By Glen Jenkins, CIPD Reward Examiner
We all know that the UK economy is recovering slowly but economists warn of not running too fast too soon.
In rewards we have an example of one of the core problems in that according to ONS (August 2013 figures), in the private sector the average growth in wages including bonuses was 0.7%. With inflation at 2.7%, the private sector is still struggling to maintain its employees level of income let alone improve their prosperity. To be sure, the private sector would like to increase pay for its employees but what is stopping it? ONS again commenting on the profitability of the UK private sector (non-financial corporations) stated "profitability, as measured by their net rate of return, was estimated at 11.4% in quarter two 2013, about the same as the typical level experienced in the last year and a half but lower than the levels experienced in 2011." Pay awards in the private sector are not matching inflation and according to XpertHR's review this is likely to continue at least into 2014. In short the private sector generally is unable to pay for wage rises above inflation.
The decline in real wages has now been sustained for nearly four years and this is not only because of pay freezes in the public sector but also because of private sector restructuring following the crisis. Indeed the trends are similar in both private and public sectors. Moreover, this is already the longest period since the 1930s that wages have been below inflation. However, in the 1930s when wages fell, prices fell faster, and wages recovered much more quickly.
The fall in real wages provides a good explanation as to why the UK recovery is so slow and why prosperity is still a long way off. With lower real incomes people tend to reduce the volume of goods and services they purchase as is the case now in the UK. It also has an impact on growing inequality in the UK.
Understandably perhaps, the TUC has called for a pay rise but they are not alone. Perhaps reacting to the feel good factor of their own potential pay rise, some government politicians have thrown caution to the wind and argued that private sector workers now deserve pay rises to “share in the success” of the recovering economy but that public sector workers do not.
These requests are unlikely to be met in the short term but clearly if the fall in real wages continues we are in deeper waters than we thought.
Attend the Reward Forum: Reward Trends, Challenges and Opportunities, Thursday 28 November
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