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Wages still not keeping pace with inflation but employment at record high

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Written by: Paloma Kubiak
21/03/2018
Average weekly earnings adjusted for inflation fell by 0.2% excluding bonuses in the three months to January but the number of people in employment stands at the joint highest since records began.

The employment rate between November and January was 75.3%, higher than for a year earlier (74.6%) and the joint highest since records began, according to the Office for National Statistics (ONS).

Its records showed there were 32.25 million people in work, 168,000 more than for August to October 2017, and 402,000 more than for a year earlier.

Unemployment over the three months came in at 4.3%, down on the 4.7% a year earlier, and the joint lowest figure since 1975.

In total, there were 1.45 million unemployed people, which is 24,000 more than for August to October but 127,000 fewer than recorded last year.

While the labour market figures show a return to positivity after the previous slight dip from the record highs, wages are still trailing inflation.

Average weekly earnings for employees in nominal terms (not adjusted for inflation) increased by 2.6% excluding bonuses and 2.8% including bonuses, compared with a year earlier.

However, when taking inflation into consideration, average weekly earnings for employees in real terms actually fell by 0.2% excluding bonuses and were unchanged including bonuses.

This means wages still lag inflation which was recorded at 2.7% for February.

In last week’s Spring Statement, Philip Hammond announced that the OBR expects inflation to fall back to the 2% target over the next 12 months, “Meaning that real wage growth is expected to be positive from the first quarter of 18/19, and to increase steadily thereafter”.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Wage growth still isn’t quite beating inflation, but both pay and prices now appear to be moving in the right direction for UK consumers.

“However, there are a number of competing factors which muddy the short-term picture for wages. The collapse of Carillion and the continued problems faced by high street outlets will act as a constraint on further progress in the labour market. An increase in compulsory pension contributions for employers due in April will also divert more reward resources into long-term retirement plans, which may come at the expense of pay in the here and now.

“On the other hand, the National Living Wage will be ratcheting up too, which should help to boost wages. And looking a bit further out any new settlement on NHS pay increases will act as a significant shot in the arm for wage growth, particularly if it is rolled out across the public sector.”

Khalaf added that if the current momentum in wage growth can be maintained, things are looking up for UK consumers and the economy.

“However, this rosier picture will give the Bank of England more confidence in raising interest rates, which would go some way to limiting any economic windfall for borrowers.”

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