Tentative signs that wages are starting to turn a corner

Regular pay growth outpaces inflation for first time since October 2009, but return to peak unlikely before the end of the decade

Average weekly earnings growth of 1.3 per cent in the three months to September 2014 overtook CPI inflation (1.2 per cent) for the first time since 2009 and only the sixth time since the start of the six year pay squeeze in 2008, raising hopes that the long-awaited recovery in real wages may finally be beginning, the Resolution Foundation said today (Wednesday) in response to the latest ONS labour market statistics.

Despite today’s better news, average earnings have fallen by 7.5 per cent since January 2008 (using CPI) and are no higher than they were back in 2003. The Resolution Foundation doesn’t expect average wages to return to their pre-crisis peak before the end of the decade and points out that today’s wages will need to rise significantly from current levels to remain above inflation when it finally returns to its target level of 2 per cent.

The latest earnings figures show considerable variation between sectors, with growth of 1.6 per cent in the private sector compared to 1 per cent in the public sector. Pay growth appears strongest in manufacturing (1.8 per cent) and weakest in retail (0.6 per cent). The single month figures suggest that pay growth in the finance sector has been particularly strong in September (2.4 per cent). Total pay – including bonuses – remains below inflation at 1 per cent.

While wage growth within sectors of the economy is broadly positive, new research from the Resolution Foundation showed last week that changes in the mix of sectors and occupations across the workforce have dragged down wage growth recently. The rapid rise of young people finding work, the decline in high-paying managerial roles and the growth of lower paying cleaning, labouring and caring jobs has dampened average wage growth even while pay within sectors has increased.

Today’s figures provided more good news on employment, with the pick-up in full-time jobs and fall in youth unemployment particularly welcome. The current employment rate for 16-64 year olds of 73.0 per cent is now level with its 2008 level and just 0.2 percentage points off its 2005 peak.

Part of the reason for the rising employment rate among 16-64 year olds is due to women working for longer as a result of increases in the state pension age (SPA). With the SPA rising for women, and soon to start rising for men too, the Resolution Foundation believes that the new ONS employment rate for workers aged 16 to the current SPA offers an interesting insight into recent changes in the labour market. On this measure (not seasonally adjusted – unlike the headline figure), the current employment rate of 74.3 per cent is still someway short of its pre-recession peak (75.2 per cent).

Recent strong jobs growth means that six of the twelve regions and nations across the UK have surpassed their pre-recession employment rate. London has experienced the most impressive growth, with its current employment rate 2.6 percent higher than that on the eve of the downturn. In contrast Northern Ireland, Wales and the West Midlands still have ground to make up to return to their pre-downturn health, and have employment rates consistently below the national average.

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

“Today’s pay data is welcome and hopefully marks the start of the long road back towards wage recovery. It is particularly positive given that our recent work has shown that the rapid pace of jobs growth over the past year has helped to pull down on wage growth by returning younger and less experienced – and therefore typically lower paid – workers to the labour market.”

“But amid the good news it is worth remembering that pay growth has only turned positive because inflation is currently significantly below target, so there is a clear need for wages to continue their upward trajectory. And the depth of the six year pay squeeze is such that we can’t expect average pay to return to its pre-crisis levels until the end of the decade.”

“It’s encouraging that the UK jobs market continues to grow at a healthy pace, with the current employment rate not far off its 2005 peak. It is particularly welcome to see youth employment rising and full-time jobs driving the employment rise. We know that there’s been a shift from higher-paying occupations to lower-paying ones over the past 12 months however, and that is a trend that will have implications for the shape of our recovery if it persists into 2015.”

Ends

1. The Resolution Foundation analysis on how changes in the make-up of the workforce is affecting wage growth is available at http://www.resolutionfoundation.org/publications/why-2014-hasnt-been-the-year-of-the-pay-rise/.
2. The Resolution Foundation analysis of the regional jobs gap is available at http://www.resolutionfoundation.org/media/blog/break-even-moment-for-employment/