Wage growth ‘will remain modest’

Pay. Picture: Owen Humphreys/PA Wire

Pay. Picture: Owen Humphreys/PA Wire - Credit: PA

Wages will increase ahead of inflation for the first time since 2007 this year but 'boom time' pay growth remains a distant prospect, according to a new study.

A special report on the labour market by EY ITEM Club forecasts a pick-up in pay growth to 1.9pc this year, delivering real terms earnings rises amid low inflation - which is expected to turn negative for part of 2015.

But it predicts that while wage growth will continue to accelerate in coming years, it will remain short of the pace achieved in the decade before the financial crisis, held back by a growth in the labour force swollen by immigration and more older workers.

The report forecasts pay to grow 3.7pc in 2018, 0.7pc short of the pre-crisis average.

Martin Beck, senior economic adviser to the EY ITEM Club, said: 'Real earnings have fallen by nearly 10pc since 2008, but workers will finally see more money in their pockets this year.

'However, this is not a normal recovery. The move towards later retirement and the huge increase in the size of the workforce has depressed real wages as workers have priced themselves into jobs.

'We don't expect a return to boom time wage growth any time soon. Employment will continue to be strong, but wage growth will remain relatively modest.'

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Wages have struggled despite the upturn in the wider economy over the last couple of years, and strong employment growth, though official data last week showed signs of sustained improvement in real terms pay for the first time since the downturn.

Today's report expects expansion in the work force to remain the 'dominant feature' of the UK labour market over the next four years, increasing by more than 1.2 million people between 2014 and 2018, at an average rate of 0.9pc a year.

A muted pick-up in pay will have important implications for the economy, the study says, with it likely to persuade Bank of England policy makers to increase interest rates in an equally gradual fashion - with a first hike early next year.

It could also hold back Government plans to cut the deficit as it restrains growth in income tax receipts.

Mr Beck said: 'A gradual pick-up in wages will translate into good news for the economy through a boost in consumer spending.

'A pay rise for the UK's workforce also offers some bonuses for the Government by supporting income tax receipts.

'But, with the pace of earnings growth continuing to lag behind pre-crisis norms, workers' pay is unlikely to be the revenue raiser that it has been in the past.'