UK wage growth remains below pre-COVID levels despite rise

Nominal wages rose 4.1% in the year to January 2022, compared to an average of 2% in the decade before the pandemic. Photo: Dominic Lipinski/PA Images via Getty

Economists said wage growth in the UK was “normal rather than exceptional” once the end of the furlough rise is taken into account.

New analysis from the Resolution Foundation suggests that a tight labor market has brought underlying nominal wage growth back to pre-pandemic levels, but not beyond.

The report argues that despite fears that the crisis could create long-lasting unemployment, the UK labor market is tight on all measures, with low unemployment, high vacancies and record employment movements. This leads to rapid nominal wage growth as employers increase wages in order to attract and retain workers, he said.

He notes that while the number of low-paid workers has increased in recent months with the reopening of sectors such as hospitality and retail, stronger job growth in some higher-paying industries over the past two years has meant that overall average pay levels remain elevated relative to pre-pandemic.

“Given the tightness of the labor market, wage growth is best seen as normal rather than exceptional, once the impact of the end of the furlough scheme is taken into account,” said Nye Cominetti, Senior Economist at the Resolution Foundation. “In fact, underlying wage growth is similar to what we were seeing before the pandemic hit.”

Nominal wages rose 4.1% in the year to January 2022, compared to an average of 2% in the decade before the pandemic.

Read more: Skills shortage and inflation drive UK wages to record highs

However, the study found that these wage growth numbers don’t tell the whole story. Underlying wage growth, which adjusts to changes in the average wage due to worker characteristics, averaged 2.7% in 2021, similar to the eve of the pandemic in 2019, the Commission said. Resolution Foundation.

According to the think tank, the impact of the Job Retention Scheme (JRS) on overall growth figures will last long after furlough payments end.

He argues that the JRS potentially boosted annual wage growth by around one percentage point in the first quarter of 2022, with the effect not ending until the fall.

This is partly due to JRS salary cuts, as 11.6 million employees received 80% or less of their usual salary. When JRS ended in September 2021, the majority of furloughed workers returned to full pay, representing almost a quarter of annual wage growth in the last quarter of 2021.

However, despite the increase, the report warned that real wage compression will worsen over the course of this year, with a return to real wage growth not likely until mid-2023.

“The forecast of nominal wage growth of 5% through 2022 will not be enough to overcome inflation of 8% this spring, which means that the incomes of most workers will fall in real terms, even taking into account last Friday’s 6.6% minimum wage hike,” the report said.

Read more: BT gives workers biggest pay rise in 20 years but unions reject offer

In its Labor Market Outlook for the first quarter of 2022, the Reolution Foundation examined how to interpret the statistics of strong nominal wage growth.

“The exact strength of wage growth matters enormously, given the impact on living standards and fears that exceptionally fast wage growth will make it difficult for the Bank of England to reduce inflation without raising unemployment,” the think tank said.

The BoE is watching the labor market closely for any signs of overheating, policymakers said while the economy is not at that stage, they are watching those risks carefully.

Britain’s central bank came under fire in February after Governor Andrew Bailey urged Britons to limit their wage negotiations to prevent the country from sliding into a price-wage spiral, with annual inflation already hitting a 30-year high and set to reach 8% this month. This is more than triple the BoE’s 2% target.

A separate analysis showed that UK companies have increased wages at the fastest rate in 25 years as employees gained bargaining power thanks in part to soaring inflation and a skills gap.

Figures from KPMG and the Confederation of Recruitment and Employment show the average salary paid to new permanent entrants rose last month more than at any time since records began in October 1997.

Watch: How does inflation affect interest rates?

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