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UK earnings growth expected to hit highest in two decades in 2021

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Visitors admire St.Paul's Cathedral from the restaurant floor of the Tate Modern gallery in London March 15, 2007.  REUTERS/Alessia Pierdomenico   (BRITAIN)  Also see image GM1DVMTMKPAA
Visitors admire St.Paul's Cathedral from the restaurant floor of the Tate Modern gallery in London March 15, 2007. REUTERS/Alessia Pierdomenico (BRITAIN) Also see image GM1DVMTMKPAA

New research has shown that average weekly earnings (AWE) in the UK are expected to grow 5.7% in 2021, the highest level in more than two decades.

According to the National Institute of Economic and Social Research (NIESR) wage tracker this will mean 3.6% growth in real terms, after 1.8% (nominal) and 0.8% (real) growth in 2020.

NIESR said that the strength of AWE is explained by high bonuses, robust public sector pay growth and a cyclical recovery exaggerated by compositional effects and increased weekly average hours due to the end of furlough.

While there is currently no generalised acceleration in settlement pay, there is evidence of higher starting salaries for new recruits, particularly in sectors experiencing labour shortages, such as hospitality. 

The record level of vacancies of 1.2 million reported earlier on Tuesday by the ONS suggests a persistent mismatch between labour force skills and the post-pandemic pattern of labour demand. The labour market recovery is U-shaped, with the number of payrolled employees in September reaching a record 29.3 million. 

The growth rate in average weekly earnings including bonuses in Britain decreased in the three months to September to 5.8% compared to a year ago, down from 8.8% in the three months to June. This is in line with what was forecast last month and reflects a smaller impact of base effects.

Read more: UK job vacancies rise to record high of 1.2 million

"We forecast average weekly earnings to decelerate further to 4.1% in the fourth quarter as the base effect fully dissipates," NIESR said in its release, citing inflation as a reason for close to no earnings growth next year if there are no significant increases in underlying wage growth.

"Unless there is an acceleration in underlying wage growth, rising inflation will reduce any real wage gains next year, and households’ income will be further squeezed by the rise in national insurance contributions," said Cyrille Lenoël, principal economist at NIESR.

Data on Tuesday showed eight out of 10 people who became unemployed during the pandemic have returned to employment, but some of them in temporary or zero-hours contracts.

A more worrying side of the labour market recovery is that participation is staying at lower levels compared to pre-pandemic, NEISR said. While the number of unemployed has decreased, the number of active people has continued to decrease since December 2020. 

The number of active people is now 460,000 lower than in February. The people who left the active labour force will need to be attracted back by jobs with better wages and working conditions.

Watch: UK jobs and payrolls hit record highs as staff shortages roll on

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