The Budget on 22 November sparked a debate over the prospects for wage growth over the coming period. The Bank of England is on one side, while on the other stand the government’s Office for Budgetary Responsibility (OBR) and the Institute for Fiscal Studies (IFS).
Earlier, in announcing its decision to raise interest rates marginally on 2 November, the Bank argued that while pay increases are currently subdued – mostly because employment has been growing in lower-paid occupations and industries – it expected earnings growth to strengthen during 2018. This will occur, the Bank said, ‘as the tightening labour market starts to put more widespread upward pressure on wage demands’.
The Bank’s position is perhaps a logical corollary of its decision to raise interest rates, a move designed to reduce the potential for over-heating in the economy. But it nevertheless highlights a number of signs of increasing wage demands.
One of these is greater ‘churn’ in the labour market, with the proportion of people moving from one job to another close to the pre-recession rate. The Bank thinks this might indicate confidence among workers about their prospects in the labour market, which could increase pressure on employers to retain them by raising wages.
The Bank’s agents have also found employers are more willing to award bigger pay rises. In their November report, they found recruitment difficulties had increased, contributing to a slight increase in pay growth, with expectations that settlements could be clustered around 2.5% to 3.5% in 2018, compared with 2% to 3% this year.
Our own research on pay in two key sectors tends to support the Bank’s findings. In call centres, pay settlements have increased slightly, and recruitment and retention problems have worsened. Meanwhile in engineering, pay growth for shopfloor staff is greater than for white-collar workers and managers, with recruitment pressures playing a part.
However the Bank also points to a potential offset to its predictions of wage growth, namely that employers’ uncertainty over the economic outlook could affect their willingness to raise pay until they have more clarity about future demand for their products and services.
This is where the IFS and the OBR come in, warning of bad times around the corner, in an echo of the old Noel Coward song. In the wake of the Budget, both bodies think economic and productivity growth will be weaker than before and have downgraded their predictions for earnings growth. They could be right but they may not be. While the Budget increased spending and reduced tax, the overall policy position is still one of austerity, and the OBR and IFS positions reflect this.
In at least two respects though, the Budget has contributed to potential upward pressure on pay. The first is the chancellor’s announcement of a 4.4% rise in the National Living Wage, from £7.50 to £7.83 from 1 April 2018. The second is his reiteration of the government’s intention to ‘move away from’ the 1% public sector pay cap and a promise to fund an NHS pay deal linked to productivity gains, and justified on recruitment and retention grounds. Any NHS award will influence claims in the public sector, and could be a trigger for a more generalised catch-up after years of restraint, perhaps leading to spillover effects in the private sector.
To read the rest of this article, you must have access to our subscriber zone. To subscribe, email firstname.lastname@example.org, call +44 (0) 1702 669549 or fill in our enquiry form here. If you are already a subscriber, please login below.