Brexit un­cer­tainty could hit pay growth, says rate-set­ter

Bank of Eng­land: Zero-hours con­tracts and flex­i­ble work­ing ‘may worsen’

The Press and Journal (Highlands & Islands) - - Business - BY KALYEENA MAKORTOFF

AkeyBankofEng­lan­drate­set­ter has warned that Brexit-re­lated un­cer­tain­ties could hit al­ready-stag­nan­tUK­pay growth, which is slower than any other G7 coun­try.

Michael Saunders – the Bank’s most re­cently ap­pointed rate-set­ter on the Mone­tary Pol­icy Com­mit­tee ( MPC) – has said Bri­tain’s di­vorce from the EU may worsen trends like flex­i­ble work­ing and ze­ro­hours con­tracts in the so­called “gig econ­omy” that are hold­ing back a rise in wages.

In a speech de­liv­ered at UK think-tank the Res­o­lu­tion Foun­da­tion in London yes­ter­day, Mr Saunders said mod­els used by fore­cast­ers have failed to fully ac­count for trends in­clud­ing “greater labour mar­ket flex­i­bil­ity and in­se­cu­rity, ex­tra labour sup­ply, in­creased un­der- em­ploy­ment, broader ed­u­ca­tional at­tain­ment and changes to the tax and ben­e­fit sys­tem”.

“These changes prob­a­bly im­ply greater down­ward pres­sure on pay growth for any par­tic­u­lar job­less rate than pre­vi­ously.

“It is also pos­si­ble that Brexit-re­lated un­cer­tain­ties will re­in­force other fac­tors damp­en­ing pay.”

Av­er­age weekly earn­ings growth in the UK “re­mains mod­est” at around 2% to 3% year-on-year.

Mr Saunders – a for­mer econ­o­mist at Cit­i­group who joined the MPC on a three-year term in Au­gust – said that there is “lit­tle sign of sig­nif­i­cantly higher pay growth for 2017”, and that un­der­ly­ing pay growth “will prob­a­bly stay com­fort­ably be­low the 4% pre- cri­sis norm dur­ing the next few years”. The slow­down in pay growth be­tween 2011 and 2016 was roughly twice the av­er­age across the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD), and labour cost growth has slowed more than any other G7 coun­try.

While Brexit ac­tivists have blamed im­mi­gra­tion for low­er­ing Bri­tish wages, Mr Saunders pointed to aca­demic re­search that sug­gests mi­gra­tion in­flows do not re­duce over­all UK pay lev­els, though it “may have de­pressed pay at the bot­tom end”.

In­stead, “avail­abil­ity of for­eign work­ers prob­a­bly en­cour­ages­firms to ex­pand and in­vest in the UK” and “in­creased em­ploy­ment boosts con­sump­tion and hous­ing de­mand”, he said.

Mr Saunders said other fac­tors in­cluded less-se­cure work through self-em­ploy­ment, agency jobs, ze­ro­hours con­tracts and the “gig econ­omy” which tends to pay less, while the cost of los­ing a job has grown thanks to tougher qual­i­fi­ca­tion cri­te­ria for gov­ern­ment ben­e­fits.

It means work­ers are more will­ing to ac­cept lower pay rises, rather than risk be­com­ing job­less, he said.

“Re­duced job se­cu­rity and the greater fi­nan­cial cost of un­em­ploy­ment­may re­duce work­ers’ bar­gain­ing power and cre­ate higher risk aver­sion – mak­ing peo­ple more likely to set­tle for mod­est or no wage growth and con­tin­ued em­ploy­ment, rather than push for higher wage growth if that comes with risks of job losses.”

In the mean­time, qual­i­fied work­ers ap­pear to be set­tling for lower-skill jobs, with the MPC mem­ber point­ing to Of­fice for Na­tional Statis­tics (ONS) data show­ing that 47% of re­cent grad­u­ates are in non-grad­u­ate jobs – up from 37% in 2001.

While the dif­fer­ence in job­less rates be­tween grad­u­ates and non-grad­u­ates has been roughly sta­ble, “the grad­u­ate pay pre­mium has shrunk in re­cent years”, he added.

The squeeze on pub­lic sec­tor pay and jobs may have also capped pri­vate sec­tor pay by re­duc­ing com­pe­ti­tion for labour, but Mr Saunders said it has been hard to find a “con­sis­tent” ef­fect over time.

How­ever, “other fac­tors may also be at work, for ex­am­ple, self-ful­fill­ing lower ex­pec­ta­tions for wage growth”, he added.

“Greater down­ward pres­sure on pay growth”

RAINY DAY: Pro­test­ers af­ter the Brexit re­sult, which does not bode well for wages in the ‘gig econ­omy‘, warned Michael Saunders

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