Pay growth and employment rate both reach post-crisis highs

But the restoration of pre-crisis pay level remains several years off

Earning growth reached a post-crisis high in the three months to July, marking a fourth consecutive month of ‘catch up’ growth. But the restoration of pre-crisis pay levels remains several years off, the Resolution Foundation said today (Wednesday) in response to the latest labour market figures.

Real wages (excluding bonuses) grew by 2.9% in the year to July, marking its highest pace since August 2002. Despite this, average weekly earnings have only recovered as far as their level at the end of 2004 and remain over £25 short of their 2008 peak.

While welcoming the continued above-trend growth, the Foundation highlights that years – not months – of further catch-up will be required to get wages back to peak, and that this may prove challenging as inflation moves away from its current 0 per cent level. Nominal pay growth remains subdued by historic standards.

The employment rate rose very slightly in the three months to July – to 73.5% – matching its highest ever recorded level. But this comes after several months in which employment has been broadly flat and the Foundation argued that continuing the impressive post-crisis rate of job creation over the coming years – and meeting the Chancellor’s target of raising employment by two million – will require fresh policy action.

The latest pay figures show that average earnings grew at an annual rate of 3.3% in the private sector in real terms. Public sector pay grew by just 1.2%.

The Foundation noted that regular pay growth continues to vary across the economy. In the three months to July it was strongest in the finance (4.2%) and retail (4.3%) sectors, but stood at just 1.5% in manufacturing. Average pay in finance is now back to its May 2007 level – just before the financial crisis hit – while in manufacturing it remains at the October 2005 level.

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

“New highs for wage growth and employment are hugely welcome. Every month of above-trend pay growth helps to close the earnings gap that opened up over the course of the six-year pay squeeze. But ultra-low inflation – while proving a boon to workers in the short-term – is doing too much of the work.

“Even if the current pace of real wage growth is maintained – by no means a given with nominal pay growth remaining subdued – average earnings won’t return to their pre-crisis peak until 2017. As inflation starts to pick up again, we may find that the current period of catch-up earnings growth proves all too short lived, meaning that pay recovery will take longer still.

“The gap between earnings growth in the public and private sectors looks set to persist given the ongoing pay cap in the latter. The longer that situation continues, the stronger the likelihood of recruitment and retention difficulties in the public sector. This could prove to be one of the key challenges facing the government in the next five years.

“While employment has ticked back up, it’s clear that the impressive progress of recent years has slowed. We may be reaching the limits of ‘bounce-back’. Going further, and pursuing the Chancellor’s target of 2 million new jobs by the end of the parliament, is likely to require a concerted policy push in order to drive up participation among key groups such as the young, single parents and those with disabilities.”