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UK pay growth still below pre-COVID levels despite rise

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·4-min read
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pay
Nominal pay grew 4.1% in the year to January 2022, compared to an average of 2% in the decade prior to the pandemic. Photo: Dominic Lipinski/PA Images via Getty

Economists have said that pay growth in the UK was "normal rather than exceptional" once the end of the furlough boost was accounted for.

A new analysis from the Resolution Foundation suggests a tight labour market has driven underlying nominal wage growth back up to, but not beyond, pre-pandemic levels.

The report argues that despite fears the crisis would create lasting unemployment, the UK labour market is tight on all measures, with low unemployment, high vacancies and record-high job moves. This is driving fast nominal wage growth as employers raise pay in order to attract and retain workers, it said.

It notes that while the number of low-paid workers rose in recent months as sectors such as hospitality and retail re-opened, stronger employment growth in some higher-paid industries in the last two years have meant that headline average earnings levels remain elevated compared to pre-pandemic.

"Given the tightness of the labour market, pay growth is best seen as normal rather than exceptional, once the impact of the end of the furlough scheme is taken into account," said Nye Cominetti, senior economist at the Resolution Foundation. "In fact, underlying wage growth is similar to what we were seeing before the pandemic hit."

Nominal pay grew 4.1% in the year to January 2022, compared to an average of 2% in the decade prior to the pandemic.

Read more: Skills shortfall and inflation drive up UK wages to record highs

However, the study found that these headline wage growth figures don’t reflect the full story. Underlying wage growth, which adjusts for average pay changing due to workers’ characteristics, averaged 2.7% in 2021, the same as on the eve of the pandemic in 2019, Resolution Foundation said.

According to the think tank, the impact of the Job Retention Scheme (JRS) on headline growth figures will last long after the furlough payments ended.

It argues that the JRS potentially bumped annual pay growth by around a percentage point in the first quarter of 2022 with the effect not ending until the Autumn.

This is in part due to the JRS suppressing wages, as 11.6 million employees received 80% or less of their usual pay. When the JRS ended in September 2021, the majority of furloughed workers moved back to full pay, accounting for nearly a quarter of the annual wage growth in the last quarter of 2021.

However despite the increase the report warned that the real wage squeeze will get deeper over the course of this year, with a return to real wage growth is not likely before mid-2023.

"The forecast of nominal wage growth of 5% throughout 2022 won’t be sufficient to overcome inflation of 8% this spring, meaning most workers’ earnings will fall in real terms, even accounting for last Friday’s 6.6% rise in the minimum wage," the report said.

Read more: BT hands workers biggest pay rise in 20 years but unions reject offer

In its Labour Market Outlook Q1 2022 the Reolution Foundation examined how strong nominal wage growth statistics should be interpreted.

"Exactly how strong that wage growth is matters hugely, given the impact on living standards and concerns that exceptionally fast wage growth might make it difficult for the Bank of England to reduce inflation without causing unemployment to rise," the think tank said.

The BoE is keeping a close eye on the labour market for any signs of overheating, policymakers have said while the economy is not at that stage now they are watching carefully for those risks.

The UK central bank came under fire in February after governor Andrew Bailey urged Brits to limit their pay bargaining to prevent the country sliding into a wage-price spiral, with annual inflation already running at a 30-year high and predicted to reach 8% this month. This is more than triple the BoE target of 2%.

A separate analysis showed UK firms hiked wages at the fastest rate in 25-years as employees were handed bargaining power thanks in part to soaring inflation and a skills gap.

Figures from KPMG and the Recruitment and Employment Confederation show the average salary awarded to new permanent joiners climbed more last month than at any time since records began in October 1997.

Watch: How does inflation affect interest rates?

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