Growth in salaries and low inflation are lifting real wages

UK private sector real-wage growth has seen a relatively positive start to 2016, at around 2.6%. Inflation remains low, at 0.4%, while GDP growth has been relatively robust. Post Brexit malaises may set in on wage growth, however, as a low pound increases inflationary pressures and businesses change tack.

Years of stagnant wage growth in the UK have taken their toll, resulting in a median real wage decrease – according to a LSE study – of 10% between 2008 and 2015. Last year, with inflation low and relatively robust GDP growth, private sector wages saw 3% growth – while inflation remained low, at 0.2% – resulting in real wage growth of around 2.8% that year.

Since last year a number of wide scale events have created considerable uncertainty in the UK. In the latest edition of Willis Towers Watson’s ‘Salary Budget Planning Report’, the consulting firm explores the most recent figures as well as expectations for the coming year.

Pre-Brexit rise

The latest report finds that low inflation, coupled with continued wage growth – including a move toward a ‘living wage’ – has seen real wage growth at 2.6% down slightly on last year. The results reflect a 3% total growth in wages, with inflation running at around 0.4%.

The picture for Western Europe as a whole is similar, for instance, in Germany wage growth (not factoring in inflation) stands at around 3%, while Italian, Dutch and French employees enjoy average pay rises in the region of approximately 2.5%. Ireland, Spain and Switzerland sees less modest growth, at around 2%.

Iain Nichols, Senior Consultant at Willis Towers Watson, says, “A combination of good pay rises and continuing low inflation means that British employees will feel they have more money in their pockets. Western Europe, sees a similar trend as most countries’ pay rises are set to significantly outstrip inflation, but with predicted increases in inflation across the region we may see a return to pay growth less than inflation in the coming years.”

Post-Brexit result

The outlook for the rest of the year is likely to be a mixed result for UK wage growth – largely due to the effects of Brexit. The consultancy firm finds that employers are, as of yet, not reducing planned pay rises of around 3%. However, the lower pound is likely to see a range of import goods increase in price, pushing up inflation and reducing real wage growth.

“Brexit has widely been predicted to have a negative effect on salary and although early statistics from the ONS have suggested there may have already been a slowdown in earnings, it is not something we have seen in our data. This suggests that companies are not amending their budgets and are using a ‘wait and see’ approach to their salary planning in the UK,” Nichols comments.

2017

Inflation across the continent is projected to hit around 1.2% next year, while pay rises are expected stay at around 3% – although the recent US election result has created considerable uncertainty. In the UK, inflation of 2.1% is expected – meaning that next year’s total increase is likely to be around 0.9% in real-wage growth if wage growth is kept constant.

Nichols concludes, “It will be interesting to see how companies react to increasing inflation. We predict there will be greater emphasis on pay rises to high performers, emerging talent and those with in-demand skills, and less emphasis on across-the-board increases. Without differentiation, companies may face retention and attraction pressures, especially in high demand areas.”