Britain’s pay squeeze deepens despite low unemployment

Real average weekly pay packets fell by 1.3 per cent in February, with a far deeper squeeze coming in the months ahead, despite the jobs market continuing to tighten and last year’s furlough flattering the headline pay data, the Resolution Foundation think tank said today in response to the latest ONS labour market statistics.

The UK jobs market continued to tighten in early 2022, with vacancies hitting a record high, unemployment falling to 3.8 per cent – matching its lowest level since December 1974 – and short-to-medium-term unemployment falling to a record low.

But the overall size of the labour market remains smaller than it was pre-pandemic. Economic inactivity increased again to 21.4 per cent, suggesting that more Covid retirees are leaving the labour market.

However, a buoyant labour market is not generating much wage pressure, especially once base effects from furlough are taken into account. And with inflation soaring, Britain’s pay squeeze will continue to tighten. The current fall in real wages is not projected to end until late 2023, and will leave average wages no higher than in 2007.

Real regular pay fell by 1.3 per cent in the year to February. Public sector pay fell by 3.8 per cent in real terms, compared to a 0.8 per cent fall in the private sector, a huge gap that is likely to make the coming period of public sector pay restraint even more challenging, says the Foundation.

The Foundation adds that the scale of Britain’s pay squeeze is likely to be even more severe than the headline data suggests, with up to a quarter of current pay growth accounted for by the effects of high furlough rates in early 2021 (which, by depressing pay, boost growth rates 12 months later).

Nye Cominetti, senior economist at the Foundation, said: “Soaring inflation is casting a big shadow over an otherwise buoyant labour market. Vacancies are at record highs, while redundancies and unemployment are close to record lows.

“But while this positive news on the jobs front is leading to higher wages, it is not enough to prevent an already painful pay squeeze that will get worse in the months ahead.

“Everyone will be affected by the UK’s latest pay squeeze, which isn’t expected to end until late 2023. And with the current inflation being driven by soaring energy bills, it will be lower-incomes families feeling the squeeze the most.”