People will have to be more productive to drive sustained pay recovery
Employees expecting a return to strong wage growth during 2016 are likely to be disappointed, according to analysis from the Resolution Foundation think tank (RF).
Predictions that pay would increase by an average of 2 to 2.5 per cent are too optimistic, the think tank suggested. RF estimated that real-time pay is more likely to be just 1 per cent higher by this time next year because of the combined impact of Britain’s continuing productivity problem and this year’s historically low inflation which has produced an artificial impression of wage growth.
RF analyst Laura Gardiner said: “A tightening labour market and ultra-low inflation were big drivers in the first year of the pay recovery, but there are signs of flattening-in measures of slack, and the expectation remains that inflation will soon start rising.”
She added: “Productivity will have to do far more of the legwork in 2016 and beyond if the pay rebound is to be maintained.”
According to analysis by RF, pay settlements during 2015 rose, causing nominal pay growth, but in recent months earnings growth has already begun to level off, to levels at, or below the pre-crisis trend.
It argued that if productivity growth remains unchanged (at around 1.3 per cent), and inflation grows to what the Bank of England (BoE) wants it to (around 2 per cent), then by the end of 2016, real wage growth will only be 0.9 per cent.
Last week, at a speech to the Institute of Directors (IoD), the BoE’s deputy governor Minouche Shafik hinted that next year would be the right time for the bank to begin to think about raising the cost of borrowing, with inflation hitting 1.25 per cent by late 2017 or early 2018.
Gardiner said: “Pay growth in 2016 will ultimately be determined by whether the recent upturn in productivity is enough to offset rising inflation.”
Michael Martins, economic analyst at the IoD, said: “As inflation begins to climb, it will be a test of the British economy to see if we can cling on to the strong wage growth and productivity gains of recent months, or whether they will dissipate as prices begin to rise. Despite real wages growing strongly in 2015, nominal increases were still small.”
But despite this poor outlook, others disagree. Research by Korn Ferry Hay Group yesterday predicted workers would receive a real wage increase of 2.3 per cent - the largest since 2008.
Adam Burden,cConsultant at Hay Group, said: “The majority of UK employees should feel optimistic. Despite some sector variations, and the fact that we’re still catching up after several post-recession years of shrinking real wages, there will be a tangible increase in real income for many.”