UK real pay to return to 2007 level in 2017 if inflation remains low
Average real (inflation-adjusted) pay may return in 2007 levels in 2017 if inflation remains low according to a report that was published last weekend. The Resolution Foundation (RF), the UK think-tank, has today followed up with a report on the National Living Wage (NLW), which was proposed by George Osborne, the chancellor, in a budget last July — one in four workers will get a pay rise from the new national living wage according to the research. The impact will be greatest in hospitality, retail and support services.
The analysis finds that around one in four workers are expected to benefit from the NLW — which will initially be set at £7.20 an hour in April 2016 and is expected to rise to over £9 by 2020. The total wage bill is set to increase by £1.5bn (0.2%) in April 2016, rising to £4.5bn (0.6%) in 2020.
The report finds that around 2.9m employees benefitting from the NLW — almost half of those affected — work in industries where the wage bill is expected to increase by 0.6% or less. These include education, health, manufacturing and construction. The Foundation notes that employers in these sectors should typically not see a major increase in costs, though some will still face significant challenges, notably in social care, and the situation will vary for different sized firms.
A further 2.7m employees who are set to receive a pay rise work in hospitality, retail and support services. A far greater proportion of workers in these sectors will be affected — almost half of all hospitality workers will benefit by 2020 — and the increase in their wage bills will be higher. The report finds that hospitality will experience by far the biggest wage bill increase at 3.4% by the end of the decade.
The report finds that the ‘bite’ of the NLW — its value relative to typical hourly earnings — will also vary considerably across sectors. The bite in retail — which is currently 74% — will eventually rise to 88% by 2020.
In hospitality — where the minimum wage bite is already 93% — it is expected to eventually rise to an unprecedented 110%. More than half of all hospitality workers will be paid the NLW or less as a result. The think-tank says that "It is important to note, however, that part of the reason for this is that a high proportion of workers in the sector (around one in three) are under 25 and therefore ineligible for the NLW."
The Foundation says that it is not yet clear how businesses in the most affected areas will respond to the NLW, though it points to past evidence of modest price rises in hospitality and efficiency gains elsewhere, with warnings of job losses often proving to be overstated. It says that improved productivity growth will be essential if the NLW is to be affordable.
The Foundation is calling on the government to set out a clear plan for implementing the new NLW and clarify the role of the Low Pay Commission (LPC) in monitoring progress and identifying areas of concern — a key recommendation of the RF review of the future of the minimum wage.
Real earnings are set to continue playing ‘catch-up’ in the short-term, with pay expected to maintain its recent growth rate, but there are doubts about how long this can continue, according to the Resolution Foundation’s latest pay projection published on Sunday.
The analysis, which forecasts short-term trends in regular (non-bonus) pay ahead of official figures published later this week, predicts that average weekly earnings grew by between 2.7 and 2.8% in the three months to July. This is broadly in line with the figure of 2.8% recorded in April, May and June — the joint fastest level of real pay growth in eight years, and above the pre-crash trend of 2.2%.
The current rate of real wage growth, which is primarily due to inflation being at an historic low, is helping to make up some of the ground lost over the course of the recent six-year pay squeeze. Average pay will return to pre-crash levels in mid-2017 should this growth rate persist.
However the Foundation notes that maintaining the current pace of real wage recovery will be difficult as prices start rising again. It points to the recent Bank of England Inflation Report, which forecast wage growth to remain relatively stable over the remainder of the year, with a return to the pre-crash trend by the end of 2016. The Bank expects modest increases in nominal pay growth to be offset by a pick-up in inflation from its current 0% level.
The Foundation also highlights that even if the current rate of growth continued then pre-crash average wage levels wouldn’t be reached until mid-2017 – meaning a decade of lost pay growth. It adds that it will take longer before the typical (median) wage recovers.
With average earnings still over £110 a week below where they would have been if pre-crisis trends had continued uninterrupted, the Foundation warns that the UK may never recover the ground lost during its six-year pay squeeze.
And while long-term prospects for stronger wage growth ultimately depend on rising productivity, RF research finds that a gap has opened up between pay and output growth over the last 30 years — a process that has accelerated in the last decade.
The report shows that while growing wage inequality initially drove this ‘decoupling’ of pay and productivity growth in the 80s and early 90s, a growing share of employee compensation going to pensions and NI contributions rather than wages has driven it over the last decade. The Foundation says that getting typical wage growth back on trend will therefore require a combination of faster productivity growth and changes in the distribution of employee rewards.
Matthew Whittaker, chief Economist at the Resolution Foundation, said: “Britain’s pay recovery has settled in at a healthy 2.8%, helped along by historically low inflation. After six years of falling real pay, this period of catch-up growth is very welcome for workers. But it may prove short lived once inflation picks up. Even in the optimistic scenario in which wage growth remains above-trend, it will be 2017 before the pre-crisis average pay level is restored — a decade of lost growth. Prospects for stronger wage growth will ultimately rest on getting to grips with Britain’s poor productivity record, and ensuring that these improvements find their way into pay packets.”
Separately, the Financial Times writes today: "Britain does not have a problem with strikes. A right to lay down tools may be enshrined in law, but it is one seldom exercised. For example, manufacturing, which employs 2.5m workers, suffered 12 stoppages last year, and 7,600 working days lost. This amounts to the loss of roughly 0.001% of the labour usually available.
At the level of the whole economy, the loss of 788,000 days to strikes barely registers when set against the 3m to 6m typical in the 1980s, or 130m days typically lost to illness. Yet according to the government, the time is ripe for a serious crackdown on unions’ ability to strike. Among other measures, its Trade Union Bill raises voting thresholds for approving action and makes it easier to hire agency workers to replace those on strike."