Wage growth up but workers still worse off as inflation continues to bite
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This month’s modest shifts in vacancies and redundancies leaves you to wonder if the labour market is simply returning to ‘normal’ after Covid-19, or if we might be seeing the first signs of a coming recession as forecast by the Bank of England. Most concerning, however, is that despite strong wage growth, inflation continues to eat away at the real value of pay.
Substantial wage growth gap remains between public and private sector
Regular pay (excluding bonuses) grew by 6.4% across the economy, which is the strongest overall growth in the UK outside of the pandemic period for 20 years. This is driven by the private sector, which saw pay growth of 7.2% this quarter. We also witnessed a small uptick for the public sector compared with the previous quarter with 3.3% wage growth, although the gap between private and public sector remains substantial.
Figure 1: Widening gap between regular pay growth for the private and public sector, 2020-22
Source: Work Foundation calculations based on ONS (17 January 2022) Dataset A01 – Table 15: Average weekly earnings (nominal) – regular pay, seasonally adjusted.
Growth for the private sector is largely due to pay growth in finance and business services (7.6% over September-November). Wholesale and retail, which saw earnings growth of 7.5% in June-August have declined to 5.9% by November. This peak and then fall in wage growth in this sector could have been a response of the sector to staff shortages amidst a stronger recruitment drive for seasonal staff that usually starts in August in the run up to Christmas.
Inflation continues to reduce the real value of pay
Despite these higher than average rates of growth in pay, inflation at 10.7% ensures that workers are still worse off than they were last year. In real terms, the value of pay fell by 2.6% on the year.
This is a slightly less steep decrease than we saw in the spring quarter of 2022, but it highlights the continued challenge that workers are facing in meeting their usual expenses. The Bank of England has raised its interest rates to 3.5% to curb inflation, making repayment of mortgages more expensive and pushing up rent prices. Further, the British Retail Consortium warned that fresh food inflation reached as much as 15% in December.
The Office for Budget Responsibility forecasts that wage growth will decrease over 2023 and 2024, based on the expectation that inflation will fall over that period. Already, there are signs that gas prices, which have been driving inflation, are falling. The OBR predicts this will be followed by a protracted period of low wage growth.
Figure 2: Wage growth expected to fall in the next two years, followed by period of low growth
Source: Office for Budget Responsibility (2022). Economic and fiscal outlook: Section - Average growth outturn per year and average growth forecast.
What does this mean for workers and employers?
At the close of last year, Government dedicated support for the cost of living crisis in the form of £400 for energy bills for every household, and a one-off £650 payment for people on Universal Credit and other benefits. The one-off payment for people on benefits was larger than could have been expected if benefits had been uprated in line with inflation. However, we must recognise that Universal Credits and other benefits have not kept up with the increasing cost of living over the past years, and on the whole provide very low levels of income. Particularly as support is tapering off in 2023, it is these low-income households that will continue to feel the crunch.
Colleagues at the Work Foundation are investigating the pressures that employers are under with rising costs and staff shortages, as well as the kinds of support employees need from their employers during the cost of living crisis. Support can range from financial advice, access to pay between pay periods, to one-off payments. These can be helpful to workers, but also ultimately improve the bottom line through enhanced retention in a tight labour market. What is increasingly becoming clear is that the pressure on people’s financial wellbeing is here to stay for the next few years. This means we must move away from short-term solutions and think about what this means for workers in the medium to long term. Forthcoming work will outline what employers can do to support their staff through these challenging times.
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