Pay excluding bonuses continued to grow at a record rate in March to May 2023, but real-terms pay once again fell owing to high inflation, as both the chancellor and the governor of the Bank of England called for wage restraint.
The July 2023 labour market figures from the Office for National Statistics (ONS) showed that growth in employees’ regular pay, which does not include bonuses, was 7.3% compared with the same three-month period a year ago – the highest growth rate on record. In February to April 2023, this growth rate was 7.2%.
Total pay including bonuses also grew at a significant pace, 6.9%. However, in real terms (adjusted for inflation), growth in total and regular pay fell on the year, by 1.2% for total pay and 0.8% for regular pay.
Bank of England governor Andrew Bailey and chancellor Jeremy Hunt told delegates at the annual Mansion House dinner that wage restraint was needed to curb high inflation.
Wage restraint
The chancellor said: “That means taking responsible decisions on public finances, including public-sector pay, because more borrowing is itself inflationary.”
Bailey said that nobody wanted “to see unemployment higher or growth weaker” but “both price and wage increases at current levels are not consistent with the inflation target”, which is 2%.
Unions fear the government will use high inflation as a reason to reduce the level of public-sector wage increases from those recommended by various pay review bodies.
TUC general secretary Paul Nowak said: “The government must stop scapegoating workers for its failures. Wages are not driving inflation – they are not even keeping up with it.
“In the public sector and lower-paid private sector industries, pay is even further behind. The Bank of England’s own data shows that nominal pay gains are being driven by the very highest earners.”
Ben Harrison, director of the Work Foundation at Lancaster University, said the post-pandemic recovery risks being derailed by high inflation and sickness absence.
“While high nominal pay growth should be good news, workers are facing the 18th consecutive pay drop on record. With the cost of a typical two-year fixed mortgage now close to the mini-Budget peak, and government refusing to commit to meet public sector pay recommendations this year, millions of workers across the UK continue to face significant cost-of-living challenges.
“Despite the governor of the Bank of England recommending restraint on wage increases, this month’s statistics suggest that employers must offer competitive terms and conditions to retain and recruit staff.”
To achieve its commitment to halve inflation, Harrison said the government must accelerate efforts to support those who are on long-term sick leave. This should include strengthening job security, introducing a right to flexible working from day one, and improvements to statutory sick pay, he said.
The government must stop scapegoating workers for its failures. Wages are not driving inflation – they are not even keeping up with it” – Paul Nowak, TUC
The labour market figures also showed a monthly decrease in the number of employees on payrolls in June, down 9,000 on the revised May 2023 figure.
The number of economically inactive people decreased by 0.4 percentage points compared with the previous quarter, largely driven by people looking after their family or home returning to work and by retirement. However, the economic inactivity rate, 20.8%, is still higher than that seen before the pandemic.
There was a slight decrease in the number of people inactive because of long-term sickness but the unemployment rate, now at 4.0%, increased by 0.2 percentage points compared with the previous quarter.
Loosening labour market
Vacancies fell for the 12th consecutive quarter. In April to June 2023, the estimated number of vacancies fell by 85,000.
Jonathan Boys, labour market economist for the CIPD, said: “A familiar pattern is emerging: high nominal pay rises, accompanied by real-terms pay cuts due to high inflation… This dynamic will worry the Bank of England who fear a wage-price spiral, but for individuals, it’s cushioning the blow to living standards.
“Today’s figures are typical of the post-pandemic period. Unemployment, though increasing slightly, remains low. One in five people are economically inactive, meaning they are not seeking and available to work, and a large part of the recent increase is due to long-term sickness.”
Jack Kennedy, UK economist at Indeed, said: “While the labour market is gradually loosening, it’s still one of the tightest of the last 20 years with just 1.3 unemployed people per vacancy. That’s sustaining wage growth at a rate that’s incompatible with the Bank of England’s 2% inflation target.
“The key question for the [Bank of England’s] Monetary Policy Committee is whether the labour market is cooling fast enough to bring down wage growth without needing to bring about a recession through further monetary policy tightening.”
Kennedy said Indeed had seen signs of a weakening in competition for hires. “For example, the share of job postings on Indeed offering signing bonuses has dropped to less than 0.8% from a peak of 1.1% last November,” he said.
“Lower recruiting intensity could remove some of the heat from wage growth as headline inflation falls back over the coming months. That could ease some of the pressure on Threadneedle Street, but the MPC will need to see evidence of moderating wage growth sooner rather than later to dissuade them from further, and perhaps substantial, rate hikes.”
Tania Bowers, global public policy director at the Association for Professional Staffing Companies, noted that many sectors were still seeing significant staff shortages.
“Sectors including technology, healthcare and education are still struggling to find the talent needed to meet demand. And while the number of working days lost due to labour disputes fell in May, the fact that this remains above 100,000 lost days in sectors where skills shortages are still rife is a concern,” she said.
While we don’t expect there to be an overnight solution to the skills crisis, we believe there isn’t enough focus on sustainable skills growth in the UK.”
Neil Carberry, chief executive of REC, said: “The labour market has softened since last summer, but overall demand remains high. This shows underlying need to hire among businesses despite their concerns about inflation, interest rates and weak economic growth.
“Sustainable wage rises require economic and productivity growth, and affordable access to capital for businesses. These should be priorities. Government needs to focus on how we get investment going to drive growth. Part of that is policies that deal with labour shortages in the medium-term, across childcare, transport, skills and immigration.”
Additional reporting: Rob Moss
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