Understanding Wage Stagnation in the UK

Understanding Wage Stagnation in the UK

The latest ONS report shows that the average pay in the UK in July 2018 picked more than expected (by 2.6%) compared to the 2.4% recorded during the same period last year. Excluding volatile bonuses, wages were up 2.9%. July 2018 saw the most rapid wage growth in the UK in three years.

The BOE (Bank of England) hiked interest rates to 0.75% in August after forecasting wage growth would be 2.5%. The bank expects the growth to increase further to 3.25% in 2019. UK workers who have been suffering for a long time with increasing costs of living and increasing household debt have something to smile about considering forecasts indicate the wage growth has a sustainable pace. But what makes wages stagnate?

Considering one of the reasons why many UK households rely on short term loans such as payday loans is because their wages haven’t increased for years to match the rising cost of living, it’s important to understand wage growth in depth.

UK unemployment stands at 4% which is the lowest in almost 50 years. The figure is a testament that Britain’s economy is vibrant despite the uncertainties surrounding Brexit. However, there is an apparent dilemma – if unemployment is at the lowest levels, why aren’t British workers getting sizeable pay hikes?

Tight labour market?

According to the Lead economist at Oxford Economics, Andrew Goodwin, decreasing unemployment is among the array of indicators suggesting the UK labour market has become increasingly tight. The fresh low in the number of unemployed people coupled with the record low in the no. of Britons who have changed their employment status recently (in the last 3 months) is a confirmation of tightness in the labour market.

Employers have a new dilemma – How do they get people to take up vacant roles? British employers have two options namely; to bring individuals who have been inactive back into the labour market or add the number of hours for existing workers. There is evidence showing companies are pursuing both options.

According to Goodwin, inactivity to employment has increased in the recent past suggesting that some people may have sought temporary inactivity due to universal credit delays. Underemployment has fallen again in the second quarter of 2018 reaching a record low since mid-2008 according to the ONS.
For employers to be able to increase working hours via the above avenues would require a significant increase in wages designed to entice people to abandon inactivity or for employees to work more.

Traditional economics

According to traditional economics, tight labour markets characterised by low unemployment should result in increased wages.

The reason behind this is simple – when few people don’t have work, there are less candidates for jobs which means, individuals entering the labour market can demand higher wages.

Why wages have stagnated in the UK

The UK labour market has defied traditional economics. Wage growth stands at just 2.6% excluding bonuses yet; the inflation rate is 2.5%. The effect – real wages aren’t rising. The reason why wages have stagnated in the UK remains a mystery to many including seasoned economists. According to Goodwin, there lacks sustained acceleration of wages that is usually expected in a labour market such as the UK’s currently.

What are the reasons for this disconnect? Well, the fall of UK’s trade unions and a rise of the “gig economy” could be among the key reasons for stagnant wage growth. Trade unions haven’t been as vibrant as they were decades ago. Technological advancements have also led to the rise of freelance work and short-term contracts as opposed to permanent work.

The BOE (Bank of England) has been defensive arguing that the stagnant wage growth is a mere “blip” that is bound to correct itself. Goodwin disagrees with this sentiment arguing there are several convincing reasons as to why wages won’t increase any time soon.

Goodwin’s take

According to Goodwin, there are structural factors hindering wage growth. These factors which include low productivity growth and an increase in other labour costs (as a result of factors like pension auto-enrollment and rising activity among the elderly) depress pay growth and make it difficult to “see” wage growth as the BOE argues. These key factors “aren’t going away” in the near future casting doubt on a future characterised by real wage growth.

Mark Scott

Is the Company Director of Swift Money Limited. He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.