In a welcome surprise for many, the UK has experienced a rapid increase in wage growth, reaching speeds not seen for nearly two years.
Data from the Office for National Statistics (ONS) paints an encouraging picture for workers, with average weekly earnings (excluding bonuses) leaping from 6.7% to 7.2% in the three months leading up to April 2023.
The acceleration in regular pay growth is the fastest since June 2021 and a record high outside the pandemic context, according to the ONS.
The Current State of UK Wages
In April, a rise in the national minimum wage came into effect, impacting the lower end of the pay scale.
Simultaneously, private sector employers rolled out new annual pay awards, adding an extra boost to pay packets across the country as we started the new tax year.
The Impact of Wage Growth
Beyond the immediate benefits for employees, wage growth often indicates brewing inflationary pressures within the economy.
These figures will undoubtedly pique the interest of the Bank of England’s rate-setters, who are ever vigilant for signs of strengthening inflation.
When wages rise robustly, the result is often a corresponding inflation increase as businesses pass on increased labour costs to consumers.
However, real wage growth, which takes into account inflation, remains in the negative due to the double-digit inflation experienced in February and March.
A Look at the Labour Market
Despite positive wage growth, UK labour market statistics paints a somewhat different picture.
The unemployment rate inched up by 0.1 percentage points to 3.8% in the three months to April, driven by individuals who had been out of work for over a year.
Despite this slight increase, the jobless rate still managed to stay below the 4% forecast by economists.
The UK’s labour market has maintained a healthy level of activity over the past year, resisting pressures from rapidly rising interest rates as businesses persist in their hiring and retention endeavours.
The quantity of available roles, although dwindling since its record peak last summer, remains high with over a million positions available.
Anticipated Moves from the Bank of England
As we approach the Bank of England’s next interest rate decision on June 22, all eyes will be on the Monetary Policy Committee (MPC).
Current speculation leans towards an increase in borrowing costs by another quarter of a percentage point to 4.75%.
The enduring high inflation rate, which stubbornly outpaced the MPC’s projections, reached 8.7% in April.
Labour Force Inactivity and Its Impact
An interesting metric to watch is labour force inactivity, which measures the percentage of the population not actively seeking employment. This figure dipped by 0.4 percentage points to 21%.
The number of people attributing long-term sickness as their reason for inactivity hit a record high between February and April.
The pandemic has had a severe impact on labour force participation in the UK, dramatically reducing the supply of workers and giving existing employees increased bargaining power for better pay deals.
The Issue of Early Retirement
Bank’s Monetary Policy Committee member Catherine Mann recently highlighted the risk of early retirees stoking intergenerational tensions.
Younger workers could bear the burden of their elders’ retirement through higher taxes necessary to fund public services.
This tension, in addition to the current wage growth and labour market status, presents a complex tapestry for policymakers and businesses alike to navigate.
Summary
As we advance through 2023, the UK wage growth trend and its potential ramifications on the broader economy will be a story to watch closely.
The Bank of England’s upcoming decision will undoubtedly have far-reaching effects, making it a pivotal point in this ongoing narrative.
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