Short-term pay pain eases, but long-term legacy leaves scars

Today’s labour market stats offer a glimmer of good news when it comes to pay: real wages in June were higher than a year ago for the first time in 18 months, offering a welcome respite for workers in Britain. But this welcome news for workers won’t be shared by policy makers at the Bank of England, as it will put further pressure on their efforts to curb inflation. And the big picture is a 15-year period of wage stagnation – meaning pay packets have only just surpassed their 2008 level.

The 18-month real pay squeeze may have ended but 15-year wage stagnation leaves a legacy

What’s been happening to pay in real terms? Real wages have been roughly flat over the past six months, but they are now beginning to rise. There are two landmarks to note. First, annual growth in real pay has turned positive for the first time in 18 months – albeit only just (0.1 per cent growth). Second, average weekly pay in June was slightly higher than the pre-financial crisis 2008 peak in real terms. (It surpassed this peak briefly during the Covid-19 pandemic, but this was down to furlough-related measurement effects.) Average weekly pay was £613 in the three months to June, compared to £612 in March 2008 (in 2023 prices).

Of course, this is really a reminder of just how bad the last 15 years have been. Average weekly pay is a massive £230 (27 per cent) below the level it would be if the pre-financial crisis trend of 2.1 per cent real-terms wage growth had continued.

The Bank of England will remain worried about strong nominal pay growth

High pay rises are of particular worry to members of the Bank’s MPC. Domestically-driven inflation (i.e. fast-rising pay) is very much on the list of things they could and should counter. The latest data showed that regular pay growth continued to accelerate in June to 7.8 per cent across the economy, by 8.2 per cent in the private sector and 6.2 per cent in the public sector. That said, the latter should rise following the Government’s recent pay offer, while the former should be the first to be affected by a cooling labour market (which we discuss last).

(For a more detailed look at what’s been happening to pay and conditions in the public sector, read yesterday’s Labour Market Outlook.)

When bonuses are included, nominal pay growth looks even stronger, at 8.2 per cent. Why? This is largely because the June data also included bonuses for NHS staff in the region of £1,250 to £1,600. The effect: for the first time, bonuses in the public sector were higher than in the private sector. Pensioners may well be the ultimate beneficiaries of this mini pay boom – driven in part by these one-off NHS bonuses – as pay growth in the three months to July will determine the size of a permanent increase in the state pension next April, if it’s higher than September’s inflation figure (the so-called ‘triple lock’).

But a cooling labour market may take the steam out of pay rises in the coming months

The labour market reached a turning point last summer. Since then unemployment has been rising, and vacancies falling. Unemployment reached 4.2 per cent in the three months to June, driven by a high June figure (its highest level since Dec-Feb 2021). Short-term unemployment – a timelier indicator – rose especially sharply. Similarly, vacancies fell for the 13^th consecutive month to 1,020,000. Other indicators tell a similar story of a still-tight but now definitely cooling labour market. Voluntary job moves continue to fall and redundancies are now creeping back up – now back at pre-Covid levels.

Stepping back, a return to real pay growth is certainly good news for workers. The Bank of England, on the other hand, will be concerned, since another month of accelerating nominal pay growth alongside a cooling labour market puts more pressure on their efforts to curb inflation. With unemployment rising and vacancies falling, the Bank will hope that pay rises will start to cool in the coming months.