Real wages growing faster than in pre-crash years

But average earnings still £30 a week below pre-crisis peak

Strengthening pay and ultra-low inflation mean that real wages are now rising more quickly in real-terms than before the financial crisis. But this rebound may prove short-lived as inflation begins to pick up, the Resolution Foundation said today (Wednesday), in response to the latest ONS labour market figures.

Year-on-year growth in regular pay of 2.7 per cent, combined with inflation of -0.1 per cent, means real earnings growth increased to 2.8 per cent in the three months to April 2015. Since August 2002 this rate of growth has only been exceeded once – in September 2007. Real growth averaged 2.2 per cent over the pre-crisis (2001-2007) period.

Underpinning this rebound is strong pay performance in parts of the private sector (3.3 per cent real growth), with growth of 4 per cent in the low paying retail and hospitality sector and 4 per cent in construction. In contrast, pay was up just 1.1 per cent in manufacturing and 1.1 per cent in the public sector.

Real wage growth has built strongly over the course of 2015, but the Foundation expects this momentum to ease off in the coming months as inflation edges up, reflecting the fact that nominal pay growth remains well below its pre-crisis level. According to the Bank of England’s last forecast, real wage growth will have fallen back below the pre-crash norm by the end of the year.

Despite the stronger recent performance, average earnings remain around £30 a week below their pre-crisis peak, and are lower than they were a decade ago. In many jobs, full pay recovery is unlikely to occur before the end of the decade.

The jobs recovery continued at a slightly more muted pace in today’s figures, the Foundation says, with the 16-64 year old employment rate (73.4 per cent) now just below the record achieved last month. Nonetheless, the performance of the jobs market in the early months of 2015 remains strong overall, in particular due to continued growth in full-time working. This marks a reversal of the sharp fall a few years ago, with the number of full-time employees now back above pre-crash levels. Having driven much of the employment growth between 2011 and 2013, self-employment numbers again fell back slightly in the latest period.

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

“It’s very encouraging to see wages growing at a faster rate than the pre-crisis norm. Following a deep six-year pay squeeze, a rebound is long overdue. Despite the good news though, average earnings remain £30 a week below their pre-crisis peak. And they are around £100 below where they would have been if trend growth had continued uninterrupted.

“We need to see current rates of real wage growth sustained for years, not months, if we have any hope of reclaiming much of the ground lost in recent years. The concern is that today’s above-trend growth owes too much to historically low inflation, which can’t last. Having taken much longer than expected to arrive, the bounce back in pay may prove short-lived.

“Looking beyond the current window of opportunity presented by low inflation, the longer-term challenge is securing productivity gains to ensure that the wage recovery can be sustained.”