Wage Growth Softens Below 7 Per Cent as Labour Market Loosens Gradually

Main points

• Pay growth remains strong: The latest ONS estimates suggest that the annual growth rate of average weekly earnings, including bonuses, was 6.5 per cent in the three months to November 2023 while pay growth excluding bonuses was 6.6 per cent. These figures indicate that wage growth continued to soften towards the end of 2023, after peaking over summer (Figure 1).
• We forecast wage growth to slow as the labour market continues to cool: economy-wide total pay (incl. bonuses) and regular pay are estimated to have grown at 5.7 and 6.2 per cent, respectively, in the fourth quarter of this year relative to the third quarter. Our forecast for the first quarter of 2024 sees these figures at 5.6 and 6.0 per cent, respectively.
• The further fall in vacancies is driving the cooling of labour market conditions: with experimental estimates of the unemployment and inactivity rates remaining largely unchanged in recent months, it is decreasing vacancies that have been contributing to a gradual loosening of the labour market. Vacancies fell by 49,000 in the fourth quarter of 2023, representing a 5.0 per cent decrease on the quarter and marking the 18th consecutive period in which vacancy numbers have fallen. However, vacancies still remained above their pre-pandemic level.

“Today's ONS figures suggest that the annual growth rate of average weekly earnings was 6.6 per cent in the three months to November 2023, and 6.5 per cent if we include bonuses. While these figures remain elevated by historical standards, they indicate that wage growth softened gradually towards the end of the year, after peaking over summer. That said, when we account for inflation, real regular pay (excluding bonuses) only rose by 1.4 per cent, while real total pay rose by 1.3 per cent – illustrating the extent to which elevated inflation erodes household incomes. With vacancies falling steadily on the quarter, and experimental estimates of the inactivity and unemployment rates not moving much, we can infer that the labour market continues to loosen – albeit at a slow pace – and that the general trend of softening wage growth will continue in the first quarter of 2024.”

Paula Bejarano Carbo

Economist, NIESR