What do the latest UK labour market data mean for real wages?

New data show that earnings have increased in the UK on average. But much of the growth is in sectors that offer bonuses and which have seen workers’ pay return to 100% after the furlough scheme. For many, rising prices are likely to erode any effects of these wage increases.

This week, the Office for National Statistics (ONS) released new data for UK earnings. With inflation at a 30-year high, workers’ wages are being stretched as price rises erode the value of the pound in their pocket.

According to the latest data, UK earnings including bonuses (known as total pay) grew by 6.8% during February to April 2022, compared with the same period last year. Pay excluding bonuses (known as regular pay) grew by 4.2%. High bonus payments, especially in March 2022, combined with increasing regular pay, mean that total pay growth was strong in this period.

But price rises are negating this strong growth. Consumer price inflation including owner occupiers’ housing costs (CPIH) stood at 7.8% in April 2022. As a result, when adjusted for inflation, growth in total pay was 0.4% in February to April 2022, while regular pay fell by -2.2% compared with the same period last year.

In terms of single-month annual growth rates (comparing each month’s pay levels with the same month one year ago), total real wages fell by -2.4% and regular real wages by -3.4% (see Figure 1). The latter is the biggest drop in over two decades.

Figure 1: Total pay, regular pay and CPIH growth (January 2001 to April 2022)

Source: ONS

This means that including bonuses, earnings are now worth 2.4% less than they were in April 2021. Earnings excluding bonuses are now worth 3.4% less. With inflation predicted to rise to around 10% later this year and if wage growth fails to keep up, then these pay contractions are only set to get worse.

How have different sectors of the economy been affected?

Wage growth has not been uniform across sectors and industries. According to the latest data, average total pay growth for the private sector was 8% in February to April 2022. In the public sector, it was 1.5% (see Figure 2). This was driven by stronger regular pay growth as well as higher bonus payments in the private sector.

Figure 2: Average weekly earnings annual growth rates for total and regular pay – by sector (January-March 2001 to February-April 2022)

Source: ONS

These figures are not adjusted for inflation, so they do not reveal the extent to which workers in the private and public sectors are feeling the burden of price increases. Instead, this chart shows the disparity between the two parts of the economy.

This 3.8 percentage point difference in total private and public sector pay growth is among the largest ever recorded. The last time the gap was this wide was mid-2021. But this was at a time when the data were being strongly affected by base effects, as the UK came out of lockdown.

Wages were very low in 2020, due to Covid-19 measures such as the furlough scheme, which cut earnings by 20% on average. This meant that when pay slowly returned to normal levels after lockdown restrictions were lifted and more and more people could return to work, earnings sprung back.

In terms of different industries, the finance and business services sector have had the largest three-month average year-on-year growth rate (at 10.6%), partly because of strong bonus payments (see Figure 3).

Wholesale, retail, hotels and restaurants saw a growth rate of 8.4%. This industry group includes cafes, restaurants and pubs, which had the highest proportion of workers on furlough during February to April 2021. This means that the 15.9% wage growth rate within this sector is affected substantially by the base effect.

Figure 3: Average weekly earnings annual growth rates for total pay – by industry (January-March 2018 to February-April 2022)

Source: ONS

Conclusions

The latest data show that wages are failing to keep pace with rising prices. The extent of the lag depends partly on the sector in which an individual works, and whether they usually receive a bonus or not.

Areas of the economy with traditionally high bonuses, such as finance, have been able to cushion their workers against surging inflation to some degree. In contrast, people working in the public sector, such as civil servants and NHS workers, continue to see the value of their take-home pay shrink. This is due to lower growth in regular pay and the fact that bonuses are rare, or smaller if they are paid.

With energy prices set to rise further this autumn, and food and other commodity prices under continuing pressure due to the Russian invasion of Ukraine, many will be worried about making ends meet. The cost of living crisis risks plunging thousands of people into poverty, and policy-makers must act now to support those whose wages are most under pressure from soaring prices.