Stormy Weather To Hit The UK...LONDON, ENGLAND - OCTOBER 21: City workers walk over London Bridge as the early morning sun breaks through clouds on October 21, 2014 in London, England. Despite weather warnings issued by the Met Office for high winds and rain off the back of Hurricane Gonzalo, those predictions didn't materialise in London. (Photo by Dan Kitwood/Getty Images)
Employment is at record levels in the UK but living standards are being squeezed © Getty

Britain’s workers face worsening living standards as pay growth slows while inflation continues to rise.

Official data show the UK’s labour market continues to create plenty of jobs but employers are trimming pay rises in every sector. The wage growth slowdown is particularly painful because inflation has been driven up by the falling value of the pound since last year’s Brexit vote.

The result is another squeeze on real pay, which has not yet recovered from the cuts that followed the financial crisis. The latest official forecasts suggest the average worker will still earn less in 2021 than they did in 2008.

Average regular pay growth slowed from 1.8 to 1.7 per cent in the year to April. Total pay growth, which includes bonuses, slowed from 2.3 to 2.1 per cent. Samuel Tombs, an economist at Pantheon Macroeconomics, called the wage figures “astonishingly weak”.

Inflation outstripped both regular and total pay growth in the three months to April. As a result, regular pay fell 0.6 per cent in real terms while total pay fell 0.4 per cent. The figures are likely to worsen next month because inflation reached a four-year high of 2.9 per cent in May.

“News of slowing pay growth alongside rising inflation add to growing worries about the UK’s economic outlook,” said Chris Williamson, an economist at Markit.

“Households are being squeezed by falling real pay at the same time that business uncertainty is likely to have escalated in the aftermath of the election, posing a double-whammy of downside risks to the economy.”

Economists are puzzled by employers’ refusal to raise wages. Workers usually demand bigger pay rises when inflation goes up — and their bargaining power should be strengthened by the fact that companies are struggling to find staff. The UK is not the only country to face this paradox: wage growth is unusually weak in the US, Japan and Germany too in spite of low unemployment.

Ian Brinkley, acting chief economist at the CIPD, the professional body for HR, blamed “persistently low productivity growth and a fall in confidence among employers about the future prospects for demand in the UK economy”.

Other economists believe that workers scarred by the long recession are unwilling or unable to ask for better pay. An increasing number of them are negotiating individually without any collective bargaining. Union membership fell by more than a quarter of a million last year to 6.2m, the largest fall in more than two decades.

However, analysts at the Resolution Foundation said there were signs that job security was improving, even if pay was not.

Employment was already at record levels but another 109,000 people found jobs between the three months to January and the three months to April. Full-time employee jobs account for 97 per cent of net job creation in the past 12 months. Less secure jobs such as agency work and zero hours contracts have become slightly less prevalent.

There are now 31.95m people in work in Britain — a record 74.8 per cent of all working-age people. Unemployment held steady at 4.6 per cent, the lowest since 1975.

Scott Bowman, an economist at Capital Economics, said the increase in the number of people with jobs should cushion the economy from the squeeze on real pay.

The Bank of England’s latest forecasts predict that inflation will recede next year and wage growth will strengthen to 3.5 per cent thanks to the tight labour market. However, some economists are sceptical.

Philip Shaw, an economist at Investec, said that “at some stage” he expected the weakness of wage growth to have a “material impact” on the thinking of the BoE’s Monetary Policy Committee.

“We cast some doubt on the committee’s wage growth forecast of 3.5 per cent for next year. If the trend shown in today’s figures is not reversed, the BoE’s wage forecast of 2 per cent for this year could be undershot as well.”

Get alerts on UK inflation when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article