11 July 2023

Why are wages rising and what does it mean for the economy?

11 July 2023

Official figures have revealed that wages across the UK have risen at record levels as inflation remains stubbornly high.

Higher pay will provide a welcome boost for many households who have come under pressure from more expensive energy and food bills over the past year.

But some economists have cautioned that high wage inflation could cause problems for the economy in the longer-term.

Here the PA news agency looks at what is happening to pay and why.

– What is happening to wages?

Average regular pay, not including bonuses, was 7.3% higher in the three months to May compared with the same period last year – the joint highest reading since records began in 2023.

The reading from the Office for National Statistics (ONS) is the same as it reported over the three months to April, which had been revised upwards in the new update on Tuesday.

It comes after a steady acceleration in wage growth in recent months.

– Why are wages rising?

Wages are largely increasing in response to recent rises in the cost of living, which saw overall Consumer Prices Index (CPI) inflation peak at 11.1% growth last year, and was last reported a 8.7% for May.

As a result of more expensive food and energy bills, many Brits have sought pay increases from employers to support their living costs.

Many firms who have seen revenues increase through higher pricing have also been able to pass these rises on to their workers proportionately.

Figures for the three months to May and those for the three months to April also partly hit record growth year-on-year as they included the latest jump in the minimum wage.

This increased by 9.7% to £10.42 per hour for workers aged 23 and over from the start of April.

– Are people better off?

The increase in pay comes amid a backdrop of much higher, broader inflation, which was last reported at 8.7%.

It means that the average worker saw real regular pay – the change in pay once inflation is taken into account – fall by 0.8% for the three months to May.

This means the average worker was theoretically poorer than a year earlier due to the impact of inflation.

But the ONS said this was the smallest decline in pay in real terms since the end of 2021.

– What do record wage rises mean for the economy?

The rate of wage inflation was ahead of the expectations of economists and resulted in some worries from experts on Tuesday.

The high level of wage inflation could result in continued high levels of broader inflation and in continued higher spending power from British households.

There are concerns that increased spending could mean that inflation does not fall away as quickly as predicted, with businesses not having to reduce prices in order to drive sales demand.

High labour costs in the supply chain or workforce could also provide another reason for firms to continue to pass price rises on to customers.

The Bank of England has hiked interest rates over the past 13 consecutive meetings in an effort to help inflation cool, and therefore continued wage growth could force the central bank to continue with further hikes.

– Have all workers seen similar increases?

Although average regular pay grew by 7.3% for the three months to May, the ONS also revealed that total pay – which includes bonuses – grew by 6.9% for the same period.

The fresh data also showed a rosier picture for those working in the private sector, as they saw a 7.7% increase.

Meanwhile, public sector pay was up 5.8% for the period. This was however the largest annual public sector increase since 2001.

Workers in the finance and business services industry saw the largest increase at 9%, followed by those working in the manufacturing sector, who saw a 7.8% rise.

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