High Inflation Expectations Continue to Drive Pay Growth

Main points

• The latest ONS estimates suggest the annual growth rate of average weekly earnings, including bonuses, was 5.9 per cent in the three months to February, while pay growth excluding bonuses was 6.6 per cent. NIESR’s wage tracker estimates that total and regular average weekly earnings will have grown at 6.0 and 6.7 per cent, respectively, in the year to the first quarter of 2023. Our early forecast for the second quarter of this year sees these figures at 7.2 and 6.0 per cent, respectively, with the latter reflecting high expected private sector bonus growth.
• The disparity in public- and private-sector wage growth has fallen for a fifth consecutive month, with private sector regular pay growing by 6.9 per cent while regular pay in the public sector grew by 5.7 per cent.
• Real total pay in the United Kingdom fell by 3.0 per cent on the year in the three months to February, remaining among the largest falls in growth since comparable records began. Public-sector workers experienced an average fall of 3.5 per cent while private sector workers saw their income eroded by 2.8 per cent, on average.
• The economic inactivity rate decreased by 0.4 percentage points in the three months to February, though this was driven by students aged 16-24 rather than the key 50-64 age group the Chancellor sought to target in his Spring Budget.
• 348,000 working days were lost in February to industrial action (mostly in the education sector), up from 210,000 in January. While this pales into insignificance compared with the figure of 2.5 million days per month recorded during the ‘winter of discontent’ in 1979, it is nonetheless concerning as continued strike action is set to occur in the coming months.

“Average weekly earnings, excluding bonuses, grew by 6.6 per cent across the whole economy in the three months to February. This was driven by higher-than-expected growth in both the private and public sectors, which saw regular pay growth of 6.9 per cent and 5.3 per cent, respectively. Despite these elevated figures, there are some signs that the labour market may begin to cool, with today’s figures and higher-frequency data pointing to decreases in vacancies and a slight rise in the unemployment rate. Still, these changes remain marginal and are far outweighed by the effect of high inflation expectations on pay dynamics. Given that it will take some time for the Chancellor’s most recent measures to have any effect on the labour market, I wonder if embedded inflation expectations will continue to drive high pay growth throughout this year.”

Paula Bejarano Carbo
Associate Economist, NIESR

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