A measure of private sector pay incorporating a 12-month smoothing of bonuses rose by 0.9% more than consumer prices in the year to January, confirming that real wages are picking up more strongly than the Bank of England and consensus expected.
Private sector regular weekly earnings rose by 2.2% in the year to January versus CPI inflation of 1.9% in that month. Bonuses, meanwhile, increased by 8.7% in the 12 months to January from a year before. A measure of total pay calculated by adding regular earnings and a 12-month moving average of bonuses, therefore, rose by an annual 2.8% in January. This pay growth measure was below CPI inflation between July 2008 and November 2013 – see first chart.
Whole-economy growth, i.e. incorporating public sector workers, is lagging the private sector but was also above inflation in January, at 2.2%.
The earlier-than-expected resumption of real wage growth further undermines the Bank’s claims of economic fragility and may have a significant political impact – statistical analysis confirms that real wage trends influence the poll gap between the main governing and opposition parties.
A key issue is whether the real wage pick-up reflects a recovery in productivity growth or a shift in the balance of power in favour of workers, due to a tight labour market. Productivity optimists will cite an increase in aggregate hours worked of only 0.1% in the three months to January from the prior three months – well below quarterly GDP growth currently estimated at 0.7% in the fourth quarter. Some productivity catch-up, however, had been expected following dismal performance in the year to the third quarter, when whole-economy output per hour rose by only 0.1%.
The vacancy rate – the stock of unfilled positions expressed as a percentage of employee jobs – continues to suggest that labour market slack has been eliminated, rising further to 2.1% in the three months to January versus a post-1995 average of 2.0%. The divergence between the vacancy and unemployment rates casts strong doubt on the Bank’s view that the latter can fall to 6-6.5% without generating inflationary pay pressures – second chart.
