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Pay growth continues to flat-line, while employment numbers decline

Paloma Kubiak
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Paloma Kubiak

The number of people in work declined in the three months to September 2017 and real wages – adjusted for inflation – fell 0.4% compared to a year earlier.

The employment rate for the period was 75%, slightly down from the 75.1% recorded in the preceding three months, but up from 74.4% a year earlier, according to the Office for National Statistics (ONS).

There were 32.06 million people in work between July and September 2017, 14,000 fewer than in the previous quarter, but 279,000 more than for a year earlier.

Unemployment over the three months also fell to 4.3%, down from 4.8% for a year earlier. This is the joint lowest rate since 1975. In total, there were 1.42 million unemployed people, 59,000 fewer than recorded in the previous three months and 182,000 fewer than a year earlier.

While the labour market data continues to show positive signs, the outlook for wages is weaker.

Average weekly earnings for employees in real terms (adjusted for inflation, excluding bonuses) fell by 0.5% (0.4% including bonuses). However, in nominal terms (not adjusted for inflation), average weekly earnings increased by 2.2%, both including and excluding bonuses, compared with a year earlier.

This means wages still lag inflation, which was held at 3% for October.

The average total real term pay for employees (including bonuses) was £490 a week before tax and other deductions, down from the pre-downturn peak of £522 per week recorded for February 2008. Average regular pay (excluding bonuses) was £458 per week before tax and other deductions, £15 lower than the pre-downturn peak of £473 per week recorded for March 2008.

When will labour tightness feed into higher wages?

The Bank of England said this should happen next year, but Ben Brettell, senior economist at Hargreaves Lansdown, said it’s not a given.

“In theory, with unemployment so low, sooner or later demand for labour will outstrip supply and workers will be able to demand higher wages. But it looks like something fundamental has changed in the labour market, allowing wages to remain depressed despite low unemployment.

“Perhaps technological developments and global competition has weakened the bargaining power of the worker. A report this week from the Chartered Institute for Personnel and Development (CIPD) said employees weren’t pushing for higher wages even though unemployment is low.

“The underlying problem remains one of productivity, which is the only sustainable driver of real wage growth. In this respect the UK continues to lag behind its developed-world counterparts, notably the US and Germany. Economists and governments have tried – so far in vain – to find a solution to this productivity puzzle.”

Research by Fidelity International revealed nearly half (46%) expected a pay rise in 2018, with the average worker holding out for an inflation-beating 4%.