Real wages accelerate despite productivity falls

Real wages grew by 2.1% in the 12 months to February 2024, faster than any time in the previous 16 years.

The Resolution Foundation has found that, despite productivity falling by 0.6% since the end of 2022, wage growth has rocketed and helped recover some of the wages lost from the sharp pay squeeze after the pandemic.

The think-tank said that the 2.1% real wage increase would have been respectable even pre-2008, when regular and strong real wage increases were more common, and is the strongest annual growth rate outside of pandemic-related distortions in over four years.

Productivity is usually the main determinant of pay growth in the long term, so it is unusual to see real-terms pay increase while productivity falls.

But the foundation’s Macroeconomic policy outlook for Q2 2024 report says that two areas have made wage increases more affordable while productivity wanes: higher interest rates closing the deficit in pensions funds and lower import prices being passed on to consumers.

However, it notes that this short-term disconnect between wage growth and productivity will not continue for much longer, and suggests the mismatch could be worrying the Bank of England, which sets the base interest rate.

The report says for real wages to keep rising, productivity needs to improve.

Greg Thwaites, research director at the Resolution Foundation said: “After 16 years of wage stagnation, real pay packets in Britain are growing again at a healthy two per cent. This welcome turnaround is all the more remarkable given that output per worker – the ultimate driver of rising wages – has actually fallen.

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“But while this welcome real wage recovery has been affordable so far, it won’t be in the future. Unless productivity picks up, wage growth will peter out, or pay rises will simply be passed on through higher prices and prolong our inflation problems.”

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