Wages growing at fastest rate since before the crash

Official figures published later this week are expected to show real wages growing at their fastest rate since October 2007, according to new analysis published today (Monday) by the independent think-tank the Resolution Foundation.

The analysis, which models recent labour market data to forecast short-term trends in pay, predicts that average weekly earnings growth will jump upwards to an annual rate of between 2.5 and 2.6 per cent in Feb-April 2015 (compared to 2.2 per cent in Jan-March). This, combined with inflation falling to -0.1 per cent in April, means that real wages rose by 2.5-2.7 per cent – their fastest rate since October 2007 (when average pay rose by 2.5 per cent).

Growth in average earnings in the private sector is expected to increase to 3.0-3.2 per cent in Feb-April – the highest real terms growth since September 2007 (3.2 per cent).

However, the Foundation expects real wage growth to level out in May if inflation edges up and notes that, according to the Bank’s latest forecast, real wage growth will be lower at the end of the year as inflation starts to return.

The return of respectable real wage growth is desperately needed, says the Foundation, following the UK’s six-year pay squeeze. It adds that average weekly earnings are still lower than they were a decade ago – and are around £100 a week lower than they might have been in the absence of the downturn.

Given that inflation will inevitably start to pick up again, even if it remains low, the Foundation says that nominal earnings growth must increase further still if the UK’s real pay revival is to be sustained. It argues that rising productivity holds the key to bigger pay packets over the long term, and has called on the Chancellor to set out practical steps for boosting it.

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

“The good news is that real wages are now – finally ­– growing at a respectable rate by historical standards. The bad news is that this only appears to be happening because of inflation falling to unprecedented levels.

“Normally we’d have expected wages to grow at this rate far earlier on in a recovery, so there is an enormous amount of ground to make up. We need to see real wage growth sustained at this rate year on year.

“Ultimately, rising productivity will determine the strength of pay packets over the long-term, and tackling Britain’s productivity problems should be the Chancellor’s top priority in the run-up to the Budget.”

Resolution Foundation central pay growth prediction, June 2015