Pay growth ‘normal rather than exceptional’ once end of furlough boost is accounted for

A tight labour market has driven underlying nominal wage growth back up to, but not beyond, pre-pandemic levels according to new Resolution Foundation research published today (Saturday) that highlights the role of ending furlough in boosting headline pay growth figures.

Labour Market Outlook Q1 2022 examines how strong nominal wage growth statistics should be interpreted. Despite fears that the pandemic would cause lasting unemployment, the labour market is tight on all measures, with low unemployment, high vacancies and record-high job moves. These factors are driving fast nominal wage growth, as employers raise wages in order to attract and retain workers.

Exactly how strong that wage growth is matters hugely, given the impact on living standards and concerns that exceptionally fast wage growth might make it difficult for the Bank of England to reduce inflation without causing unemployment to rise.

In the year to January 2022, nominal pay grew by 4.1 per cent, compared to an average of 2 per cent in the decade prior to the pandemic. But the report finds that these headline wage growth figures don’t reflect the full story. According to Resolution Foundation modelling, underlying wage growth – which adjusts for average pay changing due to workers’ characteristics, for example if average earnings rise because the workforce becomes higher-qualified – averaged 2.7 per cent in 2021, the same as in 2019, on the eve of the pandemic.

This is in part due to the Job Retention Scheme (JRS) suppressing wages, as 11.6 million employees received 80 per cent or less of their usual pay (unless topped up by employers). When the JRS ended in September 2021, the majority of furloughed workers moved back to full pay, accounting for nearly a quarter of the annual wage growth in the last quarter of 2021 (0.9 per cent from total Average Earnings growth of 3.9 per cent).

The impact of the JRS on headline growth figures will last long after the scheme ended, with it likely to have boosted annual pay growth by roughly a full percentage point in the first quarter of 2022 and its effect not ending until the Autumn.

The Foundation also notes that, while the number of low-paid workers rose considerably in recent months as sectors such as hospitality and retail re-opened, stronger employment growth in some higher-paid sectors over the past two years means that headline average earnings levels remain elevated compared to pre-pandemic.

Four sectors which as a whole have above-average earnings levels – professional services, health and social work, admin, and IT and communications – experienced particularly strong growth during the pandemic, and together accounted for 53 per cent of the growth in aggregate pay (the total amount of money going to employees) since the pandemic began, despite making up just 35 per cent of the workforce.

Looking ahead, the forecast of nominal wage growth of 5 per cent throughout 2022 won’t be sufficient to overcome inflation of 8 per cent this spring, meaning most workers’ earnings will fall in real terms, even accounting for last Friday’s 6.6 per cent rise in the minimum wage. This real wage squeeze will get deeper over the course of 2022, with a return to real wage growth not likely before mid-2023.

Nye Cominetti, Senior Economist at the Resolution Foundation, said:

“The labour market has emerged from the pandemic relatively unscathed, with low unemployment and high levels of vacancies. This welcome success is driving strong nominal wage growth, but worries that it might be too strong are overdone. Headline wage growth figures in part simply reflect workers returning to work from furlough, when many were earning only 80 per cent of their normal wages.

“Given the tightness of the labour market, pay growth is best seen as normal rather than exceptional, once the impact of the end of the furlough scheme is taken into account. In fact, underlying wage growth is similar to what we were seeing before the pandemic hit.

“With inflation set to reach 8 per cent in the coming months, most workers’ earnings will fall in real terms – even with a 6.6 per cent rise in the minimum wage – further squeezing living standards in the months ahead.”