Real wages rise faster than past 16 years despite productivity slump

WAGES have grown more over the past 12 months than over the previous 16 years, despite the productivity crisis plaguing Britain’s workforce, research shows.

After accounting for inflation, real earnings increased by about 2pc in the year to February, meaning workers’ pay packets stretch further than they did 12 months earlier, according to the Resolution Foundation.

It brings an end to a decade and a half in which wages barely grew faster than prices and at times, including the cost of living crisis, fell sharply behind living costs. However, the think tank warned that if wages rise without extra output, additional costs imposed on businesses may threaten to push up inflation, which in turn could force interest rates to remain higher for longer.

Productivity has fallen over the past year, dropping by 0.6pc by the final quarter of 2023.

Gregory Thwaites, economist at the Resolution Foundation, said: “This means that what British workers can buy with their wages is rising just as the amount they produce in their jobs is actually shrinking.

“The positive side to this wage growth is that it has protected household incomes, but it may worry the Bank of England because real wages are rising faster than productivity per worker.”

Officials at the Bank of England, led by Governor Andrew Bailey, want evidence that inflation is back under control before cutting interest rates from their 16-year high of 5.25pc.

A key worry for the rate-setting Monetary Policy Committee is the strength of wage growth, with many workers switching jobs in order to get a pay rise.

However, there have been signs that this is starting to level off. The Chartered Institute of Personnel and Development’s (CIPD) latest labour market outlook report shows that more workers are staying put in positions for greater job security rather than seeking out better-paid roles. It found 55pc of employers were expecting to maintain their staffing levels amid falling turnover levels in their workforce.

James Cockett, the CIPD’S labour market economist, said: “The so-called ‘Great Resignation’ is well and truly over and has been replaced by ‘The Big Stay’, with more people opting for job stability.” However, the CIPD said there was evidence that employers had not yet lowered their expectations for pay increases even with the cooling jobs market. Mr Cockett said: “While employers’ pay rise expectations remain above pre-pandemic levels, we would expect them to adjust their plans for pay rises in the coming months, as inflation falls and the labour market continues to slow.”

The recent period of strong wage growth has kept inflation high in the services sector.

Overall consumer prices inflation has fallen from a peak of 11.1pc in October 2022 to 3.2pc in March. Lower energy bills mean a further drop is expected in April’s figure, which is due to be published next week.

Some businesses have been hiring fewer people to offset wage pressures.

However, Mr Thwaites said companies have been able to fund higher wages without higher inflation.

This is because higher interest rates have closed funding shortfalls in final salary pension schemes, allowing businesses to pay less into pension pots and more directly to workers. At the same time, falling import prices have reduced costs for companies and for workers, again allowing higher real wages.

Mr Thwaites said more investment is needed by employers and by the Government to boost productivity.