Pay growth has finally caught up with inflation, with regular pay excluding bonuses increasing by 0.6% in real terms.
The September 2023 labour market figures from the Office for National Statistics (ONS) showed that annual growth in regular pay reached 7.8% in May to July 2023 compared to the same period in 2022.
This is the same rate of growth as the previous three-month period, but a slowdown in inflation meant employees saw real-terms pay growth; in June the consumer prices index measure of inflation including housing costs (CPIH) was 7.3%, and in July it fell to 6.4%.
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Annual growth in employees’ total pay including bonuses was 8.5%, boosted by the one-off payments the government awarded to NHS workers and civil servants in June and July.
When adjusted for inflation, this meant employees saw a 1.2% increase in their total pay compared to the same period last year.
Growth in weekly earnings was mainly driven by high awards in the private sector, with annual growth averaging at 8.1% compared to May-July 2022. The finance and business services sector saw the largest annual regular growth rate at 9.5%, followed by the manufacturing sector at 8.1%.
Public sector pay growth was also strong at 6.6% – the highest regular annual growth rate since records began in 2001.
Recruitment and Employment Confederation chief executive Neil Carberry said: “Pay rising to meet falling inflation is a function of firms giving higher pay awards to staff in the spring, ongoing staff shortages in some sectors such as hospitality and logistics, and a big rise in the minimum wage. It was always likely that pay would meet falling inflation during this year, but we should be cautious of any analysis that suggests pay is driving rising prices at this stage – businesses have been carefully managing looking after workers and maintaining cost stability.
“Today’s numbers do suggest that the path to lower inflation may be more of a slope than a cliff, but there is evidence of the gentle cooling in the jobs market the Bank of England has been seeking. With employment and hours dropping a little alongside inflation, wage pressure in the private sector is not likely to be as high from here on in as the labour market loosens.”
Jim Moore, employee relations expert at HR consultants Hamilton Nash, said: “These figures mark an important turning point, and it’s great to see real pay finally catch up with inflation.
“But the long-running gap between pay and inflation has stored up months of pain for workers, and wages will need to keep rising for a long time before consumers feel better off.”
Julia Turney, partner at consultancy Barnett Waddingham, said half of employers are still reporting problems with recruitment, which has fuelled “the vicious cycle of wage-growth inflation, rising labour costs, and, ultimately, goods and services price hikes”.
“And while the outlook for wage growth has fallen to around 5%, this is still concerningly high if we compare it to typical pre-pandemic rates of 2-3%,” she said.
Economic inactivity rises
The September 2023 labour market figures also suggested economic uncertainty deterred employers from taking on new staff, while the economic inactivity rate continued to grow.
Vacancy numbers fell on the quarter for the 14th consecutive period in June to August 2023, down by 6.0% from March to May 2023. The number of vacancies fell in 13 of the 18 industry sectors, with administrative and support service activities, and professional, scientific and technical activities contracting the most.
While the outlook for wage growth has fallen to around 5%, this is still concerningly high if we compare it to typical pre-pandemic rates of 2-3%” – Julia Turney, Barnett Waddingham
The employment rate is 1.1 percentage points lower than before the pandemic. The UK economic inactivity rate was estimated at 21.1%, 0.1 percentage points higher than the previous quarter and 0.9 percentage points higher than before the Covid-19 pandemic. This was mainly driven by an increase in people on long-term sick leave.
James Reed, chairman of recruitment giant Reed, said it has seen a 29% decrease in job postings for the first two weeks of September compared to the same period in 2022, reflecting some organisations’ need to prioritise stability over growth.
“There are also notable variations between sectors when it comes to job postings. Whilst we’ve seen a decline in IT and telecoms and education, other sectors are performing above average, such as banking, strategy and consulting, and medicine, which are historically lucrative industries and demonstrating buoyancy in the current market,” he said.
Adam Myers, head of HR consulting at Southampton-based HR specialists Stellamar, said: “In our experience, the UK employment market is still very busy at the moment, surprisingly so given the pressures many sectors are under.
“Money is the key to everything hiring-related right now, especially when dealing with a younger generation just entering the workplace, many of whom fear never being able to even own a property. It’s crucial that organisations are not only competitive around salary, but spell out what the ‘earnings journey’ will look like for the employee.
“The biggest problem at the moment in the hiring market is organisations being able to fill what are perceived as ‘lower level’ roles. This is specifically the case in sectors such as retail, hospitality and transport.”
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