Real levels of UK wages fell at the fastest rate for at least 20 years in the second quarter of this year, official figures showed on Tuesday in data that will provide little comfort that inflation is coming under control.
Data from the Office for National Statistics showed that in the three months to June, underlying headline real wages fell 3 per cent, the steepest decline since comparable records began in 2001. But it also showed that nominal pay was rising faster than the Bank of England thinks is consistent with its 2 per cent target for inflation.
The wage data from the ONS came alongside broader labour market figures showing only the early signs of cooling. Unemployment was still close to 50-year lows, with historically high levels of vacancies and stable rates of employment.
Regular pay growth of 4.7 per cent was dwarfed by prices rising even faster. When compared with consumer price inflation, which rose to a 40-year high of 9.4 per cent in June, the fall in regular real wages was even steeper at -4.1 per cent.
The figures highlight the difficult financial position of households even before sharp energy bill rises expected in October. They also show the cost of living crisis to be much tougher for those working in the public sector, with regular pay levels rising at an annual rate of only 1.8 per cent, compared with 5.4 per cent in the private sector.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that despite the sharp squeeze in real wages, pay was still growing faster than a level at which the BoE’s Monetary Policy Committee thought would reduce inflation to its 2 per cent target.
“Wage growth has more momentum than the MPC can tolerate,” Tombs said.
Ruth Gregory, senior UK economist at Capital Economics, said that “by any metric the labour market is still exceptionally tight” and this would put pressure on the BoE to raise interest rates by another 0.5 percentage points in September.
“With wage growth running well above the rates of 3 to 3.5 per cent that are consistent with the 2 per cent inflation target, it supports our view that the Bank of England will have to raise interest rates further than most anticipate to 3 per cent,” she said.
Even though the wage data was unlikely to make the BoE question its decisions to tighten monetary policy, it pointed to a hard squeeze on living standards for those in work, according to the Resolution Foundation.
Nye Cominetti, senior economist at the Resolution Foundation, said the real pay decline was probably worse than at any point since 1977. “This squeeze has come about despite robust pay growth and a lively jobs market, with pay settlements strengthening slightly,” he said.
In a sign that pensioners are feeling increasingly vulnerable about their financial position, the data showed a jump in the number of over-65s going back to work or staying in employment.
Although the state pension age rose to 66 in October 2020, there was a sudden surge of 180,000 people aged over 65 working or available to work in the second quarter alone — an increase of 13.6 per cent on the first quarter. Employment for those aged 16-64 fell over the same period.
Kate Smith, head of pensions at Aegon, the Dutch insurance company, said the rise in the number of over-65s in the workforce was likely to have been caused by a desire among those of retirement age to ease financial pressures.
“We know already that some individuals are withdrawing more from their pension pot than they were previously, with 31 per cent of over-55s surveyed by Aegon saying that they have done so to help cover the rising cost of living,” she added.
The ONS said it was looking at the underlying reasons for the sudden jump in employment of over-65s, but the data had passed its initial quality assurance checks.
In the second quarter, the broader data showed the labour market still historically tight, but with some early signs of cooling.
The unemployment rate crept up 0.1 percentage points to 3.8 per cent. This was only marginally higher than its level of 3.7 per cent in the first quarter of the year, which was the lowest rate since the early 1970s.
This was mirrored by employment rates, which showed a marginal decline to 75.5 per cent, just 1 percentage point below the pre-pandemic level. This reflected continued high levels of sickness and early retirement among those aged 50 to 64, according to the ONS.
Job vacancies remained “very high” at 1.27mn according to Allan Monks of JPMorgan, but they were down for the third successive month, leading him to think “the labour market is no longer tightening any further”.
That will not yet be enough for the BoE to think inflation is likely to come back to its target, however.
With unemployment low, there was still almost one vacancy for every person who was registered as unemployed and was seeking to start work immediately. This was far above pre-pandemic levels when there were half as many vacancies as unemployed.
Kallum Pickering, senior economist at Berenberg Bank, said the data were still too strong for the BoE to feel any comfort, and the bank was likely to tighten the squeeze on households even further when it next met in September.
He predicted that this autumn, “vacancies should start to fall back while unemployment edges higher — to a peak of 5.3 per cent in the fourth quarter of 2023”.
“Together, falling labour demand and rising labour supply should weaken wage pressures,” Pickering said.
Chancellor Nadhim Zahawi warned that the labour market data showed there were “no easy solutions” to the cost of living pressures that the country faced.
“Whilst we cannot completely shield everyone from these global economic shocks, we are targeting this support on millions of the most vulnerable people in our society: those on the lowest incomes, pensioners and disabled people,” he said.