Private sector earnings growing at fastest rate in 15 years

Low inflation and welcome shift in types of job roles being created is driving mini pay surge

Private sector earnings are growing at their fastest rate since the early 2000s, but maintaining the  pay surge into 2016 will prove challenging once inflation starts to rise, according to the Resolution Foundation’s new earnings outlook published today (Monday) ahead of the latest ONS pay statistics later this week.

The Foundation forecasts that real average weekly earnings in the private sector grew by between 3.4 and 3.6 per cent in the three months to August. This would represent the strongest wage growth since July 2002 (3.45%), and possibly since May 2001 (3.54%). Real average weekly earnings across the economy are expected to have grown by between 2.9 and 3 per cent.

The Foundation’s earnings outlook says that while the recent growth in real wages has been driven primarily by historically low inflation, there has also been a welcome shift in job creation towards higher paying roles.

The analysis shows that higher paid managerial roles have made up a growing share of the workforce over the last 12 months, while the share of lower-paying customer service and care roles has fallen, which has helped to drive up average pay. This shift contrasts with last year, when the growth of lower paid cleaning and caring jobs acted as a drag on pay. The Foundation says that as well as boosting pay, this shift towards higher-paid roles should help to spur productivity growth.

However, the Foundation warns that despite this welcome pay revival, average earnings remain several years off a return to their pre-crash level, and around £110 a week below where they would have been if pre-crisis trends had continued uninterrupted.

The Foundation’s analysis shows that big question marks loom over the medium term outlook for pay, and that it will take far stronger earnings growth to maintain the UK’s mini pay revival once inflation starts rising towards the end of the year.

The report shows that under-employment – the number of extra hours wanted by those both in and out of work – has fallen over the last year, but is still around two-thirds higher than its early 2000s level. Further falls in under-employment could act as a tailwind for stronger wage growth.

However, it also highlights that the rate at which people are moving between jobs – a key route to higher pay and career progression – is well below pre-crash levels, and particularly subdued for young people (who tend to do move jobs more often).

The Foundation notes that the rate at which young people are moving jobs is 40 per cent down on its early 2000s level. It warns that this lack of job mobility risks blocking young people’s career paths and holding back their pay prospects.

The RF earnings outlook also raises concerns about the longer-term health of the jobs market. In particular, it highlights that training intensity has fallen over the last decade, while the number of graduates in non-graduate occupations, which often reflect skills mismatches and may keep individuals productivity below their potential, is rising.

The Foundation says that these worrying trends on skills will need to be reversed in order to drive up productivity, which ultimately holds the key to stronger wage growth in the long run.

Laura Gardiner, Senior Policy Analyst at the Resolution Foundation, said:

“Workers across the UK are enjoying a much-needed mini pay surge after a painful six year squeeze. And while much of this growth is down to historically low inflation, there are welcome early signs too of a shift towards higher paid job creation that could boost pay still further.

“But while the immediate outlook for pay is healthy, it will be far harder to maintain this ‘catch-up’ growth once inflation starts to return, especially with the labour market still under-performing in many key areas.

“The relatively subdued level of moving between jobs among young people is a particular cause for concern, as it can harm career prospects and their long-term earnings potential.

“The jobs market has proved remarkably resilient over recent years. But securing a sustainable period of strong employment and pay growth will require a renewed focus on jobs quality, skills, investment and productivity.”