It is meant to be a fundamental economic rule that when unemployment falls, wages rise. Companies have to offer higher pay as competition for new staff intensifies – or just to keep existing workers from jumping ship.
Today, joblessness is close to pre-pandemic lows. But pay isn't keeping up with prices, even as the threat of double-digit inflation makes everyone worried.
Official figures on Tuesday showed real earnings fell by the most in at least 20 years in the three months to June. The 4.1pc drop compared with a year earlier means the average British worker is facing two decades of lost pay growth.
Double-digit inflation is just around the corner, which will eat further into pay packets. Despite this, wage growth shows no sign of picking up. It is being held back by fears of recession and soaring costs for businesses as well as their staff.
Chief executives are noticing a "nervousness" in the air that has changed the conversation on pay, as employees start to worry about the future of their jobs.
"I have noticed fewer people asking for pay rises," says the boss of one major law firm. "There is less noise [on pay] I believe because there are less opportunities to transfer to other positions.
“I have seen a nervousness amongst those working in the City about their positions – lots are returning early from holidays so that they are seen and less subject to cuts. This may also mean a decline in those desperate to work from home.”
One banker told the Telegraph: “I’m currently on holiday and spending half the time worrying about whether I’ll have a job to come back to.”
Low unemployment and a shortage of workers is still pushing up pay in nominal terms. But inflation at a 40-year high means workers' are suffering steep cuts in their purchasing power.
Average weekly earnings rose by 5.1pc before inflation in the three months to June compared with a year earlier. Much of this headline rise is being driven by bonuses. Retailers, hotels and restaurants have joined investment banks and accountancy firms in offering one-off payments to help cling onto staff.
Xiaowei Xu, senior economist at the Institute for Fiscal Studies, highlights: "Average bonuses as a share of total pay was 6.8pc in the second quarter of this year, up from 5.7pc in Q3 2019."
The number of job ads offering a bonus rose from 13.6pc in Jan 2021 to 16pc this July, according to job search engine Adzuna. The Bank of England has said around a quarter of companies have, or are considering, awarding a bonus this year.
"The benefit of a one-off bonus is that it’s a one-off cost for this year which doesn’t roll over into following years,” says one publishing executive involved in crunch meetings about wages this week.
“We don't want to do anything rash at this stage. I’m tempted to wait until the end of the year when we have a better idea of what’s going to happen [with inflation], as if we do pay rises now we’ll have to factor extra costs into our budget – most costs are staff.”
Neil Carberry, chief executive of the Recruitment and Employment Confederation (REC), says employers in general are becoming more careful when it comes to offering bumper pay rises.
He said: "Earlier this year lots of staff were gung-ho about moving jobs and chasing the money. But in the last couple of weeks more people are sitting tight because they're thinking about the economic outlook."
Mr Carberry added: "Companies also have to think about how those rises will impact the people already working for them," hinting at possible resentment towards new joiners with huge pay packets.
Many boardrooms are split on the issue. Some fear that hiking salaries by too much could attract people for the wrong reasons, leaving their business trapped with high costs and uninterested staff. Others worry that a one-off bonus won't be enough to keep people in the face of soaring bills.
Then, there is the question of whether businesses can afford raises. Having agreed to pay higher salaries earlier this year, the manager of one pub chain says he's now facing the prospect of energy costs going from £330,000 to almost £1m from October.
Rising energy bills are the main driver of what the Bank of England predicts will be the longest recession since the financial crisis, forecast to start at the end of this year. Eonomists believe pay demands will start to moderate as this threat looms.
Martin Beck, chief economic adviser to the EY ITEM Club, says: “Every recession we have had since the 1990s has seen a shock where pay trends down and has stayed lower permanently.
“People were scared into keeping their pay demands lower because of the experience of unemployment, or globalisation, offshoring – recessions shock people and they never get their confidence back to demand pre-recession pay growth.”
Difficulty finding workers could be easing too. The removal of Covid restrictions has prompted a renewed influx of foreign workers. Samuel Tombs at Pantheon Macroeconomics notes that the recent rebound in the UK workforce has been driven by an increase in immigration.
"Covid [is] no longer influencing migration decisions and more UK businesses now have sponsor licences, which mean they can lawfully employ non-UK nationals,” he said.
More people across the UK will also seek work as the cost of living crisis starts to bite even harder over the winter.
This is already showing up in the data. The number of people with a second job currently stands at 1.2m and is on the rise, while a record rise in the number of over-65s in employment this quarter suggests many more are putting off retirement.
But as Mr Carberry at the REC highlights, money isn't always everything.
"A couple of months ago I visited a couple of similar warehouses along the A5 corridor [that connects the M1 with the M6]," he recalls. "One place paid £1 more per hour than the other. But staff turnover was greater at the place with higher pay. The difference? The managers [who offered lower pay] were better, the toilets were clean, and they had a canteen."
For employers debating whether to hike pay or raise wages, perhaps there is a cheaper option after all.