Wages in the United Kingdom experienced the fastest annual growth rate since records began, according to the Office for National Statistics (ONS). In the three months leading up to June, wages grew by 7.8%. This positive development, coupled with lower inflation, indicates a recovery in people’s real pay, said ONS director of economic statistics Darren Morgan.
However, the data has raised concerns among policymakers at the Bank of England, who fear that strong pay growth could fuel inflation. The central bank recently implemented its 14th consecutive interest rate hike, bringing the benchmark rate to 5.25% – the highest level since February 2008. Ruth Gregory, deputy chief UK economist at Capital Economics, believes that with wage growth still accelerating, the Bank of England is likely to deliver one more rate hike before concluding its tightening cycle.
Despite the positive wage growth, the ONS data also revealed signs of a cooling labor market, which policymakers may welcome. The unemployment rate rose to 4.2% in the quarter leading up to June, although it remains low compared to historical standards. Additionally, job vacancies decreased by 66,000 in the three months leading up to July, compared to the previous quarter. However, the number of vacancies still remains above 1 million.
The decline in job vacancies puts pressure on UK companies to offer higher wages in order to compete in the labor market. A survey conducted by the Chartered Institute of Personnel and Development found that 40% of employers made counteroffers to retain employees who had received job offers elsewhere. Of those counteroffers, 38% matched the salary of the new job, while 40% offered even higher pay. The CIPD predicts that the use of counteroffers will increase as recruitment and retention challenges persist.
In a significant development, private sector pay growth has surpassed inflation for the first time in over a year. Average regular pay growth, excluding bonuses, accelerated to 8.2% in the April-to-June quarter compared to the same period in 2022. The Bank of England has been closely monitoring this measure as an indicator of domestic inflationary pressures. Average total pay growth, including bonuses, also reached 8.2%, although the ONS noted that this data was influenced by one-off bonus payments made to healthcare workers.
Martin Beck, chief economic adviser to the EY ITEM Club, commented on the latest labor market figures, stating that there are few signs that the growing slack in the jobs market is restraining pay growth. He believes that unless there is a major downside surprise in the upcoming inflation data, another interest rate rise in September is highly likely.
Official data expected to be released on Wednesday is anticipated to show a slowdown in inflation to 6.8% in July, according to economists polled by Reuters.
What is the significance of weak productivity growth in the argument for a cooling labor market and why might businesses be less likely to hire additional workers in such circumstances
E. While wages are increasing at a record pace, the number of job vacancies decreased by 86,000 in the three months leading up to June. This suggests a potential slowdown in the labor market, which could help alleviate concerns of excessive wage growth and inflation.
Additionally, the ONS data showed that productivity growth remained weak, with output per hour increasing by just 0.4% in the second quarter of the year. This could further support the argument for a cooling labor market, as businesses may be less inclined to hire additional workers if productivity is not improving.
Overall, the strong wage growth in the UK is a positive sign for workers and indicates a recovery in real pay. However, policymakers at the Bank of England are wary of the potential inflationary pressures that could result from continued wage growth. While they have already implemented a series of interest rate hikes, there may be further increases to come if wage growth continues at its current rate.
This is certainly great news for workers but the concern for higher inflation is definitely worth keeping an eye on.
It’s encouraging to see wages increasing, but inflation can definitely erode these gains if not managed properly.