Wages in the UK grew by 3.4% after adjusting for inflation, marking the fastest rise in over three years. This increase, driven primarily by private sector wage growth, reflects significant changes in the UK labor market.
Between September and November, pay packets rose by an average of 3.4% compared to the same period last year. The Office for National Statistics (ONS) attributes this growth to rising private sector earnings, which outpaced increases in public sector pay.
Private Sector Growth and Inflation Concerns
Despite robust wage growth, concerns persist about potential inflationary effects. Higher wages often lead to increased spending, potentially pushing prices up. The Bank of England is closely monitoring pay and employment trends as it decides on interest rates. Currently at 4.75%, rates are expected to drop to 4.5% in February, following a recent decline in inflation.
Average weekly earnings reached £660 in November, with inflation then at 2.6% and now slightly lower at 2.5%. “Pay growth is finally outpacing inflation after years, giving households more disposable income,” said Sarah Coles of Hargreaves Lansdown. However, she cautioned that rising wages might delay interest rate cuts if inflation resurges.
Ashley Webb, UK economist at Capital Economics, noted some Bank of England officials are concerned about rapid private sector wage growth. However, most may focus on signs of a loosening labor market and proceed with planned rate cuts.
Labor Market Adjustments Amid Economic Pressures
The unemployment rate rose slightly to 4.4%, while job vacancies fell by 2.9% to 812,000 between October and December. Although still above pre-pandemic levels, this decline signals a cooling job market. The ONS urged caution in interpreting the data due to low survey response rates.
Petra Tagg of Manpower UK highlighted that companies in engineering, IT, and artificial intelligence are offering higher wages to attract skilled workers. Yet, employees remain hesitant to switch jobs due to economic uncertainty. Meanwhile, firms are pausing hiring plans after recent tax increases on businesses.
Chancellor Rachel Reeves announced £40 billion in tax hikes, including National Insurance increases and reduced employer thresholds, putting pressure on businesses. Companies warn these costs, combined with rising minimum wages and reduced reliefs, could limit growth, restrict pay rises, and reduce hiring.
Rob Wood of Pantheon Macroeconomics observed a gradual loosening of the labor market but noted no significant downturn in jobless claims or redundancies.
Risks to Wage Growth and Economic Stability
While wage growth is currently strong, analysts warn of potential setbacks. Businesses facing higher costs may cut staff or limit wage increases later this year. Worker shortages in key industries, a persistent issue, have contributed to wage rises but could dampen long-term economic growth.
The Resolution Foundation reported 2024 as the best year for wage growth since 2005. However, this optimism is tempered by fears of inflation driven by higher consumer spending.
Work and Pensions Secretary Liz Kendall emphasized the need to boost employment and improve living standards. She highlighted government efforts to reform Jobcentres and ensure young people gain opportunities for work or education.
As wages continue to rise, balancing economic growth with inflationary pressures remains a key challenge for the UK.
