Latest data from the Office for National Statistics (ONS) suggests that while pay growth is still at record levels, high inflation means rates are still effectively a real-terms wage cut.
The July 2023 labour market figures showed that salaries excluding bonuses continue to rise rapidly, at 7.3% compared to the same three-month period last year, up from the 7.2% reported in June for February to April 2023.
Including bonuses, total pay also grew significantly by 6.9%. However, when taking inflation into account, both total and regular pay dropped by 1.2% and 0.8% respectively.
Commenting on the figures, Jonathan Boys, labour market economist for the Chartered Institute of Personnel and Development, said: “A familiar pattern is emerging: high nominal pay rises, accompanied by real-terms pay cuts due to high inflation. Regular pay grew by 7.3%, the highest seen by the ONS since the time series began in 2001. However, real regular pay fell by a modest 0.8%. This dynamic will worry the Bank of England who fear a wage price spiral, but for individuals it’s cushioning the blow to living standards.”
The figures also showed that while the number of people who are economically inactive fell by 0.4 percentage points from the last quarter, the economic inactivity rate is still higher than pre-pandemic levels at 20.8%.
The number of people inactive because of long-term sickness also dropped slightly, but the unemployment rate rose by 0.2 percentage points from the previous quarter to at 4%.
Boys added: “Today’s figures are typical of the post-pandemic period. Unemployment, though increasing slightly, remains low. One in five people are economically inactive, meaning they are not seeking and available to work, and a large part of the recent increase is due to long-term sickness. The Chancellor’s last budget was focused on increasing labour supply and there are signs that we are turning the corner here. However, more must be done to help people with health challenges stay in employment or find suitable jobs if they’ve left the labour market. This means a focus on improving access to occupational health support and ensuring more jobs have the flexibility to support those with health conditions.
“There’s been a slight easing of recruitment and retention pressures. Increasing numbers of people are rejoining the labour market this quarter, perhaps in response to the cost-of-living crisis.”
John Pearce, SVP payroll operations at CloudPay, has again warned that pay inflation rates are unsustainable and believes that benefits and financial education are essential.
He commented: “With the cost of living still increasing and inflation rates remaining stubbornly high, pay increases aren’t going to be sustainable for all. We believe a balance needs to be struck where employees are paid fairly, but are also given access to benefits and financial education or advice that provides more than pay support.
“It’s clear that people are struggling to make their wages go further and there needs to be additional help in place – that is driven by employers – to enable them to access tailored financial advice during these difficult times. Providing flexible pay solutions that will support those who have unexpected costs before pay day will also keep people clear of costly loans that will only worsen their financial situation.
“Pay inflation can’t be the only solution to the economic challenges that today’s workforce is facing. Businesses need a smarter approach, and that includes flexibility around pay and financial education.”
Michael Stull, director at ManpowerGroup UK, said: “The gradual decline of vacancies overall and slight rise in the unemployment rate to 4.0%, contrasts with a very strong hiring intent that we’re seeing from employers in nearly every sector and across all parts of the UK. It brings home the reality of the talent shortages reported by 80% of UK employers, with skills development now a critical longer-term priority that will help put the economy back on track.
“Added to this, questions continue to be raised over whether people are typically more productive at home or in the workplace as the debate around hybrid-working best practice rumbles on. It’s causing a lot of anxiety for both employers and employees who each have their own ideas about what ‘good’ flexibility should be.”
Stull explains that in such a tight labour market consisting of many workers who are set on pursuing career progression, many businesses are understandably reluctant to draw a line in the sand and risk losing out to competition.
He added: “Employers need to be crystal clear about their expectations are, treating their workers as an asset and with convincing and compelling reasons outlined for when employees are expected to be in the workplace.
“Firm and fast decision-making is advised in any case. Speed is a big determinant of success in the current labour market and those organisations that are quicker to assess and interview candidates will gain a significant advantage .”