Wage Growth in Services Sector Shows No Signs of Cooling

Main points

• The latest ONS estimates suggest that the annual growth rate of average weekly earnings, including bonuses, was 6.9 per cent in the three months to May, while pay growth excluding bonuses was 7.3 per cent - equalling the largest growth rate in regular pay recorded during the pandemic. Our forecast for the second quarter of this year sees both figures at 7.2 per cent.
• Private sector regular pay grew by 7.7 per cent – representing the largest growth rate seen outside of the pandemic period - while regular pay in the public sector grew by 5.8 per cent. Our forecast sees these figures at 7.5 per cent and 5.9 per cent, respectively, in the second quarter of 2023.
• The unemployment rate increased by 0.2 percentage points relative to the previous quarter to 4.0 per cent in the three months to May. This rate has now risen to its pre-pandemic level. The employment rate grew by 0.2 percentage points to 76.0 per cent. Rises in both figures indicate the economic inactivity rate has decreased; the data suggests this rate fell by 0.4 percentage points to 20.8 per cent, driven by those inactive for other reasons, those looking after family or home, and those who were retired. This signals that economic pressures, rather than back-work policies, may be pushing certain workers into work.
• Services sector total AWE annual growth has been on an increasing path since the initial pandemic-related plummet, currently at 7.0 per cent in the three months to May. Seeing that 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 7.3 per cent in the three months to May, equalling the highest growth rate previously seen during the pandemic. Private sector employees saw an average regular pay growth rate of 7.7 per cent, while for the public sector it was 5.8 per cent. When accounting for bonuses, wage growth was 6.9 per cent in the three-month period. Given that the unemployment to vacancy ratio remains low at 1.3, the labour market remains tight, indicating that we will not see a softening in pay growth in the near future. Monetary policymakers will be watching the effect this has on services inflation, which will likely become a driver of headline CPI inflation over the coming months as energy price increases drop out of the CPI basket.”

Paula Bejarano Carbo
Associate Economist, NIESR