Strong pay growth in finance and business services since the pandemic has benefited high earners in London, leading to a rise in geographical inequality in mean earnings.
A study by the Institute for Fiscal Studies has highlighted growing inequality in the UK in terms of salaries, as the top earners in the capital surge ahead of the rest of the country, including middle earners in London, in pay growth.
IFS analysts found that the best pay growth (9.8%) since the start of the pandemic has been enjoyed by those in energy and business services. Those in administrative and support services have also seen pay growth of above 9% while professional services has also done well (8.6%).
Real earnings in finance have fallen since their peak in mid-2022, but are still 7.6% above their pre-pandemic level. Information and communications (ICT), another high-skilled service sector, also saw mean earnings rise, by 5.5%.
However, pay across the UK economy grew by only 2.7% over this period, with many sectors seeing declines of 1% to 3.9%.
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Many more isolated rural regions had performed badly for real terms mean wage growth since the pandemic, such as Caithness in the far north of Scotland (-0.5%), and Gwynedd in north west Wales (0.2%), but more urban areas such as Durham, York, Bradford and mid-Lancashire also experienced growth of less than 0.5%. Mean earnings in London increased by 5%.
A third of jobs in finance, professional services and ICT are based in London, which accounts for just under a fifth of all jobs across the economy. As a result, mean earnings growth among employees living in and around London has outstripped growth in the rest of the country.
The IFS said that given London and the south-east’s high levels of earnings before the pandemic, the recent earnings growth in these areas has exacerbated geographical inequalities in mean earnings. Before the pandemic there was a gradual reduction of inequality of mean earnings but this has been reversed.
The institute emphasised that there was also widening inequality within London, because those employees working in the sectors seeing high pay growth tend to be already well remunerated, with pay growth in business services sectors in London being driven by the highest earners within these sectors.
“Mean pay in London is growing faster than median (middle) pay in finance, professional services, and administrative and support services,” it said. Overall, top earners in London have pulled away while middle earners have seen little real pay growth, leading to an increase in earnings inequality within London.
In some low-paid sectors, such as hospitality, wholesale and retail, median pay growth has been slower in London than in other parts of the country, the IFS found. Outside London most areas have seen higher growth in median earnings than in mean earnings, implying a fall in earnings inequality at the local level. “This continues the trend towards greater pay equality locally in most places since 2014, when the PAYE data became available,” said the study.
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The IFS concluded that given pay growth had been concentrated in business services sectors which are mostly around London, inequalities have increased in mean earnings across the country, and “With the top pulling away and the middle seeing low growth, there has been an increase in earnings inequality within London.”
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