UK wage growth base below headline figures, think-tank warns

Baseline wage growth in the UK was weaker than official statistics released because wage increases were boosted towards the end of the pay rise scheme, according to a research group.

The Resolution Foundation said the wage increase was similar to pre-pandemic levels despite rising prices, reducing the need for the Bank of England to raise interest rates to limit inflationary pressures.

In January, nominal wages excluding bonuses rose at an annual rate of 4.1% compared with an average of 2% in the decade before the pandemic, according to data from the Office for National Statistics.

But analysis by the Resolution Foundation, released on Saturday, shows the official figures had been bolstered by the end of the furlough scheme in September.

Disadvantaged workers receive 80% or less of their usual salary, thus boosting growth as they return to full wages.

After adjusting for higher plans and factors such as an increase in the number of low-wage workers due to the reopening of retail and hospitality services, base wage growth averaged only 2 .7% in 2021, the same as in 2019, before the pandemic.

This is in spite of Inflation is now at a 30-year high, which shows that workers are suffering from rising consumer prices. The team calculated that in the final quarter of 2021, about 1 percentage point of wage growth was due to high-income workers returning to their full wages.

Nye Cominetti, senior economist at the Resolution Foundation, said that the headline figures “give a misleading impression of wage growth. Given the tightening of the labor market, wage growth should best be seen as normal rather than exceptional, once the impact of the growth agenda is over,” he added.

Line chart of year-over-year % change shows UK base wage growth weaker than headline figures

The ONS is well aware of these issues and warns that “interpretation of middle-income data is very difficult at the moment”. The effects of overtime plans are easing as the number of overtime workers fell last year, but they will last into the fall as this year’s growth is calculated relative to 2021.

Cominetti argues this is “extremely important” because salary growth rate is a key factor for the Bank of England when it comes to setting monetary policy, especially at a time when the country faces exceptional price pressures.

Concerns for policymakers are that high inflation expectations and a tightening labor market are creating a wage spiral that could lead to a longer period of high inflation.

The labor market in the UK is really shorthanded. The unemployment rate is near a record low, the unemployment rate for vacancies is the lowest on record, and workers are voluntarily switching jobs at a record high rate.

However, the results of the Resolution Foundation show that base wage growth is no faster than when the labor market was in similar conditions in 2019, despite much higher price pressures.

The same model for the Bank of England, but based only on the private sector, shows a higher base pay increase than that of the Resolution Foundation. However, in both analyzes “there is still no evidence of accelerating wage growth to match rapidly rising prices,” the team notes.

The Resolution Foundation also estimates that nominal wages will increase by an average of 5% by 2022.

This means that “with inflation expected to hit 8% in the coming months, the incomes of most workers will fall in real prices – even if the minimum wage increases by 6.6% – continue to squeeze living standards in the coming months” Cominetti.

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