UK Sees Record Wage Growth in Q2 Despite Slight Labour Market Loosening

Main points

• The latest ONS estimates suggest that the annual growth rate of average weekly earnings, including bonuses, was 8.2 per cent in the second quarter of 2023, while pay growth excluding bonuses was 7.8 per cent – representing the highest annual regular pay growth rate recorded since comparable records began in 2001. Our forecast for the third quarter of this year sees economy-wide regular pay growing at 7.0 per cent and total pay growth at 6.9 per cent.
• Private sector regular pay grew by 8.2 per cent in the second quarter– representing the largest growth rate seen outside of the pandemic period - while regular pay in the public sector grew by 6.2 per cent. Our forecast sees these figures at 7.2 per cent and 6.6 per cent, respectively, in the third quarter of 2023.
• The unemployment rate increased by 0.3 percentage points relative to the previous quarter to 4.2 per cent in the second quarter of this year. The employment rate decreased by 0.1 percentage points to 75.7 per cent. The economic inactivity rate decreased on the quarter by 0.1 percentage points to 20.9 per cent, driven by those moving from inactivity to unemployment.
• Services sector total AWE annual growth has been on an increasing path since the initial pandemic-related plummet, currently at 8.4 per cent in the second quarter of 2023. Since pay in the services sector makes up most of the input costs in this sector, it is the main driver of services inflation. Elevated wage growth in this sector will concern monetary policymakers, who may take this as a sign that services inflation will continue to generate persistence in underlying inflation in the UK, despite monetary tightening.

“Average weekly earnings, excluding bonuses, grew by 7.8 per cent in the second quarter of 2023, representing the highest growth rate in regular pay seen since comparable records began in 2001. Including bonuses, wage growth was 8.2 per cent, though this figure is partially driven by NHS one-off bonus payments. As a result of elevated wage growth and recent drops in inflation, this quarter marks the first time in nearly two years that real regular and total wage growth are both positive. Though there are increasingly tangible signs that the labour market is cooling – such as a rise in the unemployment to vacancy ratio to 1.4 – the labour market remains quite tight, suggesting we will still see continued high pay growth this year.”

Paula Bejarano Carbo, Associate Economist