• Real pay falls for first time in two years

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  • 16 Mar 2017
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Wage growth slowing despite high levels of employment, and experts predict decline will continue

British workers have suffered a decrease in their real pay for the first time in two years, according to new figures from the Office for National Statistics (ONS). Despite Britain’s unemployment rate falling to its lowest level since 1975, inflation has outpaced wage growth, sending average pay into decline.

Total pay including bonuses was 1.7 per cent higher in January 2017 compared with January 2016 – below the 1.8 per cent headline rate of inflation. It is the lowest rate of year-on-year wage growth since February last year. Total pay growth slowed sharply from 2.6 per cent to 2.2 per cent in the three months to January, and real pay growth – adjusted for inflation – was just 0.7 per cent, the weakest in more than two years.

The fall in wage growth is expected to contribute to mounting pressure on household finances through 2017, as the sharp drop in the value of the pound since the Brexit vote increasingly feeds through to higher prices for consumer goods. Household budgets are already under strain from a spike in supermarket prices, and inflation is expected to rise to about 3 per cent by the end of the year.

“With the unemployment rate last lower in summer 1975 and the employment rate still at a record high, the labour market remains robust,” said David Freeman, senior statistician at the ONS. “But smaller wage increases and higher inflation mean the growth in real earnings has slowed sharply in recent months.”

Ian Brinkley, acting chief economist at the CIPD, warned that the ONS figures flagged “less positive underlying trends” in the labour market. “First, the number of migrants in work continues to edge down, especially those coming into the UK from the A8 countries, suggesting that continuing uncertainty about the future status of EU citizens in the UK is already having an impact,” he said.

“Second, average earnings growth on regular pay has slowed, suggesting that real wages are falling as inflation increases. This could be a sign that some employers are seeking to offset the impact of the introduction of the apprenticeship levy and increases to the national living wage next month through lower basic pay awards. With less chance of a pay rise and money not going as far when paying for the weekly shop and bills, UK workers will need to watch their spending carefully.

“Third, it looks as though employment growth is becoming increasingly polarised, with only full-time permanent employment and self-employment showing any net growth. This could be down to squeezed wages forcing workers to look for more hours, or the impact of a slowdown in hiring by sectors traditionally offering part-time roles, like retail and the public sector. If this trend continues, it may reduce employment options for some people in the future.”

The ONS statistics coincided with the latest earning outlook report from the Resolution Foundation, which suggested a real wage decline has already begun in the public sector, and is set to continue until at least 2019.

With public sector pay rises limited to 1 per cent for the next three years, real pay is forecast to continue to fall for the rest of this decade, the report warned. Average real pay in the public sector is likely to drop below 2004-05 levels by 2020 – although the lowest earners will be protected because of increases in the national living wage.

A separate report from the Institute for Fiscal Studies this week suggested that public sector employees were still paid more at present than their private sector counterparts, but that this would change significantly before 2020.

“While rising inflation is applying the brakes to real pay growth across the board, the outlook for public sector pay looks particularly weak,” said Adam Corlett, economic analyst at the Resolution Foundation. “Pay is now actually falling, and worst is expected to continue for the rest of the parliament, with levels at the end of the parliament dropping back to levels last seen in 2004.”

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  • Real pay has been stagnant and falling since the Tories got into power, under the guise of austerity and way before a brexit vote.