UK earnings growth remains sluggish despite record employment highs

UK wage growth slowed to its weakest level in seven months, official data showed on Wednesday, increasing the pressure on consumers as inflation rises.

Unemployment improved with 39,000 more people in work in the period to the end of February, though the headline unemployment rate remained at 4.7%.

While employment was up by 39,000 in the three months to February to 31.841 million, this is actually down from a record high of 31.854 million in the three months to January – so there are some signs that the labour market may now be starting to lose momentum

More importantly, growth in average weekly earnings excluding bonuses slowed to 2.2% in the three month period compared to the same period a year ago, down from the 2.3% rate announced a month ago but higher than the 2.1% consensus forecast.

On a single-month basis, pay growth fell back to 1.9% from 2.2% in January.

So, despite the tightening of the labour market, the pressure is not feeding through to wages and means growth remained below the 2.3% rate of CPI inflation for a second month.

Including bonuses, average wages rose 2.3%, accelerating from 2.2% a month before and on a single month basis, annual growth in average weekly earnings picked up from 2% in January to 2.9% in February but this jump was driven entirely by an unusually low level of bonuses in the financial sector a year ago.

A more timely unemployment measure of the March claimant count showed a fall of 25,500 to 765,400, the Office for National Statistics said, with the claimant count rate of 2.2% up from 2.1%.

The ONS said strong demand for labour was translating into a shift from part-time to full-time employment, and an increase in the average hours worked per week by both full time and part-time employees, with the share of part-time workers declining to 26.5%, the lowest since October 2009, but still above its pre-crisis average of 25.5%.

Vacancy numbers increased by 2.1% to 767,000 between the last quarter of 2016 and the first quarter of 2017, the highest level on record.

“A joint record employment rate and a new record high for the number of vacancies point to continued strength in the labour market," said ONS senior statistician David Freeman. "However, higher inflation, coupled with subdued earnings increases, means that the real growth rate in pay has tailed off to just above zero.”

Perfect storm for consumers

With households being caught in a "perfect storm" of rising inflation and slowing labour income growth, economist Sam Tombs at Pantheon Macroeconomics said.

"The continued weakness of core wage growth bolsters the view of the majority of MPC members that interest rates do not need to rise this year in order to combat inflation," he said.

Paul Hollingsworth at Capital Economics said struggles of underlying wage growth to keep pace with inflation "is another reason to think that household spending will slow this year" but while wage growth remained subdued, he doubted that the country would be hit by the same level of erosion of households’ spending power seen from the major depreciation of sterling in 2008, when the rise in inflation was exacerbated by a pick-up in commodity prices and a series of VAT hikes.

"We remain optimistic that the decline in labour market slack will feed through into at least some pick-up in nominal wage growth. In any case, consumer spending should be supported by strong confidence, jobs growth, and supportive credit conditions," Hollingsworth said.

For public sector workers, a government cap of 1% on wage increases means the average full-time public sector worker has lost out to the tune of £9,000 since 2010, which Rehana Azam of the GMB public sector union said showed how millions of workers were feeling the pinch.

“Wages are falling in real terms for both private and public sector workers, but the situation is made even worse in the public sector by the cruel and unnecessary pay caps introduced by the government."

Len McCluskey, general secretary of the Unite union, said: “Only the people of Greece have suffered a bigger fall in living standards during these miserable austerity years. For too many workers in this country, work simply does not pay."

He blamed the government for, among other things, failing to invest and the year-on-year wage cut for public sector workers, and called for businesses to also do their part to create a fairer economy, citing excessive levels of boardroom pay.

"The government must act to reverse this appalling and yawning inequality. We need collective bargaining restored to secure a fair rate for the job in sectors like construction and hospitality. And we need action to bridge the wage gap between the shop floor and the boardroom."