The UK faces the risk next year of a return to the squeeze in real pay suffered earlier in the decade as higher prices and a stalling of jobs growth puts living standards under pressure, a thinktank has warned.
The Resolution Foundation – which concentrates on the living standards of those on low to middle incomes – said 2015-16 had been the fastest year of real wage growth since 2001 but said the combination of low inflation and strongly rising employment would not be repeated.
Torsten Bell, the foundation’s director, said 2016 was “getting a bad press” but added: “We may well come to look back at 2016 with fond nostalgia – not least given what 2017 looks set to have to offer. The issue is not that last year was awful, more that it risks being as good as it gets.”
The foundation’s analysis of official ONS data shows that the 3% increase in non-pensioner household incomes in 2015-16 was evenly shared, with all parts of the income distribution seeing growth of over 2%.
Bell said 2014-15 had also been a strong year for real income growth. “Very rapid employment growth coupled with near zero inflation created a solid living standards recovery over the past few years, with the added bonus for low earners of the national living wage more recently.”
He added that the strong recent performance had to be set against the unprecedented squeeze on real incomes during the deep recession of 2008-09 and the years that followed.
However, Bell said neither of the two factors that had caused living standards to rise over the past two years would be repeated in 2017. Employment growth had slowed to a trickle in recent months as the labour market entered a holding pattern in the spring.
“The good news is that employment remains close to record highs at over 75% and firms are by and large not planning on shrinking their workforces,” Bell said. “The bad news is that without further employment growth in 2017 one of the big boosts to household incomes of recent years (more people working and earning) will weaken. That leaves other determinants of income growth to pick up the slack. Unfortunately they look set to do the opposite.”
Bell said ultra-low inflation had been the other factor boosting living standards but that prices were now starting to rise rapidly, with the result that the UK was “on course for fast, significant and repeated falls in real earnings growth early in the new year.
“This earnings freefall means we expect wage growth to fall to around 1% in the three months to January – the slowest real wage rises in over two years. With inflation forecast to continue rising we project real earnings growth hovering around, or even below, zero for the second half of the year. A return to the pay squeeze we thought we had left behind in 2014 is a real risk.”
