Private sector continuing to lead pay rebound

First fall in employment for two years suggests jobs surge could be losing momentum

The pace of Britain’s real pay recovery increased slightly in May, though the first fall in employment for two years appears to have put jobs growth on pause, the independent think-tank the Resolution Foundation said today (Wednesday) in response to the latest labour market figures.

Real weekly earnings growth increased to 2.8% in the year to May. Weekly earnings in the private sector grew by 3.3% – in line with RF’s prediction – the joint fastest growth since 2002. Average earnings in the private sector have now recovered to their August 2004 level, though they are still around 6% below their pre-crash peak.

In contrast, earnings in the public sector grew by just 1.1%. The Foundation notes that public sector earnings growth is likely to remain subdued for some time given the Chancellor’s recent announcement that the 1% cap on increases in the total public sector wage bill will be extended to 2020.

The first fall in employment for over two years suggests that Britain’s remarkable jobs recovery may be starting to level out, says the Foundation. However it cautions against reading too much into this fall, which may be a blip rather than a new trend. Last week, the Chancellor set a target of increasing employment by two million over the course of the Parliament. RF believes that ambitious new thinking on policy may be needed to meet this target.

New RF analysis published today shows that recent wage growth would have been even stronger in the early months of this year, were it not for the changing composition of the workforce dragging down average pay. It finds that the relative concentration of new jobs in low paying occupations, such as caring and cleaning work, continued to be a key drag on pay growth at the start of 2015, as it was for the whole of 2014. The return of younger and less experienced workers also continued to drag down on pay.

By assessing a wide range of factors, the Foundation’s analysis provides a more comprehensive account of how the changing make-up of the workforce affects average pay than new analysis published today by the ONS, which focuses only on changing industrial structure (and suggests that this has made little difference to average pay of late).

The Foundation says that a shift in the type of new jobs being created towards higher paying roles will be needed to maintain the strength of Britain’s pay recovery as inflation starts to return to normal.

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

“The rebound in Britain’s pay continues, thanks in no small part to historically low inflation. With a relatively rapid return to ‘normal’ inflation expected over the coming years, it’s vital that nominal wage growth strengthens further in order to sustain the real pay recovery.

“But there is a growing public-private split in this recovery, which is set to grow over the course of this Parliament. Having experienced a far bigger squeeze in the early part of the downturn, wages in the private sector are recovering relatively quickly, even if they remain some way below their pre-recession peak.

“The earnings outlook for the public sector is far less positive, with employees set to face a parliament of capped pay rises. The danger is that this could create recruitment and retentions problems in some sectors, and a greater reliance on temporary and agency staff to plug these gaps.

“The long march upwards in employment appears to have paused. Driving employment up significantly higher to meet the Chancellor’s new ‘full employment’ target is likely to require new thinking on policy.”

Ends