Finance and construction leading the way as wage growth strengthens off back of falling inflation

Jobs recovery continues as unemployment continues to fall

Finance and construction enjoyed the joint fastest earnings growth as falling inflation strengthened the UK’s pay recovery, the Resolution Foundation said today (Wednesday) in response to the latest labour market statistics.

Today’s figures – the fourth successive month of real wage growth – will be a relief to workers after six years of falling pay. Regular pay growth across the economy dipped slightly to 1.7 per cent in the three months to December (from 1.8 per cent in November), though inflation fell faster. However strong bonuses, particularly in finance, have led to a sharp rise in total pay growth.

Finance and construction experienced the strongest regular pay growth at 2.3 per cent (higher if bonuses are included), in sharp contrast to the public sector, where pay rose by just 1.1 per cent. Manufacturing (1.2 per cent) and retail (1.5 per cent) also recorded below average increases.

The recent resurgence of pay growth in finance is in part a rebound following a poor 2013, says the Resolution Foundation. But, following a period in which pay inequality has largely flat-lined as wages have fallen across the spectrum, the think-tank warns that recovery driven by high-paying sectors may start to widen the gap between the highest and lowest paid.

Today’s figures – the last for 2014 – confirm it was not the year of the pay rise after all. But with Britain’s pay squeeze finally over and record low inflation helping to boost real pay, 2015 should be the year in which some of the lost ground over recent years can be recovered.

But for nominal pay growth to surge all the way to 3.5 per cent by the end of the year, as forecast by the Bank of England last week, it would need to more than double in 12 months. The Resolution Foundation believes there is considerable uncertainty as to whether pay can reach this level by the end of the year, but notes that these sorts of figures will be needed over the medium term in order to maintain healthy real wage growth once inflation starts to move back towards its 2 per cent target.

A further fall in unemployment, combined with the employment rate hitting its 2005 peak of 73.2 per cent, shows that the UK’s job recovery is still going strong. Seven of the UK’s 12 regions and nations have now surpassed their pre-downturn employment rates. However, others – particularly Wales and Northern Ireland – are struggling to catch up. Self-employment fell and the number of employees increased.

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

“Tumbling inflation and the return of modest pay growth in the private sector at the end of last year has provided much needed relief to workers, following six years of falling wages.

“Further falls in inflation provide a propitious backdrop for a long overdue bounce back in pay. But the strength of pay rises might be set to vary by sector once again. Finance is recovering strongly after a disappointing 2013, while the public sector pay is barely able to keep up with even historically low inflation.

“There remains considerable uncertainty over how pay will grow through 2015. Far higher pay settlements and a greater concentration of new jobs in middle and higher-paid occupations will be needed to turn the current recovery into a boom, along the lines forecast by the Bank.”

Notes to Editors

An article by Resolution Foundation Chief Economist Matthew Whittaker examining the prospects for pay growth through 2015 is available here.