Punchy pay data set to cause more mortgage misery

This morning, the ONS published new labour market statistics, and all eyes are on the pay data. Strong nominal pay growth, combined with lower levels of inflation, means that the real wage squeeze that workers have been facing for the past 18 months may well have ended. But, in stark contrast to the state of affairs just a few months ago, while strong pay growth might look like good news for workers, the Bank of England (as well as those looking to remortgage…) will be thinking about the implications for interest rates.

The 18 month real pay squeeze may well have ended

Pay growth remains very strong, with the headline rate of nominal regular earnings growth (which compares pay in the three months up to April 2023 to the same three months last year) reaching 7.2 per cent – this is the fastest growth rate seen outside of the pandemic period. On this metric, real pay is still falling by 1.3 per cent, but this is much lower than has been seen recently: just a few months ago, in the three months to January, real pay was falling by 2.3 per cent.

In fact, when we look at the more timely data, the real pay squeeze is almost over. For example, when we look at annual changes to single month pay data, regular pay growth in April was 7.5 per cent – very slightly below the inflation rate of 7.8 per cent. This meant that real wages, using this single month measure, fell by just 0.3 per cent. It’ll be worth keeping an eye on next week’s May inflation data to see if inflation falls below wage growth for the first time since the cost of living crisis started. 

The Bank will be thinking about the implications of strength of nominal wage growth on interest rates 

So why is nominal wage growth stronger than was expected a few months ago, and how worried will the Bank be? In short: quite worried. Despite private sector nominal pay levels slowing at the start of this year, they have picked up again in recent months. While private sector nominal weekly wages remained fairly level between November 2022 and January 2023, at just £582 and £585 respectively, pay has shot up again since then. Between January and April 2023, average weekly wages in the private sector rose from £585 to £599. In recent months, there has been no similar jump in public sector wages, with average weekly pay remaining fairly flat at £620 in January and £622 in April 2023.

These recent trends in private sector wages are made clear when we look at higher-frequency measures of pay growth. In the private sector, annualised pay growth on a three-month measure was falling between the summer of 2022 and February this year, but has been rising more recently. In fact, by April, annualised private sector pay growth on a three-month measure stood at 8.2 per cent – up from 6.4 per cent in March, and higher than annualised six- and twelve-month pay growth (which stood at 7.1 per cent and 7.6 per cent growth respectively). This will be front and centre of MPC members’ minds when making their next interest rate decisions.

Of course, the downside of using these higher-frequency pay measures is that they might overstate the impact of one-off month-to-month changes. This is especially important to bear in mind this month, since the April data was the first to include 2023 minimum wage rates: the National Living Wage (NLW) rose by 9.7 per cent to reach £10.42 this April. Although only a minority of workers will be affected by this change (the LPC estimate 7 per cent of employee jobs are covered by the minimum wage, and a smaller proportion (around 4 per cent) of the total wage bill is accounted for by minimum wage jobs), this one-off wage boost may be contributing to around a sixth of the increase to the annualised three-month measure of private sector pay growth seen between March and April.

Whichever pay measure we use, there’s no escaping the fact that the strong private sector pay growth seen in today’s data is hard to square with the Bank’s inflation target over the medium run, so MPC members will certainly be looking for private sector pay growth to weaken in the coming months.

The workforce is expanding – but economic inactivity due to long-term sickness reached a new record high

Turning to employment, and the size of the workforce is continuing to expand, with the number of people aged 16+ who are in employment now higher than pre-pandemic, at 33.1 million. Working hours also climbed above pre-pandemic levels, with 1.06 billion total weekly hours worked in the latest data. This means that total hours worked are now 0.6 per cent higher than their pre-pandemic level. 

But we shouldn’t overstate these changes: while the 16-64 employment rate has risen in the past few months to reach 76.0 per cent in the most recent data, it is still below the pre-pandemic rate of 76.6 per cent. Likewise, economic inactivity in the UK is still above pre-pandemic rates: in February-April 2023, the economic inactivity rate among 16-64-year-olds was 21.0 per cent, compared to 20.2 per cent in December-February 2020. 

This rise in economic inactivity since the start of the pandemic should not be seen as an inevitable consequence of the pandemic: the UK is one of just eight OECD countries to be in this position, with many of our neighbours like France, Germany and Ireland seeing rates of economic inactivity fall in the last three years. 

Finally, although the overall rate of economic inactivity among working-age adults has been falling in recent months, the number who are economically inactive due to long-term sickness reached a new record high of over 2.55 million in the latest data. This has increased by 440,000, or 21 per cent, since the eve of the Covid-19 pandemic. Supporting those who are out of the labour market due to long-term sickness must remain a policy priority over the coming months.