking at 2021, the percentage of businesses currently trading has increased from 71% in early January 2021 to 75% in late March 2021. However, the proportion of the workforce on furlough leave was 19%, equating to approximately 6 million people (source: Gov.uk).
Are average weekly earnings growing?
Despite all the difficulties faced by small businesses owners, it’s not all bad. After some research, it becomes clear that maybe unexpectedly, the average earnings of workers in the UK has grown. The Office for National Statistics
(ONS) shows that the average weekly earnings of all employees during May 2021 were around £540 a week, which means a regular earnings growth rate of 6.6%.
This data, however, should be contextualised. Typically, wages are compared with 12 months ago to capture any improvement or worsening of earnings over the year.
What is the ‘Base effect’?
There are two reasons why average headline earnings are higher than the underlying rate at the moment. The first is the so-called ‘base effect’. Since spring-summer 2020, many workers were on furlough or had their hours reduced, so many people saw their earnings fall. With many people now returning to normal working hours their earnings are increasing again.
Comparing 2021’s earnings to 2020s isn’t always representative on paper, but there are ways to bring them into line. Two methods are projecting forward earnings into spring-summer 2020 using pre-pandemic trends and taking the growth rate over the two years by comparing 2021 and 2019 earnings. This makes it possible to see the annual average growth rate over the two years.
What is the ‘Compositional effect’?
The second reason we have seen this increase in earnings is the ‘compositional effect’. During the pandemic, many lower-paid employees lost their jobs which has affected the average earning of employees in the UK. If someone is paid less than the average (£540 a week) loses their job, the average earnings in the UK will increase.
Is it possible to estimate the actual earnings increase?
According to Jonathan Athow, Deputy National Statistician for Economic Statistics of the ONS, the base effect would reduce the headline rate by between 1.8 and 3.0 percentage points based on the two methods set above. In addition, the compositional development we estimate at 0.4 percentage points above pre-pandemic levels. These two effects would give an underlying rate of between 3.2% and 4.4%. However, it must be mentioned that this data represents an estimate, and is built from numbers that are constantly evolving.