Yahoo Finance Real UK wages rise as output per worker falls
UK workers are earning more while producing less, new data has shown, however this is affordable thanks to falling import prices and pension deficits.
According to the Resolution Foundation, falling pension costs and import prices have temporarily severed the link between productivity and wage growth in the UK, allowing real wages to rise without putting further pressure on inflation.
However, the foundation warned in its latest Macroeconomic Policy Outlook that it will not last.
It comes as real average weekly regular earnings have grown by 2.1% in the year to February. This has helped to recover some of the ground lost from the sharp pay squeeze in recent years. For example, real average weekly earnings fell by 2.7% in the 12 months to October 2022.
Real wages have grown as much over the past 12 months as they have over the previous 16 years (2.1% between February 2008 and February 2024), highlighting the scale of Britain’s long-term pay depression.
"Over the long term, real wage rises are driven by productivity growth. However, real wage growth can outpace (or fall behind) productivity rises over the short term," the report said.
"Such periods often result in firms being forced to pass on higher wage costs via higher prices, which is why unproductive wage growth is a huge inflation worry for monetary policy makers."
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The report highlighted two key reasons why the UK’s unproductive wage growth is affordable for firms, and isn’t fuelling inflation.
First, employer social contributions, such as payroll taxes and pension contributions, add a fifth, on average, to a firm’s wage bill. Changes to these contributions can affect how much of a firm’s wage expenditure actually reaches an employee’s pay packet.
These contributions fell by the equivalent of 2.4 per cent of wages between Q3 2020 and Q4 2024, or £20bn, driven by reduced contributions into firms’ defined benefit (DB) pension schemes.
Second, the terms of trade shock that the UK experienced during the cost of living crisis, where surging import prices fuelled inflation and reduced our purchasing power, has started to unwind.
Over the past year import prices have fallen by 2.9%, compared to a 0.1% fall in export prices. This terms of trade boost has given importing firms and consumers more in terms of the real value of their wages.
But while this welcome pay recovery has been affordable, the Resolution Foundation cautioned that it is unlikely to last as pension contributions cannot continue to fall indefinitely, and they may be offset by the freeze in employer national insurance thresholds.
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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 two per cent. 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.”
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