UK pay growth is picking up strongly, consistent with the historical relationship with the job openings or vacancy rate*, a measure of labour market tightness. This relationship suggests a continued upswing through mid-2016, at least.
Average weekly regular earnings (i.e. excluding bonuses) rose by 3.2% in the year to July, the largest annual increase since 2008. Private sector growth was 3.7% versus only 1.1% in the public sector – the recent gap is the largest on record in data extending back to 2001.
The latest Bank of England argument for delaying raising interest rates is that the pay pick-up is being accompanied by faster productivity expansion, so unit labour cost growth remains too low. This may not be true for much longer but, in any case, stronger productivity growth is a double-edged sword for policy, since it also suggests faster trend GDP expansion and a higher “equilibrium” level of rates.
The current earnings pick-up is consistent with the historical relationship with the job openings rate. As noted in a post in September 2014, “the openings rate bottomed in 2009 but embarked on a sustained rise only in the second quarter of 2012. Based on the average nine-quarter lag following the three increases over 1970-90, this suggests an upswing in earnings growth starting in the third quarter of 2014.” Regular earnings growth has risen steadily from a low of 0.7% in the second quarter of 2014 – see chart**.
The increase in pay growth is more impressive against a backdrop of falling / low consumer price inflation, which would be expected to subdue wage demands.
The job openings rate rose further in the fourth and first quarters, surpassing its 2008 high, though has since fallen slightly. If the first quarter peak is confirmed, the minimum six-quarter lead over 1970-90 would suggest a continued uptrend in earnings growth through the third quarter of 2016, at least.
*Vacancies as a percentage of employee jobs plus vacancies.
**Quarterly data except for the last data points, which refer to July for earnings and the three months to August for the openings rate.
