UK Workers See No Real Wage Growth Despite Economic Recovery

The latest official figures show that UK wage growth has matched the inflation rate for the first time in more than a year, but the labour market is showing signs of weakening as unemployment rises.

Wages and prices rise at the same pace

According to the Office for National Statistics (ONS), regular pay, excluding bonuses, rose by 7.8% in May to July compared with the same period last year. Inflation, a measure of how fast prices of goods and services are rising, also rose at the same pace over the same period. This means that people’s real pay is no longer falling, as it had been since June 2022.

However, the ONS cautioned that the wage growth figures were distorted by the effects of the coronavirus pandemic, which reduced pay for many workers last year and skewed the annual comparisons. The ONS said that underlying wage growth was around 3.5% to 4.9%, which is still above the pre-pandemic trend.

UK Workers See No Real Wage Growth Despite Economic Recovery
UK Workers See No Real Wage Growth Despite Economic Recovery

The ONS also noted that inflation is expected to rise further in the coming months, as energy prices increase and supply chain disruptions affect the availability and cost of goods. This could erode the purchasing power of workers and consumers, and put pressure on living standards.

Unemployment increases as furlough scheme ends

The ONS also reported that the unemployment rate increased slightly to 4.1% in May to July, up from 4% in the previous three months. This is the first rise in unemployment since April 2022, when it peaked at 5.2%. The number of unemployed people increased by 86,000 to 1.4 million over the quarter.

The increase in unemployment comes as the government’s furlough scheme, which has supported millions of workers during the pandemic, is due to end on September 30. The ONS estimated that there were still 1.6 million people on furlough at the end of July, down from a peak of 8.9 million in May 2020.

The ONS said that some sectors, such as hospitality and arts and entertainment, still had a high proportion of workers on furlough, and that these workers faced a higher risk of redundancy or reduced hours when the scheme ends. The ONS also said that there was a mismatch between the skills and locations of workers and the vacancies available, which could hamper the recovery of the labour market.

Vacancies reach record high amid labour shortages

Despite the rise in unemployment, the ONS also revealed that there were a record 1.03 million job vacancies in June to August, up by 249,000 from the previous quarter and by 318,000 from a year ago. This is the first time that vacancies have exceeded one million since comparable records began in 2001.

The ONS said that vacancies increased across all industries, but especially in accommodation and food services, which saw a 75% increase over the quarter. The ONS attributed this to the easing of lockdown restrictions and the increased demand for domestic tourism.

However, many employers have reported difficulties in finding suitable staff to fill their vacancies, citing various factors such as Brexit-related immigration changes, self-isolation rules, childcare issues, and low wages. Some sectors, such as transport and logistics, health and social care, and construction, have faced acute labour shortages that have disrupted their operations and services.

What does this mean for the economy?

The latest figures paint a mixed picture of the UK economy, which has rebounded strongly from the pandemic-induced recession but faces several challenges ahead. On one hand, wage growth has caught up with inflation, which could boost consumer confidence and spending. On the other hand, unemployment has increased and could rise further as furlough support ends, which could dampen demand and output.

Moreover, inflation is likely to exceed wage growth in the near future, which could squeeze household budgets and reduce real incomes. At the same time, labour shortages could hamper business activity and productivity, and push up costs and prices further.

The Bank of England faces a difficult decision on whether to raise interest rates to curb inflation or keep them low to support growth and employment. The Bank has said that it expects inflation to peak at around 4% by the end of this year before falling back to its 2% target next year. However, some analysts have warned that inflation could be more persistent and require tighter monetary policy sooner than expected.

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