The RF Earnings Outlook Q3 2016

Published on Wages & Income

Two big 2016 events dominate our view of the labour market and likely developments in the coming years – the introduction of the National Living Wage (NLW) in April, and the result of the EU referendum in June.

This final Earnings Outlook of the year – capturing data up to Q3 – provides an opportunity to take stock of these developments. In particular, we now have a full picture of how earnings were performing just after the NLW’s introduction, and new forecasts from the Office for Budget Responsibility (OBR) that provide a view on how the post-referendum economy might develop. The former confirms a positive picture, with fairly strong and very progressive earnings growth into the early part of 2016. However, the latter suggests this risks being as good as it gets: new analysis in our ‘Spotlight’ article points to an earnings growth freefall setting in from the very beginning of 2017.

In terms of the period between these two phases – from around May to now – our measures add to the headlines on the flattening of employment growth, providing further evidence that the labour market has entered a ‘holding pattern’ in which not much at all has changed.

In this briefing we use 13 indicators to take a more detailed look at underlying trends and future prospects. You can view the full interactive data here.

  • Our earnings breakdown shows relatively strong pay growth in April – particularly in the private sector – and falling pay inequality largely thanks to the introduction of the NLW. More recently there is evidence of stabilisation in both individual pay rises and compositional effects on wages.
  • Our analysis of pay pressures and slack gives a flat picture, with the stalling of job mobility well below its historic peak a particular concern. Migrant job entry continues to expand slowly, which can dampen the sensitivity of pay growth to headline measures of domestic slack. Changes to migration policy may alter this trajectory in coming years.
  • Our review of longer-term labour market health and efficiency shows that participation continues to rise, although the recent uptick in inactivity – not fully feeding through to our annual average measure yet – raises concerns for the future. Productivity growth remains very weak, and the OBR has further downgraded forecasts. However training intensity and the rate of graduates in non-graduate roles both show signs of levelling after at least a decade of going in the wrong direction. Persistence in these trends could provide a catalyst for productivity improvements in future.