Jobs market continues to recover strongly but puzzle emerging as pay growth remains subdued

The UK jobs market is recovering strongly, but a pay puzzle is emerging as the rapid fall in unemployment is failing to spur stronger wage increases, the Resolution Foundation said today (Friday) in response to the latest labour market figures.

The employment rate continued to rise in early 2015 – reaching a record high of 73.4 per cent – and the recovery in real wages strengthened, due mainly to inflation falling to zero in February.

But nominal pay growth has remained surprisingly subdued, having hovered between 1½ and 2 per cent since last Autumn, despite the UK experiencing a sharp fall in unemployment – from 7 per cent in January 2014 to 5.6 per cent in January 2015. Pre-crisis nominal pay averaged around 4 per cent.

With inflation not expected to fall much further, far higher nominal pay growth is needed to strengthen the real pay recovery and sustain it in more normal times.

New analysis from the Resolution Foundation suggests that the relative increase over the course of 2014  in the proportion of jobs accounted for by lower-skilled occupations is continuing to drag down pay growth. The think tank also believes that the unemployment rate may have to fall well below its pre-crisis level in order to drive significant increases in nominal pay.

The jobs market is recovering throughout the UK, with six of its 12 regions and nations having higher employment rates now than they did before the crash. The North East and London have performed the best since May 2008, while Northern Ireland and the South East have the most ground to make-up.

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

“It’s encouraging to see the momentum of the recent jobs recovery continuing into 2015, and to see real wage growth strengthen after a seven year squeeze.

“But there is still a lot of ground to make up before we return to pre-crash pay levels. With inflation already at zero, this much-needed catch-up rests on far stronger nominal pay growth.

“A growing pay puzzle is emerging though as the rapid fall in unemployment over the last year has failed to spur the higher pay rises that many would have expected.

“It may be that our labour market shifted over the downturn, with far lower levels of unemployment now needed to bring nominal pay growth back towards the levels seen before the crash.”

Ends

Notes to Editors

• The new Resolution Foundation briefing What’s holding back nominal wage growth? is available from the press office.

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