Silke Mayr Wage growth in the UK has surged, with inflation-adjusted pay increasing by 3.4%. Private sector pay increases have been the primary driver of this growth, marking the fastest rise in real wages in over three years.
Between September and November, average wages rose by 3.4% compared to the same period last year, according to the Office for National Statistics (ONS). The ONS attributed this increase to robust private sector earnings, which outpaced those in the public sector.
Despite concerns that rising wages could fuel inflation, the Bank of England is still expected to cut interest rates. Current rates stand at 4.75%, but traders anticipate a reduction to 4.5% in February following a recent unexpected drop in inflation.
Pay Growth and Economic Implications
The Bank of England closely monitors pay and employment data to guide interest rate decisions. The ONS estimated that average weekly earnings reached £660 in November, with inflation at 2.6%, now slightly lower at 2.5%. Sarah Coles, head of personal finance at Hargreaves Lansdown, highlighted the noticeable gap between wages and inflation, saying, “This difference gives people more disposable income.”
However, Ms. Coles cautioned that higher wages might delay rate cuts if they trigger further inflation. Ashley Webb, UK economist at Capital Economics, added that some Bank of England policymakers might worry about private sector pay growth but noted signs of a loosening labor market.
The UK unemployment rate rose to 4.4%, and job vacancies fell by 2.9% to 812,000 between October and December. While vacancies remain above pre-pandemic levels, the ONS advised caution in interpreting the data due to low survey response rates.
Recruitment challenges persist, especially in fields like engineering, IT, and artificial intelligence. Petra Tagg from Manpower UK noted that companies are offering higher pay to attract skilled workers, but employees are hesitant to switch jobs during uncertain times.
Businesses and the Economic Outlook
Employment dropped in December as firms paused hiring, influenced by tax hikes introduced in the recent budget. Chancellor Rachel Reeves’ decision to impose £40 billion in tax increases on businesses, including higher National Insurance rates, has raised concerns among employers. These additional costs, combined with rising minimum wages and reduced business rate relief, could limit wage increases and job creation.
Despite these challenges, economist Rob Wood stated there is no evidence of a severe labor market downturn. He noted that the market is loosening but at a slow pace.
The Resolution Foundation reported that 2024 has been the best year for wage growth since 2005. However, Sarah Coles warned that this trend might not last as businesses face growing financial pressures.
Worker shortages continue to affect several sectors, potentially supporting higher wages for those in demand. However, higher wages could lead to inflation if consumer spending increases, pushing up prices.
Regular pay grew by 5.6% annually between September and November, but inflation-adjusted growth was 3.4%. Work and Pensions Secretary Liz Kendall called for further efforts to boost employment and improve living standards, emphasizing reforms to Jobcentres and opportunities for young people.