Wage growth strengthening as unemployment and inflation fall but recovery of lost ground not expected before end of decade

Falling inflation and a pick-up in nominal pay growth boosted earnings at the end of 2014, the Resolution Foundation said today (Wednesday) in response to the latest labour market figures. But it cautioned that there is still a long way to go before pay returns to its pre-downturn level.

Regular pay growth (excluding bonuses) increased to 1.8 per cent in the three months to November, up from 0.9 per cent in the three months to August. CPI inflation was 1 per cent in November, while RPIJ was 1.4 per cent. This is the third successive month of real wage growth (measured against CPI), following a six-year fall.

Today’s figures cover the period to November 2014 and since then, sharp falls in oil prices have driven CPI inflation to just 0.5 per cent, with expectations that it will fall further still. The Resolution Foundation notes that this ultra-low inflation should bolster real wage recovery through 2015, but adds that it is not clear what will happen to oil prices over the medium term. Unless prices continue to fall at the same pace, inflation will start to pick up again later in the year.

The Resolution Foundation says that it is encouraging that nominal wage growth strengthened through mid-late 2014, adding that this momentum will be critical for the sustainability of the real wage recovery. It points out that in the past when the UK experienced a buoyant jobs market with strong and widely shared wage growth, nominal wage increases averaged around 4 per cent. The fact that the nominal figures are still so low – and single month pay growth fell slightly in November (from 1.9 per cent to 1.7 per cent) is therefore a concern.

The squeeze on employees’ pay is turning a corner, but the picture for the UK’s 4.5 million self-employed workers remains unclear as their earnings are not picked up in the official data. With around one in seven workers across the UK self-employed, the Resolution Foundation wants to see a new ‘all-worker’ measure of earnings growth published that captures the self-employed too.

Today’s figures also show a welcome drop in the unemployment rate. The employment rate has returned to its pre-downturn level but the recovery in the jobs market has not been shared equally throughout the UK. The employment rate in Scotland has grown the most over the last two years (4.7 per cent). In contrast, employment rates in Wales, the West Midlands and the North West have grown by less than 1 per cent over the same period.

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

“The return of real wage growth is very welcome for workers after six years of falling pay. Sharp falls in the price of oil and generally subdued inflation should mean that real pay growth continues to build in the coming months.

“But, while falling oil prices are clearly providing a fillip to consumers, it’s not clear what will happen over the medium term. In preparation for a return to target inflation of 2 per cent at some point, it’s vital that we see significant and widely shared rises in nominal wage growth through 2015. Pay has been picking up, but it remains a long way short of the level we’d expect to see during normal economic times. Without this rebound we are unlikely to make up the lost ground on wages much before the end of the decade.

“The most positive news in recent years has been the strength of the jobs recovery, with the UK employment rate back to where it was before the downturn and unemployment still falling. But this recovery has not been spread equally throughout the country. The employment rate in Scotland has surged, while Wales, the West Midlands and North West have experienced far more sluggish recoveries.”

Notes:

The Resolution Foundation case for an ‘all-worker’ earning measure is available here.

For more information contact:

Rob Holdsworth (Director of Communications) on 020 3372 2959 or 07921 236 972

Natalie Cox (Communications Officer) on 020 3372 2955 or 07983 550 337