The strength of British wages is a puzzle for economists – and a growing problem for decision -makers from the Bank of England.
Fig out, the shortages of generalized labor and a wave of public sector strikes led to the growth of nominal income from the UK average at a record level of 8.3% in the summer of 2023. Since then, the economy has blocked, vacancies have fallen and employers have put the brakes on hiring. Productivity, the long -term determinant of wages, has been down since 2023.
However, average income within three months and January were still 5.9% higher than a year earlier – and has exceeded inflation for over a year and a half.
The greater remuneration packages are a boost to household finances, but also a concern for the BOE, which considers the current growth rates of wages as inflationary, unless it is supported by better productivity.
Understanding what is going on will therefore be essential to the prospects of interest rates.
Is wage growth really as strong as it looks?
The BOE monetary policy committee minimized the latest data on official wages by announcing its decision to leave interest rates unchanged at 4.5% Thursday.
An increase of 6.1% of the average weekly income in the private sector had been supplied by certain sectors where wages growth was often volatile, he said. Other indicators were in accordance with the estimate of the BO, published in February, of a growth of the underlying wages slightly greater than 5%.
But that still means that wage growth is “at a high level and above what could be explained by economic fundamentals,” said the MPC.
The MPC added that one of the two main risks on which he would concentrate in the persistence of his May meeting was “the extent to which there could be more persistence in wages and interior prices”. The other risk he reported was geopolitical tensions pushing the economy in a deeper slowdown.
Will payment growth drop?
Salaries growth seems to be slowed down in the next year. Official data shows moderate payroll pressures in the past two months. The own BOE surveys and the data collected by the Brightmine research organization suggests that employers will grant wage awards to the staff existing between 3 and 4% in 2025.
Some employers will reward the remuneration awards of 1 to 2 percentage points to compensate for the impact of higher payroll taxes from April, according to BOE agents.
But Rob Wood, chief economist of the United Kingdom to the macroeconomics of the Pantheon consultation, said that this would probably leave the growth in profits greater than 4% on the measurement of the ONS – too high to be compatible with the maintenance of inflation on the target of 2%, in the absence of higher productivity.
What motivates him?
A possible factor is a series of large increases in the statutory minimum wage. This generally does not affect median income. But employers such as the retailer then warned against a “training effect”, which increases higher personnel wages to ensure that there are still incentives for progression.
A change in the mixture of jobs in the economy could also be part of the explanation. The data published Thursday shows that employment fell into the low -wage retail sector in the past year, while more people are employed in professional fields and in financial services.
But Xiaowei Xu, principal research economist at the Institute of Tax Studies, a reflection group, said that these factors could only explain that “a small fraction” of disconnection between wages growth and the state of the economy.
Another possibility floated by the governor of BOE Andrew Bailey – that productivity growth may not be as disastrous as official data suggest – does not convince economists.
“As if,” wrote Greg Thwaites, research director at the Reflection Group of Resolution Foundation, wrote in a recent blush.
Why is the Bank of England worried?
The great concern for the BOE is that something has changed in the structure of the British economy, which means that workers and employers are now adapting to “new normal”, where wages increase to 3.5 or 4% per year, and inflation is more than 3%.
“It would be more expensive to change if it became rooted,” warned Clare Lombardelli, deputy for BOE, at the end of 2024.
Wood maintains that this already happens and that decision -makers are “far too optimistic” on a marked increase in household expectations concerning five and 10 years in advance.
In the years preceding the cocovated pandemic, annual salary increases of 3% have become standard because people expected inflation on average 2% over time, he noted. Now, “households expect the bank of England to do absolutely nothing … and allow inflation to flow far above the target forever”.
Why don't households spend?
An additional puzzle is the reason why real salary gains do not yet stimulate consumption expenses. Official statistics show that retail sales and household consumption per capita remain below their pre-countryic level, people saving a historically high share of their income.
Friday, new consumer confidence data, published by the GFK research company, did not show sadness.
Analysts say that expenses should resume once households have rebuilt the buffers that were exhausted during the pandemic. But people still worry about increasing the costs of food, energy and housing, threats of cuts for jobs and public spending, and talk about trade and resetting wars.
Sandra Horsfield, an investment bank economist Investc, said that the need for higher defense expenses would be “disturbing” for British consumers, as well as the threat of American rates leaving people “wondering how the general (British) economic situation will get out”.
