Private sector wage growth set to match fastest rate in over a decade

Parliament of public sector pay caps will widen the divide in Britain’s pay recovery

Official figures published later this week are expected to show real wages continuing to grow at nearly 3 per cent, and by up to 3.5 per cent in the private sector, according to analysis from the independent think-tank the Resolution Foundation.

The think-tank predicts real weekly earnings growth excluding bonuses will be 2.8-2.9 per cent in the year to May, broadly level with the 2.8 per cent recorded in the year to April. In the private sector, the think-tank predicts real weekly earnings growth will be 3.3-3.5 per cent in the year to May, compared to 3.3 per cent in last month’s figures. An increase in the private sector from the current rate of 3.3 per cent would signal the fastest growth since 2002.

While the post-crisis pay squeeze in the private sector was initially more severe than in the public sector, the Foundation says that current accelerated growth in the private sector marks a reversal of fortunes. Prolonged public sector pay restraint confirmed in last week’s Budget will mean that workers in different parts of the economy are likely to feel the effects of recovery very differently, and will raise issues about public sector recruitment and retention.

Real wage growth rising above the pre-downturn trend is very welcome but the Foundation highlights that this owes much to zero inflation, and argues that nominal earnings growth must increase further still if the UK’s real pay revival is to be sustained as inflation inevitably picks up.

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

“The momentum gathering around Britain’s pay recovery is set to continue to build this week, with real wages again growing above pre-crisis rates. Too much of that growth depends on ultra-low inflation that can’t be sustained indefinitely, but after a six-year pay squeeze any period of catch-up is to be welcomed.

“Having been hit especially hard in the early part of the downturn, average earnings in the private sector are now growing particularly strongly. That’s good news, but it offers a stark contrast to the public sector, where pay restraint is set to persist in the coming years. As the gap between pay growth in the two parts of the economy widens, so we might expect recruitment and retention problems to become more of an issue in the public sector.

“In this context, repeating the pace of public service cuts delivered in the last parliament over the coming years might therefore be expected to prove significantly more challenging than was the case in the last five years.”

Ends

A briefing note explaining the methodology behind the Resolution Foundation’s pay projection is available here.