What to make of slowing UK wage growth?

November 11, 2015

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The British labour market has been a mixed bag of late.

On the plus side, there’s been plenty of good news about people getting jobs. But wage growth has slowed, against the expectation of some economists who thought tightness in the labour market would be pushing up wages more strongly by now.

Pay excluding bonuses (or regular pay) grew 2.5 percent in the three months to September, less than forecast the 2.7 percent expected in a Reuters poll. Breaking down wage growth by sector, it’s clear wage pressure isn’t particularly widespread.

Construction is one industry undoubtedly afflicted by severe labour shortages, and it shows. Regular pay in that sector ballooned 6.6 percent in the three months to September, topping the chart. But construction accounts for only 4 percent of whole economy employment.

Retail, hotels and restaurants accounts for almost a quarter of whole economy and regular pay there has risen strongly – up 3.9 percent in the three months to September.

But outside of these two sectors, there hasn’t been much sign of wage pressure. In the services sector, which accounts for 85 percent of whole economy pay, pay rose just 2.3 percent.

It might well be the case that the tightening labour market will inevitably push up wages. But no-one should be surprised by the recent weakness, which has been well-flagged by various forward-looking indicators of pay growth:

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Surveys of employers – namely from the Chartered Institute of Personnel Development, XpertHR and the British Chambers of Commerce – show no sign that British companies are about to lavish their staff with bigger pay settlements, which look stuck around 2.0 percent.

As inflation is likely to rise from zero at some point over the next few months, that might not bode well for a sustained recovery in real wage growth.

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