Recent data indicates that workers in the UK are earning higher wages despite producing less, a trend facilitated by declining import costs and pension shortfalls. The Resolution Foundation suggests that this disconnect between productivity and wage growth, supported by reduced pension expenses and import prices, has temporarily buoyed real wages without exacerbating inflationary pressures.
Nevertheless, the Foundation cautions that this situation is unlikely to persist. While average weekly earnings have increased by 2.1% over the past year, recovering from previous declines, this upturn parallels a 16-year period of stagnant wages, underlining the UK’s prolonged pay stagnation.
The report underscores that while long-term wage growth typically mirrors productivity gains, short-term fluctuations can occur. These fluctuations often compel businesses to pass on increased wage expenses through higher prices, posing concerns for policymakers grappling with inflation.
The Foundation identifies two primary reasons why the current rise in unproductive wage growth remains manageable for businesses and does not spur inflation. Firstly, employer contributions, including taxes and pensions, typically constitute a significant portion of a firm’s wage expenditure, and recent reductions in these contributions, particularly to defined benefit pension schemes, have alleviated wage pressures. Secondly, the UK’s terms of trade, which deteriorated during the cost of living crisis, have begun to improve, with falling import prices enhancing purchasing power for both businesses and consumers.
However, the Foundation warns that this wage recovery may be short-lived. It emphasizes that continued reductions in pension contributions are unsustainable, and potential adjustments in employer national insurance thresholds could offset these savings.
Greg Thwaites, research director at the Resolution Foundation, acknowledges the recent uptick in real wages as a positive development after years of stagnation. He attributes this recovery to factors such as falling import prices and redirected pension contributions. Nonetheless, he emphasizes the need for productivity improvements to sustain wage growth in the long term, cautioning that without such advancements, wage gains may stall or be absorbed by inflationary pressures.