Underlying wage growth in UK lower than headlines, think-tank warns

Underlying wage growth in the UK is weaker than official stats show as wage increases were boosted until the end of the furlough scheme, according to a think tank.

The Resolution Foundation says wage increases are similar to pre-pandemic levels despite rising prices, reducing the need for the Bank of England to hike interest rates to stem inflationary pressures.

Nominal wages without bonuses increased at an annual rate of 4.1 percent in January, compared with an average of 2 percent in the decade before the pandemic, according to data from the Office for National Statistics.

But the Resolution Foundation’s analysis, released on Saturday, shows official numbers were pushed up by the end of the furlough program in September.

Furloughed workers received at most 80 per cent of their usual wages, boosting growth rates when returning to full wages.

After adjusting for furlough measures and factors such as the rise in the number of low-wage workers as hospitality and retail reopen, underlying wage growth averaged just 2.7 percent in 2021, the same as in pre-pandemic 2019.

This is despite Inflation now at a 30-year high, suggesting that workers are being hit by rising consumer prices. The think tank calculated that for the final quarter of 2021, about 1 percentage point of wage growth came from furloughed workers returning to full pay.

Nye Cominetti, senior economist at the Resolution Foundation, said headline numbers “give a misleading picture of wage growth. Given the tightness of the labor market, wage growth is best seen as normal rather than extraordinary, taking into account the impact of the end of the furlough scheme,” he added.

The line chart of annual percentage change shows that underlying wage growth in the UK is weaker than headlines

Aware of the issues, the ONS warned that “interpreting average earnings data is difficult at the moment”. The impact of the furlough scheme is fading as the number of furloughed workers has declined over the past year, but will continue into the autumn as growth is calculated this year compared to 2021.

That was “enormously important,” Cominetti argued the pace of wage growth is a key factor for the Bank of England in setting monetary policy, particularly at this time when the country is experiencing exceptional price pressures.

Policymakers fear that high inflation expectations and a tight labor market will trigger a wage spiral that could lead to a prolonged period of high inflation.

The UK labor market is indeed short of workers. The unemployment rate is near record lows, the unemployment-to-vacancies ratio is the lowest on record and workers are voluntarily changing jobs at a record high.

However, the Resolution Foundation’s findings show that despite much higher price pressures, underlying wage growth is no faster than it was in 2019 when the labor market was in similar conditions.

Similar modeling by the Bank of England, but based only on the private sector, showed higher underlying wage growth than the Resolution Foundation. In both analyses, however, “there is still no evidence of wage growth accelerating to match rapidly rising prices,” the think tank noted.

The Resolution Foundation also estimated that nominal wages would increase by an average of 5 percent in 2022.

This means that “with an expected inflation rate of 8 percent in the coming months, most workers’ real wages will fall in real terms – even with a 6.6 percent increase in the minimum wage – which will further depress living standards in the coming months.” he said to Cominetti. Underlying wage growth in UK lower than headlines, think-tank warns

Adam Bradshaw

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