High Wage Growth, Low Productivity Growth: Are we Experiencing Wage Stagflation?

Main points

• The latest ONS estimates suggest the annual growth rate of average weekly earnings, including bonuses, was 5.8 per cent in the first quarter of 2023, while pay growth excluding bonuses was 6.7 per cent. Our forecast for the second quarter of this year sees these figures at 5.9 and 6.0 per cent, respectively.
• The disparity in public and private-sector wage growth has fallen for a sixth consecutive month, with private sector regular pay growing by 7.2 per cent while regular pay in the public sector grew by 5.5 per cent. That said, our forecast sees private sector wage growth outpacing its counterpart in the second quarter of 2023.
• The ONS’s preliminary estimate of UK output per hour worked was 0.6 per cent lower than the first quarter of 2022, representing the weakest annual growth in this estimate of productivity since 2013, excluding the pandemic period. As we stressed in our latest UK Economic Outlook, published last week, the United Kingdom needs to see increases in business and public investment as a proportion of GDP in order to tackle its stalling productivity problem. With labour supply nearing capacity, it is imperative that productivity grows if we are to see future economic growth and an improvement to living standards.
• The economic inactivity rate decreased by 0.4 percentage points in first quarter of 2023, 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.

“Average weekly earnings, excluding bonuses, grew by 6.7 per cent across the whole economy in the first quarter of 2023, in line with what we had forecast last month. The private and public sectors saw regular pay growth of 7.0 per cent and 5.6 per cent, respectively. Higher-frequency data suggests that we have yet to see a turning point in wage growth; the KPMG and REC UK Report on Jobs, for instance, recorded a four-month high in the rate of starting pay inflation in April 2023. The continued embeddedness of high inflation expectations in the labour market threatens to generate further inflationary persistence, posing a dilemma for the Monetary Policy Committee.”

 Paula Bejarano Carbo
Associate Economist, NIESR

See our previous wage tracker to follow the analysis

See our latest UK Economic Outlook