Pay Has Increased By 2.9% Image

Pay Has Increased By 2.9%, A Rate Faster Than Anticipated

The Office for National Statistics has just released its latest labour market survey, and they report that pay has increased by 2.9%

Pay Has Increased By 2.9%

Pay has increased by 2.9% for the period May to July 2018, compared with the equivalent quarter in 2017, according to the Office for National Statistics. This was up from 2.7% for the period April to June 2018. When bonuses are added in, the rate of increase for the 3 months to the end of July was 2.6%. Once adjusted for inflation, the real terms increase was 0.5% excluding bonuses, and 0.2. including bonuses. This contrasts with the position at the beginning of 2018 when their was a squeeze on living standards, where the rate of increase in pay was barely matching the increase in inflation, and prior to that a real terms decrease in pay with inflation outstripping pay rises. For example, in the 3 months to July 2017, pay in real terms both including and excluding bonuses fell by 0.4%

Findings From The Office for National Statistics Survey

The Office for National Statistics found that for the 3 months to July 2018:-

  • Pay has increased by 2.9% excluding bonuses, and 2.6% including bonuses, compared with the equivalent period in 2017. This represents the fastest rate of increase since July 2015, when pay both including and excluding bonuses increased by 2.9%
  • Adjusted for inflation, the real terms increase in pay excluding bonuses was 0.5%, and 0.2% when including bonuses
  • Unemployment fell by 55,000 to 1.36 million (4% of the workforce), the lowest level since the 3 months to February 1975
  • The number of people in work has increased by 261,000 to 32.4 million compared with a year ago
  • 8.76 million people are economically inactive (neither in or seeking work), an increase of 16,000 compared with a year ago

Factors Contributing To The Increase In Real Terms Pay

The fact that pay has increased by 2.9%, and by 0.5% in real terms (excluding bonuses), came as a surprise to economists. So what is contributing to the faster than expected increase? The main factors are:-

  • The cost of imports has stabilized, and is no longer fueling inflation. In the wake of the Brexit referendum back in June 2016, the plunge in the pound led to a rapid increase in the price of imports, which in turn brought about an increase in the rate of inflation, and a decrease in pay in real terms.
  • It is becoming more difficult for companies to recruit in terms of finding the right candidates for vacancies, which in turn increases the bargaining power of workers in pay negotiations. The difficulties in terms of recruiting are a result of the fall in unemployment and the decline in the numbers of EU workers on the labour market (as evidenced by the recent Chartered Institute of Personnel and Development (CIPD) survey)

Economist for Capital Markets, Andrew Wishart, told the BBC that “competition for workers is finally starting to provide greater support to wages“. Nevertheless, pay rises under certain circumstances can in themself be inflationary as Ben Brettell, of Hargreaves Lansdown, points out in the same BBC report: “The Bank [of England] looks at wage growth as a key driver of inflation. The problem is that if wages grow without corresponding productivity growth – as we’ve seen in the UK – it means more money chasing the same quantity of goods and services, which pushes up prices.

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