Growing ‘disloyalty bonus’ as pay growth for job movers hits 10 per cent for first time since early-2000s

Mixed signals on the labour market – with strong pay growth for job movers countered by muted pay growth for those sticking with their employer – provides the backdrop to the Bank of England’s big decision on interest rates later today, according to the Resolution Foundation’s latest quarterly Earnings Outlook published today (Thursday).

The Earnings Outlook, which lifts the lid on key UK labour market trends, includes the latest Resolution Foundation pay projection which shows that in the coming months nominal pay growth is set to remain around, or slightly below, its current level of 2.7 per cent. This is well below its pre-crisis average of 4.5 per cent.

Historically weak pay growth in part reflects the fact that there is greater slack in the labour market than many economists previously expected. The Outlook notes that while under-employment has almost returned to its mid-2000s low of 3.7 per cent, it remains elevated for women (4.7 per cent) and workers under the age of 30 (11.2 per cent).

However, wider evidence indicates that pay pressures have built in recent months as slack has reduced. Nominal pay has bounced back after a slight dip following the referendum, and has been above 2.5 per cent for the past six months.

Underneath the pay headlines, the Earnings Outlook also highlights a growing ‘disloyalty bonus’. Nominal pay growth for people who moved jobs in the last 12 months hit 11 pay cent earlier this year – its highest level since the early 2000s.

But while pay growth for job movers is rising, the Outlook also highlights that pay growth for the vast majority of workers who stick with their employer remains rooted at just 2.5 per cent – well below the pre-crisis average of over 4 per cent.

The Foundation adds that despite the growing pay premium for moving jobs, the proportion of workers who have voluntarily switched employment recently is well down on pre-crisis levels, with just 3 per cent of workers having done so in the last 12 months, compared to an average of 4 per cent in the years before the crisis.

The Foundation says that as MPC members weigh up whether or not to raise interest rates, their key judgement on pay will be whether historically weak, but recently slightly improved, earnings growth is as good as it gets given the countries’ weak productivity performance. This would strengthen the case for an increase.

If however, MPC members believe that pay growth has plenty of scope to strengthen further towards historic norms, such a view would underpin the case for holding off on a rise until this stronger pay growth materialises.

Stephen Clarke, Senior Economic Analyst at the Resolution Foundation, said: “As the Bank of England decides whether or not to raise interest rates, the evidence on the key issue of pay pressure is decidedly mixed.

“For those moving jobs, pay growth has hit 10 per cent for the first time in over a decade. However, for the vast majority of workers who didn’t move jobs in the last year, pay is still struggling along at just 2.5 per cent – barely higher than inflation. And despite this growing ‘disloyalty bonus’ young workers in particular seem reluctant to make the move.

“While overall pay growth remains weak, interest rate hawks may take the view that, bad as it is, this is still as good as it gets. Those holding off on rate rises may take the view however that recent small upticks in pay pressure mean that things can only get better.”