Bank of England concerns over the high level of pay awards are likely to be eased in the coming months as wage settlements fall in response to a tumbling annual inflation rate, a thinktank has said.
The Resolution Foundation said recent strong growth in earnings was primarily caused by a sharp increase in the cost of living, with workers trying to prevent their living standards being eroded.
In a study published to coincide with the release of official labour market figures on Tuesday, the Resolution Foundation said employee perceptions of inflationary pressure were more important to wage growth than recruitment difficulties faced by firms.
Inflation peaked at 11.1% in October 2022 but fell from 6.7% in September to 4.6% in October.
Hannah Slaughter, a senior economist at the thinktank, said: “Pay growth reached a record high of about 8% last summer. This has offered some workers respite from cost-of-living pressures, but by keeping inflation higher for longer it risks making the crisis harder to end.
“Economists often point to the tightness of the labour market as a key driver of wage growth. But while true, its effect is relatively small and takes time. Instead, workers’ views on cost of living pressures have had a far bigger effect on pay rises.”
Although the Bank of England has cited strong earnings growth as a reason for adopting a cautious approach to cutting interest rates, the Resolution Foundation said there were already signs of wage settlements coming down. The typical pay settlement had dropped from 6% to about 5% since the start of 2023, while the monthly increases in wage growth had halved from an average of 0.8% between January and May to 0.4% a month between June and September.
Slaughter said: “The big recent fall in inflation should ease the pressure on pay settlements, and help to bring about more normal wage rises and price increases next year. Ultimately, Britain needs to get back to delivering productivity-based pay rises, rather than inflation-inducing ones.”
Figures released by the Office for National Statistics on Monday showed the UK had a long tail of relatively unproductive firms, with just over 70% of workers employed by companies with labour productivity below the mean.
The ONS found that the gap between the most productive firms and the rest had increased over the past quarter of a century. In 1997, workers in the 10% most productive firms produced 3.16 times as much output as workers in the median, but in 2021 they produced 3.68 times as much.
Business dynamism – measured by the rate at which jobs are created and destroyed – was currently weaker than it had been before the 2008 global financial crisis, the ONS said.
