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Link between productivity and wage growth temporarily severed – think tank

The link between productivity and wage growth has been temporarily severed because of falling pension costs and import prices, according to a report.

The Resolution Foundation said the development has allowed real wages to rise without putting further pressure on inflation.

The think tank said the “unproductive wage growth” will not last.

The UK has seen a pay recovery, in which real average weekly regular earnings have grown by 2.1% in the year to February, said the report.

The recovery is all the more unlikely given that productivity fell by 0.6% over the same period, said the foundation.

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Greg Thwaites, research director at the Resolution Foundation, said: “After 16 years of wage stagnation, real pay packets in Britain are growing again at a healthy 2%.

“This welcome turnaround is all the more remarkable given that output per worker – the ultimate driver of rising wages – has actually fallen.

“Britain’s recent real wage recovery is largely down to the unwinding of trends that caused pay packets to shrink during the cost-of-living crisis.

“Falling import prices have boosted our purchasing power, while rising interest rates have allowed firms to redirect pension deficit contributions into pay packets.

“But while this welcome real wage recovery has been affordable so far, it won’t be in the future. Unless productivity picks up, wage growth will peter out, or pay rises will simply be passed on through higher prices and prolong our inflation problems.”