Wages in the UK grew by 3.4% after adjusting for inflation, driven by strong private-sector earnings growth. This marks the fastest real wage increase in over three years, according to the Office for National Statistics (ONS).
From September to November, average pay rose by 3.4% compared to the same period last year, even after accounting for inflation’s effects. Private-sector pay increases outpaced those in the public sector, contributing significantly to the overall growth.
Interest Rates and Economic Impact
Despite concerns that rising wages could fuel inflation, the Bank of England may still reduce interest rates in February. Current rates sit at 4.75%, but traders predict a cut to 4.5% after inflation unexpectedly dropped last month. Inflation, which measures the speed of price increases, fell to 2.5% in November from 2.6%.
The Bank closely monitors wage and employment data when making rate decisions. In November, average weekly earnings reached £660, showing a significant gap between pay growth and inflation for the first time in years.
Sarah Coles, head of personal finance at Hargreaves Lansdown, noted, “Pay hasn’t been this far ahead of inflation in over three years.” However, she warned that higher wages could delay interest rate cuts.
Labour Market Shifts
The UK’s unemployment rate increased slightly to 4.4%, while vacancies declined by 2.9% from October to December, totaling 812,000. Despite the drop, vacancies remain above pre-pandemic levels.
The ONS cautioned that low survey response rates might impact the reliability of its job market data. Petra Tagg, a recruitment expert, highlighted that companies are offering higher wages to attract skilled workers in areas like IT, engineering, and artificial intelligence.
However, fewer employees are switching jobs, as many feel uncertain in the current economic climate. Some businesses paused hiring after tax increases announced in the latest Budget, further affecting employment figures.
Business Costs and Wage Growth
Chancellor Rachel Reeves imposed £40 billion in tax hikes, targeting businesses with higher National Insurance rates and reduced employer thresholds. Companies warn these measures, combined with rising minimum wages and reduced business rate relief, could limit their ability to grow, offer pay raises, or create jobs.
Rob Wood, an economist at Pantheon Macroeconomics, said, “The labour market is loosening but only gradually.” While redundancies and jobless claims remain stable, businesses face challenges balancing rising costs and staff retention.
Future Outlook
Wage growth may slow later in 2024 as businesses struggle with higher operating costs. Worker shortages in key sectors have historically led to pay hikes, but this trend may not continue if companies cut jobs or wages to manage expenses.
Inflation risks remain if higher wages lead to increased consumer spending and rising demand for goods. Between September and November, regular pay rose by 5.6% annually, with a 3.4% real increase after inflation adjustments.
The Resolution Foundation noted 2024 as the best year for wage growth since 2005, while Liz Kendall, Work and Pensions Secretary, emphasized the need to boost employment. She stated the government aims to raise living standards, grow the economy, and ensure young people gain job or learning opportunities.
Worker shortages and economic pressures continue shaping the UK’s pay and employment landscape, influencing inflation, job creation, and growth prospects.