Real wage growth gaining momentum but no rebound in sight

Real wage growth looks set to gather pace in the coming months, due in large part to very low inflation, but there is little sign of a long-overdue rebound in pay, the Resolution Foundation said today (Wednesday) in response to the latest labour market figures.

Today’s figures show that regular pay growth (excluding bonuses) in August-October increased to 1.6 per cent – higher than CPI inflation (1.3 per cent) but lower than RPIJ (1.7 per cent). This is the second successive month of real pay growth, compared to CPI. The Resolution Foundation expects even stronger real growth in next month’s figures as they will be set against the lowest level of CPI in over a decade. The Resolution Foundation also expects wage growth to outstrip RPIJ next month – the measure it believes better reflects the cost of living – for the first time in five years.

But while pay growth is set to gain some momentum in the coming year, full recovery in wages is set to take some time.

The latest projections from the Bank imply real wage growth of 1.8 per cent by the end of 2015, compared with 1 per cent implied by last week’s OBR figures. The differences in these forecasts highlight considerable uncertainty over prospects for pay, though neither point to a rebound in real wage growth above the pre-downturn trend of two per cent. This is despite the backdrop of inflation being projected to be well below target in the coming years.

The Resolution Foundation cautions that despite today’s good news, it does not expect the weekly pay of a typical worker to return to pre-downturn levels before the end of the decade.

The UK employment rate (73.0 per cent) is broadly level with its pre-downturn peak. At the regional level, London has improved the most since 2008 – its current employment rate is 1.8 per cent higher – while Wales has struggled the most, with its employment rate is still 2.2 per cent lower than in 2008. Six of the UK’s 12 regions and nations have now surpassed their pre-downturn employment rate.

Matthew Whittaker, Chief Economist at the Resolution Foundation, said:

“It’s encouraging to see pay growth may finally be gaining some momentum after what has been another disappointing year for wages.

“Pay and productivity growth will be the key measures to watch in 2015. Significant improvements would boost living standards and make the government’s fiscal job far easier. But a continuation of sluggish pay growth will mean the economic recovery lacking the feel-good factor. Significant differences in recent pay projections from the Bank and the OBR show there is considerable uncertainly on these measures. Crucially, neither are projecting a long-overdue rebound in pay, following the UK’s six year pay squeeze.

“Rising employment and the return of full-time roles has been the big success story of 2014. The question now is whether a strong labour market will lead to a reduction in the less secure forms of employment that have grown during the downturn, or whether the historically high level of non-traditional forms of work – such as zero-hours and temporary contracts – is here to stay.”

Notes:

• AWE (regular pay) last outstripped RPIJ inflation in November 2009.
• In its latest Inflation Report the Bank of England forecast annual growth in total pay (including bonuses) of 3¼ per cent in the last quarter of 2015. On its different measure of average earnings (based on National Accounts data rather than the ONS Average Weekly Earnings series) the OBR forecast average nominal pay growth of 2.5 per cent by the end of 2015. Given their respective projections for CPI inflation in the same period, these forecasts imply real wage growth of between 1 per cent (OBR) and 1.8 per cent (Bank of England).