Experts have warned that bumper bonuses for City bankers are driving a bigger wedge between the higher paid and those on lower incomes.
Analysis from the Institute for Fiscal Studies (IFS) suggests that the bonus culture adopted by UK employers is "exacerbating" the trend towards greater earnings inequality.
Xiaowei Xu, a senior research economist at the IFS, said average earnings in the finance industry were up 25% in March 2022 versus December 2019, before taking account of inflation, compared with a 15% national average earnings increase.
Earnings for lawyers, IT consultants and accountants were 21% higher during the same time period.
Xu said the top 1% of earners saw a sharp increase in pay between February and March this year of 2.3% in cash terms, compared with 0.5% for the median earner and just 0.1% for the bottom 10% of earners.
This marks a reversal of pre-pandemic trends, where the lowest-paid saw the biggest pay rises, according to the IFS.
"This exacerbates the trend towards greater earnings inequality that we’ve seen since the start of the pandemic – in contrast to the years before the pandemic, when the lowest-paid saw the biggest pay rises," she said.
"The latest jump seems to reflect a rise in bonuses, and it remains to be seen whether this trend continues. If so, for all the talk about labour shortages driving up low pay, the legacy of the pandemic may be greater earnings inequality."
The institute added it was the first time since the pre-financial crash that it has seen a "massive increase in earnings inequality" since the end of 2019, led by "huge" pay rises in the banking sector.
A lot of focus on average earnings today.
The really big story though is that the period since end 2019 has seen a massive increase in earnings inequality. Led, of course, by huge pay increases for the richest bankers.
First time we’ve seen this since pre financial crash https://t.co/TirxKQPnuN
— Paul Johnson (@PJTheEconomist) May 17, 2022
New data from the Office for National Statistics released on Tuesday, showed UK wages continued to fall further behind the rate of inflation in March.
Average earnings excluding bonuses fell by 1.9% compared to a year earlier, the biggest decline since 2013, while unemployment was 3.7%, its lowest rate since 1974, for January to March 2022.
Although wages excluding bonuses jumped 4.2% in the first quarter, double the 2.1% average in the decade before the pandemic, it was being offset by runaway inflation and a surging cost of living.
Average total pay growth for the private sector was 8.2%, but just 1.6% for the public sector. The finance and business services sector showed the largest growth rate at 10.7%, partly thanks to strong bonus payments.
Tuesday's jobs numbers showed the number of people out of work was higher than the level of vacancies, for the first time since records began, after a 0.3% percentage point fall in the unemployment rate to 3.7%.
The decline in employment and rise in earnings add to pressure on the Bank of England to hike interest rates further in an effort to tame inflation exacerbated by the war in Ukraine and surging energy prices.
Earlier in May, the BoE increased interest rates for the fourth consecutive time, from 0.75% to 1% – the highest level in 13 years.
IFS's analysis comes ahead of Wednesday's annual inflation figures for April, with Britain's consumer price inflation expected to hit a record high of more than 9%. UK inflation hit a 30-year high of 7% in March, and the BoE governor Andrew Bailey has forecast it will rise as high as 10% this year, five times its 2% target.
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