BRITAIN’S lowest-paid workers are enjoying red-hot pay growth, thanks in part to a huge minimum wage increase in April. That’s good news for households struggling after a brutal cost-of-living crisis, but not for the Bank of England’s (BOE) inflation fight.
Data from the employment search website Indeed show that advertised salaries for high-paid and middle-wage jobs are moderating. That’s what the BOE aimed for when it ramped up interest rates from late 2021, expecting workers would temper pay demands and ease pressure on firms to raise prices. Wages for low-paid jobs, however, have gone up almost 8 per cent in the past year.
That pace has changed little since the spring, when the then-Conservative government raised the minimum wage by 9.8 per cent – the second-largest increase since Britain established a pay floor in 1999. While low-paid work has typically seen stronger pay inflation due to post-Covid labour shortages in the services sector, the gap with better remunerated roles is now widening.
“In order to maintain pay differentials between workers paid at the minimum wage and those paid at a rate slightly above it, businesses may have been increasing wages for workers paid at just above the minimum wage in recent months,” said Ashley Webb, UK economist at Capital Economics.
The pay lift has provided a much-needed boost for poorer families who were disproportionately hit by the spike in food and energy prices. Prime Minister Keir Starmer’s Labour government, which took power in July, has promised to go further. An employment rights bill introduced in Parliament last week pledges to end “discriminatory” age bands that mean hundreds of thousands of younger staff are paid a lower minimum wage.
For the BOE, however, it’s adding to a list of factors such as labour shortages in low-skill sectors and rising long-term sickness that are fuelling pay pressures in the face of high interest rates. Policymakers have signalled a “gradual” approach to easing borrowing costs and markets are no longer fully pricing in a cut in November.
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The BOE is closely watching pay settlements for signs of “sticky” price pressures after waging a painful battle to bring inflation from double digits in the wake of the energy-price shock to its current level around the 2 per cent target. Officials voted against a second consecutive rate cut in September, with some warning of “upside risk to pay growth depending on the trajectory of the National Living Wage in the first half of next year,” minutes of the meeting showed.
On Tuesday, the Office for National Statistics will publish an update of the labour market, with economists predicting wage growth excluding bonuses of 4.9 per cent in the three months to August and unemployment at historically low levels at just over 4 per cent. The pace of pay inflation has slowed sharply from almost 8 per cent a year ago but remains too high for comfort at the BOE.
Figures a day later are expected to show inflation eased to 1.9 per cent in September on the back of cheaper petrol and an easing of price growth in the services sector. However, it is forecast to pick up again later this year, with Labour’s plan to charge 20 per cent value-added tax on private school fees set to give a further upward push to prices. Robert Wood, the chief UK economist at Pantheon Macroeconomics, reckons this will add around 0.1 percentage point to headline and services inflation by January, when the VAT hike is due to take effect.
The widening divergence between high and low-paid jobs is making the UK an international outlier. In the US, advertised pay inflation has been moving in tandem across all wage tiers, according to Indeed.
“The supply of labour in the US is somewhat more flexible, such that some of the lower-wage sectors, for example, hospitality, do not end up with the same vacancy issues and hence wage pressure is lower,” said Tera Allas, director of research and economics at McKinsey UK & Ireland.
In the UK, vacancy rates have been persistently higher in lower-paying services sectors such as hospitality, retail or hairdressing than in high- and medium-paying industries such as financial services, manufacturing or real estate. That’s due to high staff turnover levels and skill shortages, as the workforce is becoming better educated while migration policy is favouring high-skilled workers from abroad.
Sectors reliant on low-wage labour are also feeling the effects of a surge in long-term sickness since the pandemic. While desk jobs such as software development can accommodate people with mobility issues, it’s harder in areas such as retail.
“If you have got a slightly sicker workforce and where the sickness is skewed towards the bottom end of the labour market, that’s going to reduce the supply of lower-paid workers a bit more,” said Gregory Thwaites, research director at the Resolution Foundation. BLOOMBERG
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