Pay growth was running at just under 3% prior to the Covid-19 pandemic, but the latest statistics released by the Office for National Statistics (ONS) show that it is now running at more than double that rate. However, the temporary nature of the factors which are fueling the boom in pay increases, mean that the rate is likely to return to more or less where it was pre-pandemic
Rate of Pay Growth Doubles
In the 3 months to February 2020, just prior to the first Covid-19 national lockdown, the rate of pay growth was 2.8% (including bonuses) and 2.9% (excluding bonuses). At that time, the rate of pay increases had been slowing down, having peaked in the 3 months to June 2019 at 4% inclusive of bonuses, and 3.9% excluding bonuses. However, in the latest statistics, which are for the 3 months to May 2021, pay rises are now running at a rate of 7.3% including bonuses, and 6.6% without bonuses. This is more than double what pay growth was prior to the Covid-19 pandemic
Nevertheless, the increased rate of wage growth is somewhat illusory, and incorporate a number of temporary factors that will not last, and some statistical quirks. These include the following:-
- The base effect: when assessing pay rises, one looks at what wage levels were at the equivalent point a year earlier. In the 3 months to May 2020, huge numbers of workers were on furlough, whilst others were on reduced hours. Accordingly, wages were falling. One year on, however, far fewer are on furlough and hours are returning to where they had been pre-pandemic. Accordingly, pay is on the increase again, but as the comparison is with an artificially low base, the pay growth statistics have been skewed as a result
- The compositional effects: the composition in terms of those who make up the workforce, and therefore the pay rise statistics, has changed, with a greater proportion of the lower paid having lost their jobs as a result of the pandemic. Hence, with a larger number of the lower paid having fallen out of the average earnings statistics, then the average is going to increase simply by reason of the change in workforce composition alone.
- Staff shortages: the rush to reopen after the lifting of covid-19 related restrictions, and the large numbers having to self-isolate have to an extent fueled pay rises. However, these are temporary issues that will in time abate. Whilst there are long terms issues that need to be addressed in terms of skills shortages through investment in training, the evidence is that this factor is unlikely to have any inflationary impact. Whilst the numbers on furlough have fallen significantly, 5% of the workforce remains on furlough, whilst 7% fewer total hours are being worked compared with prior to the pandemic
Inflation
Whilst the rate of real pay growth (wage growth adjusted for inflation) is currently running ahead of inflation, by 5.6% inclusive of bonuses, and 4.9% excluding bonuses, those statistics too have been skewed by the base effect, the composition effect, and by temporary issues relating to staff shortgages.
Pay Growth Unlikely To Fuel Inflation Long Term
There are a number of reasons as to why there is unlikely to be any serious inflationary pressure on the economy long term, for the following reasons:-
- There was no problem prior to the covid-19 pandemic, with pay growth of just under 3% in the 3 months to February 2020, and inflation at 1.74% in 2019
- As the economy approaches its pre-pandemic level in terms of GDP (now just 3% below its pre-pandemic level), the rate of GDP growth will naturally fall, and this is what is happening with the UK economy. As the Chief Economist at KPMG, Yael Selfin, points out: “May [2021] signals slowing growth as the recovery matures. With monthly growth down from the 2.3% recorded in April, these figures reflect a gradual deceleration in the speed of recovery as the economy approaches pre-Covid levels." The level of the slow down in the UK GDP growth rate suggests that the UK economy is unlikely to overheat and cause inflationary problems
- The UK's highly flexible labour market has shifted power within that market towards employers over the last 40 years, which means that there is unlikely to be a repeat of the inflationary problems of the 1970's. Trades unions are far less powerful than they used to be, enormous numbers of jobs are insecure, especially with the rise of the gig economy, and there is a significant issue with under-employment in the UK. All this means that in pay negotiations, employers have the advantage, and that is likely to dampen down pay growth, just as it did prior to the pandemic
- Whilst free movement has ended as a result of Brexit, the UK now has a points based immigration system that adapts to any labour shortages that do arise. This is done through the Migration Advisory Committee (MAC), which reviews a shortage occupation list on a regular basis and allocates additional points to those occupations where a shortage arises, in order to alleviate the problem
