Wage growth hit by higher inflation

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GEOFF CADDICK

The amount of money workers are taking home continues to fall as inflation takes its toll, official figures show.

Average earnings fell in real terms by 0.6% in three months to April, compared with the same period last year.

Before inflation, earnings rose by 1.7% excluding bonuses and were up 2.1% including bonuses, according to the Office for National Statistics.

Unemployment fell by 50,000 to 1.53 million in the three months to April – the lowest since records began 1975.

The number of people in work hit a new high of 74.8% – the best since records began in 1971.

But the biggest issue will be the falling wages, especially since the ONS revealed on Tuesday that inflation grew to 2.9% in May.

Samuel Tombs at Pantheon Macroeconomics described the wages figures as “astonishingly weak” and implied that real wages had fallen by 1.5% in April compared with the same month last year – the sharpest fall for three years.

John Hawksworth, chief economist at PwC, said: “With inflation likely to be heading above 3% later this year, the squeeze on real pay growth is now getting serious and is likely to dampen real consumer spending growth for some time to come.”

The figures wiped out sterling’s gains against the dollar on Wednesday and analysts warned that future growth could be hit.


Analysis

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By Kamal Ahmed, Economics Editor

Following traditional economic modelling, high levels of employment should, in ordinary times, lead to higher levels of wage growth.

These are not ordinary times.

The workplace has changed, and high levels of hyper-flexible working have tended to depress some wages.

Also, until recent months, labour supply has been high from, for example, the European Union.

Add to that the UK’s chronic productivity problem – many firms are just not very good at investing in improvements that increase levels of wealth creation – and this soft wage growth trend is more understandable.

Particularly when employees are reluctant to ask for increases given the economic uncertainty ahead.

In areas where labour supply is becoming more constrained – such as in construction – wage rates are picking up.

Being in employment is an economic good, and the numbers in work are at record levels.

Being in well paid employment is even better. That is now the challenge.


Ben Brettell, senior economist at Hargreaves Lansdown, said: “The UK economy faces a dangerous cocktail of political uncertainty, slowing growth and shrinking real wages.

“Unemployment remains at a multi-decade low of 4.6%, but wage growth for the three months to April undershot economists’ forecasts, meaning the squeeze on household finances is worse than previously thought.”

The ONS said that despite high employment, the number of job vacancies had also grown by more than 9,000 since February.

There were 770,000 job vacancies in the March to May period, according to the ONS.

The British Chambers of Commerce warned that the high employment levels coupled with high vacancies could worsen the skills gap.

Suren Thiru, its head of economics, said: “The continued rise in the number of vacancies is further evidence of the growing skills shortage.

“While employment levels are high by historic standards, businesses report that they are increasingly struggling to find staff with the right skills, which is constraining investment and productivity.”

Delving deeper into the data, the ONS revealed that the highest employment rate in the UK for the three months to April is the South West, at 79.1%.

The area with the lowest employment rate was Northern Ireland at 68.8%.

In terms of the number of people classed as “unemployed”, London had the highest rate at 6%, with the South West lowest at 3.4%.

The West Midlands recorded the largest increase during the period, up 65,000, while the East of England had the largest decrease of 36,000.

Nine in ten workers in London are employed in the service sector, with workers in the East Midlands holding the highest proportion of jobs in production – at 13.9%.

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